Artificial intelligence can hallucinate, but its effects can be very real.
High school teachers and college professors throughout the country are contending daily with papers and research written or conducted not by students, but by students submitting work done using AI. That trend is growing beyond scholastic usage. A recent tax court case shows that AI “hallucinations” made their way into a legal dispute.
Agentic AI takes the science to a new level, described in a Massachusetts Institute of Technology website articleas “a new breed of AI systems that are semi- or fully autonomous and thus able to perceive, reason, and act on their own. Different from the now familiar chatbots that field questions and solve problems, this emerging class of AI integrates
with other software systems to complete tasks independently or with minimal human supervision.”
IBM describes agentic AI as“an artificial intelligence system that can accomplish a specific goal with limited supervision. It consists of AI agents ‒ machine learning models that mimic human decision-making to solve problems in real time. In a multiagent system, each agent performs a specific subtask required to reach the goal and their efforts are coordinated through AI orchestration.”
The tax court case was Clinco v. Commissioner, T.C. Memo. 2026-16. A southern California restaurant operator and attorney reported a loss on the restaurant business and depreciation of two Pasadena, California, rental properties. In the tax court, the IRS and restaurant owner squared off over the facts of the case; the owner’s legal counsel cited several related cases. The problem: the cases weren’t real. From currentfederaltaxdevelopments.com (with the judge apparently taking literary license): “The Court’s analysis of these citations revealed a disturbing reality: the cases did not exist. The judge ruling on the case wrote, 'The persuasiveness of Clinco’s argument collapses like an overmixed soufflé when one looks at the citations used to prop it up.' "
Regarding the specific citations, the court observed:
∎ "’Cacchillo v. Commissioner’ does not, however, exist. Page 132 in volume 130 of the Tax Court Reports is within Porter v. Commissioner … completely unrelated to the case before us."
∎ The cited versions of Miller and Tefel were similarly fictitious. The court stated, "The bouillabaisse of case names, reporter citations, and legal propositions suggests something cooked up by AI."
Agentic AI is baking into the accounting world exciting new possibilities of client benefit based on what it can do and the speed with which it can do it.
Until recently, AI was principally used in accounting to check for consistency in accounts, conduct financial reconciliations, fraud detectionand to carry out other tasks that freed human accounting professionals to focus more on strategic client needs. The key is the use of AI by those professionals.
Given the “hallucinations’ from which AI suffered in the Clinco tax court case, a client’s caution is warranted in how an accounting firm handles AI. If an agentic AI system looks at corporate results and creates a scenario that either doesn’t fit the facts or, as in Clinco, creates facts that don’t exist, both the accountant and the taxpayer will have real-life difficulties.
When engaging an accounting firm either as a business or an individual, explore with its principals these issues: Does the firm use AI? In what functions is AI involved? Who manages the system that will deal with your account? What safeguards are in place? What role, if any, does agentic AI play? How does the firm’s use of AI benefit you as a client?
Ask questions. A skilled, experienced and prepared firm won’t mind. And it could spare you from an AI hallucination affecting your business, and your life.
Samuel French is president of the accounting and business consulting firm Rodefer Moss & Co. PLLC, headquartered in Knoxville. The company’s website is rodefermoss.com.
This article originally appeared on Knoxville News Sentinel: Why it might be risky for your accountant to use AI | Samuel French
