AI Tax Preparation

I have prepared my own taxes for my entire adult life, using H&R Block software for many years and then TurboTax for the last five. My tax return includes multiple K-1s and 1099s for brokerage transactions, mortgage interest, and interest income. I typically itemize deductions and have multiple dependents. While, for many years, I received one of the most complicated K-1s imaginable, I have always been able to complete my taxes with reasonable effort using the TurboTax software. TurboTax Live has been a nice touch over the last couple of years, as it helped me sort through some of the more complicated issues with my K-1s. I had no intention of ever leaving for another vendor or an actual CPA.

This year, while I await a final K-1 from a VC fund, I decided to try out the AI-powered solution from Prime Meridian and compare it to my draft tax forms from TurboTax. Despite being a returning customer, the TurboTax process usually takes me several hours, as I have to review my personal details, answer some interview questions about changes to my tax situation, and review forms ingested from various vendors, such as ADP, Schwab, Fidelity, and Chase. I also have to manually input the details of my K-1s, and this is and has always been fairly laborious. With Prime Meridian, I deliberately committed minimal effort. I uploaded all of the relevant documents and answered between 5 and 10 follow-up questions. This process took about five minutes. I then waited about an hour (the site says it can take as long as 24) for an email indicating that my return was ready to review.

After reviewing the results, I compared the forms prepared by the Prime Meridian software with the draft return documents from TurboTax. To my astonishment, nearly every line item was the same. This included Schedules B, D, and E. The entries related to my K-1s were identical. However, there were two notable differences in my federal return. One, Prime Meridian did not prompt me to itemize my deductions. I am not sure why. Perhaps I missed something in the interview or clicked a box incorrectly. This cost me about $12,000 in deductions, which is significant. Second, I noticed that the interest income recorded on the Prime Meridian Form 1040 was considerably lower than what I had from TurboTax. I mean CONSIDERABLY lower. My initial reaction was that it must be an error, so I was inclined to dismiss the AI as inept and move on. However, there was a part of me that hoped that the AI was right, so I decided to check the Schedule B to see if I could locate the source of the difference. There, on the Schedule B, I saw a negative entry for accrued interest paid, in the amount of roughly $200,000. That surprised me, as I assumed the interest income reported on Form 1099-INT would have already adjusted for accrued interest paid on a US Treasury bond purchase (the accrued interest is the pro rata share of a coupon payment that has already been "earned" by the holder; it must be paid to the seller when you buy a bond in between coupon payment dates). I dug in further, looking into the source document, which was a Form 1099-INT from Schwab. To my surprise, the accrued interest I paid on several US Treasury bond purchases was provided in the notes to the Form 1099-INT, but it was not subtracted from the coupon payments I received. Therefore, the interest income reported on the Form 1099-INT was significantly overstated. Prime Meridian identified this and made the proper adjustment. TurboTax ingested the exact same Form 1099-INT directly from Schwab (I did not manually enter the data), but it failed to flag the accrued interest. After studying the TurboTax workflow more carefully, I realized there was an optional box to check in order to "adjust the income reported on Form 1099-INT." I missed this, and I think I would miss it 95% of the time. So, in this case, the AI from Prime Meridian was materially better. In fact, it saved me about $100,000 in taxes this year alone. I will be able to amend prior year returns for the same issue, as well. I should mention that I paid roughly $350 for my TurboTax federal and state returns. Prime Meridian was free.

In summary, a free application from Prime Meridian leveraged an AI model--I am guessing ChatGPT--to complete a complex personal tax return with five minutes of prompting by me and one hour of thinking behind the scenes. The result was virtually the same as what I received from TurboTax, with Prime Meridian netting me six-figure savings. I thought AI would struggle to accurately complete my tax return, but I was wrong. I had no reason to leave TurboTax, but now I see no reason to stay. The user experience of Prime Meridian is essentially impossible to beat, as is the price. The lock-in effect of having my personal information and prior year's tax return is no longer relevant. In fairness, Prime Meridian has some kinks to work out. Itemizing deductions, for example, is something that a large percentage of customers will want to consider. However, by the next tax season, I feel like Prime Meridian's product, and the foundation AI model it uses, will be so much better that it will be at least on par with TurboTax, if not far ahead. So, for TurboTax and H&R Block, who still make large profits from their online tax preparation tools, notice has been given. The AI threat does, indeed, appear to be very real.