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AI and Taxation: Risk Management in Fully Automated Taxation Procedures

On January 1, 2017, the Taxation Modernization Act entered into force in Germany. It includes regulations on fully automated taxation procedures. In order to uphold the principle of investigation in such fully automated procedures, a risk management system can be established by the tax authorities. The risk management system aims to detect risk-fraught cases, and thereby to prevent tax evasion. Cases identified as risk-fraught by the system need to be checked manually by the responsible tax official. Although the technical details of risk management systems are bound to secrecy, such systems are presumably based on artificial intelligence. If this is true, and especially if machine learning techniques, where algorithms self-optimize their programming in case of errors or false results, are involved, this could lead to legally relevant problems. Examples from outside tax law show that fundamental errors may occur in systematic assessments. Accordingly, the greatest challenge of using artificial intelligence in risk management systems is their control.