Tax advice and artificial intelligence: can ChatGPT replace tax advisors?

ChatGPT is making headlines almost daily across all industries and media. We are undoubtedly facing profound social changes, some predict changes on the scale of the industrial revolution, when the steam engine and the mechanical loom replaced the agricultural economy and mass production in factories transformed society. Even if it may not be quite so dramatic, it is already foreseeable today that certain job profiles will change significantly in the future, and some may disappear almost completely. In this article, we want to clarify what the current version of ChatGPT (as of April 2023) can do in terms of tax advice and where the limits lie.

What is ChatGPT and generative AI anyway?

The history of artificial intelligence (AI for short) began in the middle of the 20th century. The term “artificial intelligence” was coined in 1956 by a programmer named John McCarthy, who was initially able to prove mathematical theorems with perhaps the first AI program. The declared aim of AI researchers at the time was to develop machines that could think like humans and learn independently. Ten years later, ELIZA is presented as the first chatbot that can create the illusion of a human conversation partner. In 1997, the computer beat a reigning world chess champion for the first time, which was seen as another milestone in AI.
The topic only really took off with the widespread commercialization of voice services: Apple’s “Siri” ushered in a new era in 2011, Microsoft countered with its “Cortana” software in 2014, and finally Amazon presented its new voice service called “Alexa” with the Echo in 2015. In the same year, Elon Musk, Sam Altman and others founded the OpenAI research institute in Silicon Valley, which aimed to make artificial intelligence generally available and finally presented the GPT-3 language model in May 2020. Reactions to ChatGPT range from fascination to shock, with numerous experts in their respective fields sounding out what the system can already do today and whether their own job description might soon lose its significance and be taken over by artificial intelligence.
We want to anticipate our findings right away – tax advisors with their natural intelligence and analog expertise will remain superior to AI for a very long time to come. We subjected the machine to a professional test and quickly found its limits. Clients are still well advised to rely on the competence of an experienced advisor and the expertise of a tax firm instead of being at the mercy of the sometimes dangerous half-knowledge of the machine. The following dialog was conducted with ChatGPT on 11.04.2023.

Can you answer some tax law questions for me?

Yes, of course! I will do my best to answer your tax law questions. Please ask your questions. Please note, however, that as a language AI model, I cannot provide legal advice and my answers are for general information only. For specific tax matters, you should always consult a qualified tax advisor or lawyer.

This is pleasantly modest, the machine is aware of its own limitations and recommends qualified specialists.

Simple tax law questions to ChatGPT

The system can answer simple questions in detail and precisely, you immediately have the feeling that you are sitting opposite a competent specialist.

What are special expenses?

In German tax law, special expenses are certain expenses that are tax-deductible and can reduce taxable income. They are regulated in the Income Tax Act (EStG) and are used to take certain expenses into account for tax purposes that are incurred for private reasons and cannot be claimed as income-related expenses or business expenses.

Here are some examples of special expenses:

  1. Pension expenses: These include contributions to statutory or private pension insurance policies, Rürup pension contracts or basic pension contracts. These contributions can be deducted as special expenses under certain conditions.
  2. Health and long-term care insurance contributions: Contributions to statutory or private health and long-term care insurance can be deducted as special expenses. However, certain maximum limits and conditions apply.
  3. Donations: Donations to charitable organizations or charitable causes can be deducted as special expenses, provided they meet certain requirements.
  4. Church tax: The church tax paid can be deducted as a special expense if you are a member of a tax-levying religious community.
  5. Childcare costs: Childcare costs can be claimed as special expenses, subject to certain conditions and maximum limits.

It is important to note that the exact rules for special expenses in German tax law are complex and subject to change. It is advisable to consult a qualified tax advisor to ensure that special expenses are claimed correctly and in accordance with the applicable tax laws.

The system recognizes without further inquiry (perhaps from the language of my input or from the evaluation of my IP address) that the question probably relates to German tax law. The answers generated by ChatGPT to a simple question “What are special expenses” are answered correctly. Reproducing simple basic knowledge therefore seems to be no problem for the AI-based chatbot. However, it must also be said that these questions could have been answered correctly and completely by Google or YouTube. Next question:

What is depreciation?

AfA stands for “depreciation for wear and tear” and is a tax term used to describe the depreciation of depreciable assets for income tax purposes.

Under German tax law, companies and self-employed persons who use fixed assets such as buildings, machinery, vehicles or other depreciable assets for business purposes can depreciate the acquisition or production costs of these assets for tax purposes via depreciation. Depreciation thus represents the tax consideration of the loss in value of depreciable assets over the course of their normal useful life.

The amount of depreciation is based on the statutory regulations and the tax depreciation rules laid down by the tax authorities. As a rule, depreciation is calculated on the basis of the acquisition or production cost of the asset as well as the useful life and the tax depreciation method applicable to the asset in question.

It is important to note that depreciation is a complex tax matter and is subject to certain regulations. It is recommended to consult a qualified tax advisor to ensure that the depreciation is calculated correctly and in accordance with the applicable tax laws.

Almost right, because instead of “in the context of income tax” it should correctly read “in the context of profit determination”, in which the so-called income taxes (i.e. income tax and corporation tax) are then calculated. This is only a minor technical inaccuracy with no major practical consequences, but an experienced tax consultant would never make such a lapse. But now we want to know a lot more:

How high will the income threshold for health insurance be in 2023?

As an AI model based on knowledge as of September 2021, I cannot provide up-to-date information as my knowledge is limited up to this date and tax and social security regulations may change. The contribution assessment ceiling for health insurance is set annually by the competent authorities and may change from year to year.

It is therefore advisable to obtain up-to-date information from the relevant authorities, such as the statutory health insurance funds or the German Pension Insurance, or to consult a qualified tax consultant or social security expert to determine the current income threshold for health insurance contributions in 2023.

The AI is smart enough to point out its outdated knowledge when the keyword 2023 is mentioned and refers to other sources. Of course, we also made it unnecessarily easy for the robot with the year in the question. Now let’s make it more difficult:

What is the income limit for mini-jobs?

The salary limit for mini-jobs, also known as marginal employment or 450-euro jobs, is 450 euros per month in 2021. This means that employees who have a mini-job may earn a maximum of 450 euros per month in order to continue to be considered marginally employed and benefit from certain tax and social security benefits, such as the flat-rate taxation of social security contributions.
However, it is important to note that this limit is adjusted annually and may change. It is advisable to check the current regulations from the relevant authorities, such as the Federal Ministry of Labor and Social Affairs or the Minijob Central Office, to ensure that you always have up-to-date information on the remuneration limit for mini-jobs.

Even without a year or other explicit references in the question, the AI recognizes that the remuneration limit for mini-jobs is not an absolute value but a limit that is adjusted annually. This is a thoroughly commendable achievement and initially creates confidence in the competence of the machine. But now we’re making it really difficult, now comes the master question:

I would like to install a photovoltaic system with a gross output of 25 kW on the roof of my terraced house? What tax benefits can I claim for this?

Installing a photovoltaic system on the roof of your terraced house can have various tax advantages that are regulated by German tax law. Here are some potential tax benefits you may be able to take advantage of:

1. depreciation (AfA): You can claim the costs for the purchase and installation of the photovoltaic system against tax via the so-called depreciation for wear and tear (AfA). Depreciation allows you to write off the acquisition and installation costs of the system as operating expenses over a certain period of time and thus reduce your taxable income.

By now at the latest, we have caught the machine cold. This question can also only be answered correctly with up-to-date specialist knowledge, but because a completely new and unforeseeable legal regulation applies here, the machine cannot even issue a warning about a possibly changed frame. It is correct that from 2023, a new legal regulation states that new PV systems on private residential buildings with an output of less than 30 KW are no longer to be taken into account for income tax purposes, even retroactively from 2022.

2. input tax deduction: If you operate the photovoltaic system as an entrepreneur and are liable for VAT, you can claim the input tax from the costs of purchasing and installing the system as input tax. This reduces the VAT payable on your own sales.

This is also completely wrong, as new VAT regulations will apply here from 2023 with the introduction of a zero tax rate. Input tax deduction is therefore no longer possible.

3. feed-in tariff: If you feed the electricity generated from your photovoltaic system into the public grid and receive a feed-in tariff for this, this income may be taxable under certain circumstances. However, certain expenses, such as maintenance and repair costs incurred in connection with the photovoltaic system, can also be claimed as operating expenses in order to reduce taxable income.

As was to be expected, this information is also incorrect, as according to the new legal regulations, income from private PV systems is no longer taxable income with retroactive effect from 2022, meaning that the expenses can no longer have a tax-reducing effect. Your tax advisor will be happy to explain! We ask further:

I am a small business owner according to § 19 UStG, can I still have the VAT refunded when I buy a PV system?

As a small business in accordance with § 19 UStG (Value Added Tax Act), you are exempt from VAT and do not show VAT on your invoices. This means that, as a rule, you cannot claim input tax on purchases, as you do not pay VAT to the tax office yourself.
If you purchase a photovoltaic system as a small business owner, you cannot generally receive a refund of the input tax incurred on the purchase of the system. As you do not pay VAT to the tax office, you are not entitled to an input tax refund.

This statement by ChatGT is completely invalid, as the zero tax rate means that VAT is no longer payable on purchases.

However, there are exceptions to this rule, for example if you use the photovoltaic system for both business and private purposes. In this case, you may be able to claim an input tax deduction on a pro rata basis, according to the ratio of business use compared to the total use of the system. Precise documentation of business and private use is required in order to calculate the input tax deduction correctly.

ChatGPT has thus finally been convicted of tax incompetence, because this statement is also completely outdated and simply wrong due to the introduction of the zero tax rate! What sounded good for the first few simple questions turned out to be a consulting disaster when it came to complex issues with changed legal bases. The dialog capabilities of the system are amazing, the answers respond precisely to the question asked and appear very competent. Unfortunately, however, they are completely wrong here because the AI is not aware of the legal regulations on the promotion of PV systems, the new VAT rate of 0% and the resulting advantages for small businesses. If you are not familiar with these either, we recommend our blog post Tax-free PV system (/pv-anlage-steuerfrei), or you can seek individual advice from an experienced tax consultant from our team.

Conclusion: ChatGPT versus tax advisor and analog advice

The dialog capabilities of ChatGPT are fascinating, the illusion of chatting with a human counterpart is perfect! Simple reproduction questions on basic concepts of tax law are answered very well, comprehensively and conveniently. The system’s outdated level of knowledge becomes negatively noticeable at the latest when it comes to current limits and values, which change annually or at regular intervals. Thank goodness the system is smart enough to point this out. The answers on the tax classification of PV systems can rightly be described as dangerous half-knowledge, because the system can neither know nor suspect that things have changed fundamentally in the meantime. So where a real consultant is just starting out, the AI machine has long since reached the end. Even future generations of AI with better up-to-dateness will not be able to adequately compensate for this decisive disadvantage; natural, analog intelligence will always be required.
Another factor is crucial, especially in the field of tax advice: the system at the other end of the screen does not know the client’s individual background and financial circumstances, whereas the personal advisor in a law firm knows the client very well. It is precisely this individualization of advice that an AI system will never be able to achieve, as it may be able to draw on the knowledge collected on the Internet, but not on information that arises in the personal context of many years of support and is relevant to advice.
We can only encourage you to try out ChatGPT and gain your own experience, because AI will become increasingly prevalent in our everyday lives. ChatGPT is certainly the most intelligent machine that has ever existed – but it remains a machine without common sense. Tax consultancy is much more than the schematic retrieval of specialist knowledge, so it cannot be assumed that tax consultants will soon become unemployed. But watch out, because the following guiding principle applies among experts in the field: most of what AI can’t do, it can’t do yet!

AUTHOR: Dipl. oec. Claudia Jenewein, tax consultant
EXPERIENCED: Sebastian Schießling, Tax Consultant