Artificial Intelligence and Cost Segregation

What Tax Professionals Need to Know About the IRS’s 2026 Guidance on Responsible AI Use

Prepared by Scarpello Consulting

Reviewed by Richard Lurk
October 2026

Executive Summary

Artificial intelligence is rapidly changing the tax and accounting profession. AI tools can analyze information, improve efficiency, assist with research, and automate routine tasks. The IRS recognizes these potential benefits.

But the IRS has also made clear that AI does not replace the professional judgment, competence, diligence, and accountability required of tax practitioners.

On June 24, 2026, the IRS Office of Professional Responsibility (OPR) issued OPR Alert 2026-19, “Introductory Guidelines for Responsible AI Use in Federal Tax Practice.” The guidance addresses the risks of generative artificial intelligence (GAI) and explains how existing professional obligations under Treasury Circular 230 apply when tax professionals use AI.

The message is straightforward:

Technology can assist tax professionals. It cannot replace them.

For Cost Segregation, this distinction is particularly important. A Cost Segregation Study involves the analysis of a specific physical property, construction documentation, asset classifications, depreciation rules, tax law, and engineering methodology.

A report that simply produces plausible-looking numbers is not enough.

The question for taxpayers, CPAs, asset managers, and other advisors should therefore not be:

“Was AI used?”

Instead, the better questions are:

• Who verified the information?
• Who inspected the property?
• Who evaluated the engineering components?
• Who confirmed the applicable tax treatment?
• Who reviewed the calculations?
• Who is accountable for the conclusions?
• What happens if the IRS challenges the position?

This white paper explains the IRS’s current guidance and what it means when evaluating AI-assisted Cost Segregation work.

The IRS Is Not Banning AI

It is important to start here.

The IRS does not say that tax professionals cannot use artificial intelligence.

In fact, the OPR guidance recognizes that AI is already widely used throughout professional tax practices and that it can provide meaningful benefits, including efficiency and data analysis.

The concern is not the technology itself.

The concern is unreviewed reliance on technology that can produce inaccurate, incomplete, biased, or fabricated information.

The IRS specifically identifies limitations of generative AI, including:

• Fabricated outputs, commonly called “hallucinations”
• Bias
• Lack of transparency
• Privacy and confidentiality concerns
• Data protection risks

The IRS therefore states that tax professionals using GAI must carefully review documents produced by the technology.

That principle is critical when AI is used to generate or materially assist with a document supporting a federal tax position.

Circular 230 Still Applies When AI Is Used

The IRS’s 2026 guidance does not create an entirely new set of professional obligations.

Instead, it applies existing professional standards to a new technology.

Circular 230 governs practice before the IRS and establishes requirements involving competency, diligence, ethical conduct, and professional responsibility.

Several provisions are particularly relevant to AI-assisted tax work.

Section 10.22 — Due Diligence

Circular 230 §10.22 requires practitioners to exercise due diligence when:

• Preparing or assisting with tax returns and other IRS-related documents
• Determining the correctness of representations made to the Treasury Department
• Determining the correctness of representations made to clients regarding matters administered by the IRS

The IRS’s 2026 AI guidance applies this requirement directly to AI-generated material.

When AI is used, practitioners must review AI-created documents and language before delivering them to clients or submitting them to the IRS. Facts, citations, calculations, and other substantive information must be verified.

What does this mean for Cost Segregation?

An AI system may be able to produce a Cost Segregation report that looks professional.

That does not establish that the report is correct.

A qualified professional must still determine whether the underlying facts, asset classifications, calculations, tax treatment, and conclusions are accurate.

AI output is not a substitute for due diligence.

This is particularly important because Cost Segregation is not simply a matter of applying a percentage to a building’s purchase price. The analysis involves actual property characteristics, engineering judgments, supporting documentation, and applicable tax law.

Section 10.35 — Competence

Circular 230 §10.35 requires a practitioner to possess the knowledge, skill, thoroughness, and preparation necessary for the federal tax matter in which the practitioner is engaged.

The IRS’s AI guidance expands on what competence means in an environment where AI is being used.

Tax professionals must understand:

• The tax law applicable to the matter
• The AI technology being used
• How the AI system generates content
• The system’s limitations
• Potential sources of error or bias
• Whether the AI output is appropriate for the tax matter

In other words, using AI does not reduce the professional’s responsibility.

It increases the importance of understanding what the technology is doing and whether its output can reasonably be relied upon.

The Cost Segregation implication

A firm cannot reasonably treat an AI-generated Cost Segregation report as accurate simply because the software produced a confident answer.

Someone with the appropriate Cost Segregation, engineering, and tax expertise must evaluate the result.

Section 10.36 — Firms Need AI Oversight Procedures

Circular 230 §10.36 requires individuals with principal responsibility for a firm’s tax practice to take reasonable steps to ensure the firm maintains appropriate procedures for compliance.

The IRS’s 2026 guidance specifically identifies the need for firms using AI to establish appropriate controls.

Those controls can include:

Employee training: Staff should understand the capabilities and limitations of AI and how it may appropriately be used.

Secure data handling: Firms need protocols governing what taxpayer information can be entered into AI systems and how that information is protected.

Accuracy monitoring: Firms should have procedures for reviewing and validating AI-generated material.

Third-party vendor review: AI products supplied by outside vendors should be appropriately evaluated before being incorporated into a firm’s tax practice.

Documentation: Firms should document their AI procedures and verification processes so they can demonstrate compliance.

This is an important distinction between using AI as a professional tool and outsourcing professional judgment to AI.

Section 10.37 — Written Tax Advice Must Be Supported

Circular 230 §10.37 establishes requirements for written advice concerning federal tax matters.

Among other things, written advice must:

• Be based on reasonable factual and legal assumptions
• Consider relevant facts and circumstances
• Make reasonable efforts to identify relevant facts
• Relate applicable law and authorities to the facts
• Avoid unreasonable reliance on representations or information
• Avoid relying on the possibility that an issue will not be audited

The IRS specifically addresses AI in connection with these requirements.

AI-generated information cannot simply be accepted because it sounds authoritative. Facts, legal authorities, citations, formulas, calculations, and other substantive information must be independently verified. If the system’s reasoning or underlying sources are unclear, reliance may be unreasonable.

This matters in Cost Segregation.

A Cost Segregation Study ultimately supports a taxpayer’s depreciation position.

If the study contains incorrect classifications, unsupported assumptions, inaccurate calculations, or improperly applied tax rules, the taxpayer—not the AI system—bears the consequences.

Why Cost Segregation Requires More Than an Algorithm

Cost Segregation is uniquely dependent on the facts of the property.

A proper study may require examination of:

• Architectural plans
• Construction documents
• Contractor invoices
• Capital expenditure records
• Property acquisition information
• Building systems
• Electrical components
• HVAC systems
• Plumbing
• Flooring
• Site improvements
• Specialized equipment
• Land improvements
• Other building components

The physical characteristics of one building may be materially different from another building that appears similar on paper.

That is why professional Cost Segregation work has historically relied on engineering analysis and physical inspection.

An automated system may identify patterns in available data. But it cannot independently establish what is physically installed in a particular property simply because the information appears in a public database, satellite image, generic building model, or existing dataset. The property itself matters.

AI Can Be a Tool. It Should Not Be the Professional.

There is an important distinction between:

AI-assisted professional work

and

AI-substituted professional work.

A responsible Cost Segregation process may use technology to:

• Organize documents
• Search large quantities of information
• Identify potential data issues
• Assist with calculations
• Improve workflow efficiency
• Support research

Those applications can be valuable.

The concern arises when technology effectively becomes the person making the professional determination.

The IRS’s conclusion is clear: AI can improve professional services, but it does not replace professional judgment. Final decisions must remain with qualified professionals who understand the tax and ethical requirements involved.

The Human Review Question

One of the most important questions to ask a Cost Segregation provider is:

“Who reviews the AI-generated work?”

Not:

“Does your software have AI?”

But:

“Who is responsible for verifying what the AI produced?”

A credible process should be able to answer:

1. Who physically inspected the property?
2. Who reviewed the construction documentation?
3. Who evaluated the engineering classifications?
4. Who reviewed the tax treatment?
5. Who verified the calculations?
6. Who approved the final report?
7. What professional is accountable for the conclusions?
8. What happens if the IRS questions the study?

If the answer to these questions ultimately leads back to an automated system, taxpayers and their advisors should take a closer look at the provider’s methodology and professional oversight.

What Scarpello Consulting Brings to the Process

Scarpello Consulting has been performing Cost Segregation Studies since 2001.

Our approach combines the disciplines required to analyze complex Cost Segregation projects:

Engineering + Accounting + Tax Expertise + Legal Expertise

Our professionals evaluate the actual property and supporting documentation rather than relying solely on generalized assumptions or automated classifications.

We use technology where it makes sense.

But technology remains a tool—not the final authority.

Our professionals are responsible for the work.

That means:

• Real people conduct the analysis.
• Real professionals review the results.
• Actual property information supports the conclusions.
• Tax law is evaluated by people who understand it.
• Questions can be answered by experienced professionals.
• Clients have access to expertise beyond the initial report.

And because tax law continues to change, our team continually monitors developments that may affect Cost Segregation and depreciation strategies.

What CPAs and Advisors Should Ask Before Recommending a Provider

Before recommending a Cost Segregation provider to a client, consider asking:

Methodology

How is the property evaluated?

Does the provider conduct a physical inspection and review actual project documentation?

Professional oversight

Who reviews the study?

Is there a qualified professional responsible for the final conclusions?

Tax expertise

Who monitors changes in tax law?

Does the provider have tax professionals and other experts available to address changing rules?

AI usage

Where is AI being used?

Is AI being used to assist professionals, or is it effectively replacing professional analysis?

Verification

How are AI-generated facts, calculations, classifications, and citations verified?

Accountability

Who stands behind the report if the IRS asks questions?

Data security

What happens to confidential taxpayer and property information entered into AI systems?

Long-term support

Will the provider still be available years after the study is completed?

These questions can help distinguish technology that improves professional work from technology that attempts to replace it.

The Bottom Line

The emergence of AI does not eliminate the need for Cost Segregation professionals.

It makes professional oversight more important.

The IRS’s 2026 guidance reinforces a fundamental principle of tax practice:

Technology is a tool. Professional responsibility remains with the practitioner.

Cost Segregation is ultimately a tax position supported by engineering analysis, factual documentation, calculations, and professional judgment.

A report can be produced in minutes.

That does not mean the underlying tax analysis has been performed correctly.

For taxpayers and advisors, the better question is not whether a provider uses AI.

It is whether the provider has the people, processes, expertise, documentation, and accountability necessary to stand behind the work.

Scarpello Consulting has been doing that since 2001.

About Scarpello Consulting

Scarpello Consulting was founded by professionals with Big Four experience who helped develop the Cost Segregation practice.

For more than two decades, Scarpello has provided Cost Segregation services supported by experienced engineers, accountants, and tax professionals.

Our goal is straightforward:

Use technology where it improves the process. Use experienced professionals where professional judgment matters.

For questions about a current or upcoming Cost Segregation project, contact Scarpello Consulting.

Let Our Personal Team Put Together and Verify Your Study

877.410.5040 // Info@ScarpelloConsulting.com

Important Note

This white paper is provided for general informational purposes and is not intended to constitute legal, tax, accounting, or professional advice. Federal tax rules and IRS guidance may change. Taxpayers and practitioners should consult their qualified tax advisors regarding the specific facts and circumstances of a particular transaction or Cost Segregation Study.

Primary Sources

Internal Revenue Service, Office of Professional Responsibility, OPR Alert 2026-19, “Introductory Guidelines for Responsible AI Use in Federal Tax Practice,” June 24, 2026.

U.S. Department of the Treasury, Circular No. 230, Regulations Governing Practice Before the Internal Revenue Service. The IRS identifies Circular 230 as the governing framework for standards of conduct applicable to practitioners practicing before the IRS.