Office of Professional Responsibility, Internal Revenue Service, U.S. Dep't of the Treasury, Alert Issue No. 2026-19, Introductory Guidelines for Responsible AI Use in Federal Tax Practice (June 24, 2026).

The IRS Office of Professional Responsibility on June 24, 2026 issued an Alert dealing with the use of artificial intelligence in tax practice (U.S. Dep't of the Treasury, Alert Issue No. 2026-19, Introductory Guidelines for Responsible AI Use in Federal Tax Practice).

The rapid integration of artificial intelligence ("AI") has transformed modern law and accounting offices. While traditional AI tools—such as advanced legal research products and document review platforms—have been ubiquitous for years, the emergence of generative artificial intelligence ("GAI") introduces a paradigm shift. The Office of Professional Responsibility (OPR) defines AI fundamentally as "the use of machines in a way that mimics human cognitive skills, including judgment, perception, and prioritization". Unlike legacy analytical software, contemporary GAI platforms "have the ability to make discretionary decisions, devoid of any human interaction". This autonomy stems from "GAI’s use of complex pattern-recognition capabilities that continually interact and evolve, allowing the program to learn from itself". Although these tools offer transformative potential—such as "cost savings, rapid data analysis," and advanced government risk assessment applications—they also pose profound ethical, regulatory, and legal hazards for federally authorized tax practitioners.

Inherent Vulnerabilities: Hallucinations, Bias, and Confidentiality Gaps

The technical limitations of GAI present substantial operational risks, notably "fabricated outputs (or, as commonly termed, 'hallucinations'), bias, and lack of transparency". These technical shortfalls directly translate into severe "ethical and legal risks". In particular, client confidentiality and data security can be heavily compromised. This occurs because "client privacy can be compromised when data generated for one client is repurposed by the program to respond to an inquiry concerning another client, or data compiled for a particular issue is spilled over into an algorithm and combined with a related tax issue involving a different client".

These technical limitations have already had severe, real-world consequences. The OPR observes that courts are increasingly penalizing legal and tax professionals for GAI-related misconduct, "mainly due to fake citations or other hallucinations contained in legal filings". The judicial system has not hesitated to enforce compliance; typical "penalties imposed in these cases have included financial sanctions—often amounting to several thousand dollars; public censure; required completion of legal ethics or professional responsibility courses; default judgments entered against the responsible party; removal from representation of a party to the matter; and disciplinary referrals to state bar authorities". Such judicial actions "stem from violations of duties of candor and competence, and they often entail reputational harm". For instance, in a highly publicized international matter from July 2025, the Australian government published a report prepared by Deloitte Australia that contained GAI-generated "invented quotes attributable to a judge, references to non-existent reports, and books ascribed to the wrong author," which required the firm to resolve the dispute by agreeing to "partially refund a portion of the fee it received".

The Core Standard of Due Diligence under Section 10.22

To mitigate these operational hazards, the OPR emphasizes that the use of GAI does not alter a practitioner’s core professional duties under Treasury Department Circular No. 230. Foremost among these is the duty of due diligence established under Circular 230, § 10.22. The regulatory text explicitly mandates:

“A practitioner must exercise due diligence in preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; in determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and in determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.”

Under the OPR's guidance, practitioners using GAI "must thoroughly review all AI-created documents and language incorporated into writings before delivery to a client or submission to the IRS". The federal standard of due diligence cannot be delegated to an algorithmic process; instead, it requires active "verifying the accuracy of facts, citations, and calculations produced by AI". Ultimately, "human scrutiny and editing are essential to ensure correctness and compliance with IRS expectations".

Technical and Technological Competence under Section 10.35

The integration of advanced software also implicates the core standard of practitioner competence under Circular 230, § 10.35. The regulation states:

“A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.”

The OPR clarifies that competent federal tax practice in the modern era is no longer limited to legal and statutory literacy; it encompasses technological literacy as well. Specifically, practitioners "must understand both the law and the technology used in their representation of clients before the IRS, including AI systems’ operational mechanics, limitations, and risks". A professional must possess the capability to "understand how AI develops content, recognize the potential for bias or errors, and be able to evaluate whether AI outputs are suitable for use in IRS matters". Failure to maintain this baseline of "technological competence could lead to improper advice or flawed filings".

Mandatory Practice Controls and Firm Oversight under Section 10.36

For firm leaders, partners, and managing directors, the deployment of AI is not merely an individual ethical concern but a systemic compliance obligation under Circular 230, § 10.36. The regulatory text under § 10.36(a) places a clear affirmative obligation on:

“[A]ny individual subject to the provisions of this part who has (or individuals who have or share) principal authority and responsibility for overseeing a firm’s practice governed by this part, including the provision of advice concerning Federal tax matters and preparation of tax returns, claims for refund, or other documents for submission to the [IRS], must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with [Circular 230], as applicable.”

Furthermore, under § 10.36(b), a supervising practitioner is "subject to discipline for failing to comply with the requirements of this section" if they, "through willfulness, recklessness, or gross incompetence," fail to take reasonable steps to implement adequate firm procedures, fail to ensure that existing procedures are followed, or fail to take prompt corrective action when they know or should know of a "pattern or practice" of noncompliance within the firm. To satisfy these requirements, the OPR states that firms "must deploy internal policies and procedures for compliance with Circular 230 in the AI space". These procedures must encompass comprehensive staff training regarding GAI risks, clear "protocols for secure data handling" and accuracy monitoring, and a rigorous process for vetting "outsourced or third-party AI tools" to document compliance with § 10.36.

Strict Guardrails for Written Advice under Section 10.37

When GAI is utilized to draft taxpayer correspondence, memoranda, or other forms of written communication, practitioners must adhere strictly to the requirements of Circular 230, § 10.37. The regulation mandates that a practitioner must:

“(i) Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events); (ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know; (iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter; (iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable; (v) Relate applicable law and authorities to facts; and (vi) Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.”

Because written tax advice must rest on "reasonable factual and legal assumptions," the OPR cautions that practitioners "cannot rely on GAI projections or representations without verification". If the internal logic or algorithmic mechanics of a GAI platform are opaque, "reliance may be unreasonable under section 10.37". Practitioners must perform independent legal and factual authentication, treating any GAI-drafted advice merely "as a starting point, subject to thorough review" before it is delivered to clients.

Unreasonable Fees and Administrative Efficiencies under Section 10.27

The administrative efficiencies enabled by GAI also directly intersect with the regulatory standards governing professional billing. Circular 230, § 10.27(a) provides that:

“A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.”

While AI tools drastically "reduce research and drafting time," practitioners must ensure their billing structures accurately reflect this reduced effort. The OPR warns that "billing clients for manual labor or time that was not actually spent or double billing for AI-assisted tasks may violate § 10.27, depending on the facts". Any cost-savings and administrative efficiencies derived from GAI "should be passed on openly". Managing practitioners must establish billing practices that "fairly credit to the client’s account any cost reductions" and clearly "disclose, in general or specific terms as needed, the AI activities performed".

Statutory Penalties and Taxpayer Data Security under Sections 6713 and 7216

Beyond the administrative bounds of Circular 230, federal statutory law imposes strict civil and criminal penalties for the unauthorized use or disclosure of sensitive client data. Under Internal Revenue Code (IRC) §§ 6713 and 7216(a), preparers face severe penalties for unauthorized disclosures of "tax return information". Under Treasury Regulation § 301.7216-1(b)(3)(i), this information is defined broadly as:

“[A]ny information, including, but not limited to, a taxpayer's name, address, or identifying number, which is furnished in any form or manner for, or in connection with, the preparation of a tax return of the taxpayer.”

Furthermore, Circular 230, § 10.51(a)(15) explicitly prohibits the willful disclosure or use of tax return information in an unauthorized manner, including in violation of the IRC. The OPR warns that uploading sensitive taxpayer data to "unsecured or public systems" creates an acute risk of unauthorized exposure. Consequently, federal tax practitioners "must strictly handle all client data using only secure, enterprise-approved AI" that is backed by "robust confidentiality safeguards".

Evolving Jurisdictional and Professional Frameworks

The regulatory environment is further complicated by state-level developments and advisory guidance from professional organizations. Several states, including "California, Colorado, Illinois, and Utah, have enacted AI governance legislation focusing on transparency, reducing bias, and protecting consumers". In parallel, professional bodies have issued critical ethical opinions, such as the American Bar Association’s (ABA) Standing Committee on Ethics and Professional Responsibility Formal Opinion 512, "Generative Artificial Intelligence Tools," issued on July 29, 2024, which aligns closely with Circular 230 by evaluating key Model Rules of Professional Conduct in the context of GAI.

Conclusion: Safeguarding Professional Trust

While generative artificial intelligence holds immense "promise to improve efficiency and professional services in tax practice," the foundational "ethical obligations of competence, diligence, and confidentiality remain unchanged". Ultimately, AI is a "powerful tool, not a substitute for professional judgment". Managing practitioners must remain actively engaged in "ongoing self-education and awareness, as directives and guidance from government agencies and professional bodies continue to evolve". By maintaining rigorous "human supervision" and establishing robust compliance procedures, tax professionals can leverage the immense benefits of generative AI while preserving the credibility of the tax profession and the public's trust.

Prepared with assistance from NotebookLM.