Can ChatGPT and AI Automate Analysis of K-1s?
BY Scott Turner
ChatGPT has brought generative artificial intelligence (AI) into the mainstream. Created by OpenAI, Chat GPT employs deep learning techniques using a transformer-based architecture to generate human-like responses based on the data that users input.
GPT-4, the latest iteration of the model powering ChatGPT, has encouraged leaders across industries to rethink the way they work, create, and even learn. And its robust power is why so many are eager to better understand the technology.
The US government is also getting involved. Congress recently interviewed a series of experts, including OpenAI CEO, Sam Altman, to explore the risks and rewards of this rapidly advancing technology. On the heels of these hearings, we expect further conversations around the proper uses and limits of AI technologies.
For forward-looking organizations in alternative investments, now is the perfect time to better understand whether ChatGPT or other AI-powered solutions are best suited to process and analyze Schedule K-1s at scale.
How AI is Transforming the Way We Work
The birth of AI dates as far back as the 1950s, but organizations are still in the early stages of using it to power their businesses. But companies large and small are bullish on ChatGPT’s potential, especially as they navigate tighter budgets and a more competitive labor market.
OpenAl’s paper on the future of the U.S. economy assessed the potential labor market impact of large language models (LLMs) and different applications of generative AI, including ChatGPT. The paper specifically examined the U.S. industries and jobs most “exposed” to large language models like GPT. The results include jobs where humans could possibly use AI to optimize their work, as well as jobs that have the potential to be automated altogether.
6 out of 10
U.S. workers will have at least 10% of their
work tasks impacted by GPT technology
The results are staggering, but not surprising: 6 out of 10 U.S. workers will have at least 10% of their work tasks impacted by GPT technology, while 2 out of 10 will have more than 50% of their work tasks impacted by GPT.
The paper also highlighted the jobs likely to see (or already seeing) AI disruption, where AI can reduce the time to do tasks associated with the occupation by at least 50%. “Information processing industries” that involve writing, calculating, and high-level analysis have a higher exposure to LLM (large language model)-based artificial intelligence. However, science and critical-thinking jobs within those industries negatively correlate with AI exposure. The professions OpenAI predicted to be most impacted by this rapidly evolving technology vary from journalists and reporters to, you guessed it, accountants. Spoiler alert: We agree that AI will be transformative to tax compliance and accounting teams who work with alternative investments. We disagree that LLMs like ChatGPT/Open AI will lead the way. Below, we outline why.
How AI is Impacting Accounting Teams
OpenAI found through its research with OpenResearch and the University of Pennsylvania that both accountants and tax preparers have an AI exposure rate of 100%. The researchers defined “exposure” as a measure of whether access to a GPT-powered system could reduce the time it takes for a human to perform a specific work task by at least 50%.
AI automates the most robotic parts of the job–leaving that work to…the robots, while leaving high-value, critical thinking to humans
Needless to say, AI will have a staggering impact on the future of the accounting and tax spaces. In some industries, the rise of AI has sparked raucous debate about the power of humans versus machines. Despite the ominous sound of that 100% number, AI can be a wonderful new technology for tax professionals and accountants. Here’s why. AI automates the most robotic parts of the job–leaving that work to…the robots, while leaving high-value, critical thinking to humans. In the alternative investment world, think of the multiple steps and time required to check portals, sign in with two-factor authentication, access PDF versions of the IRS Schedule K-1, copy data from each field in each PDF, paste that data into tax software, and paste again into excel spreadsheets. This is tedious, manual, time-consuming work that is ripe for human error and human burnout. For organizations grappling with worker shortages, especially in accounting and tax teams, AI can be a saving grace.
More than 300,000 accountants have left the profession over the past two years, and that number is expected to only rise in the future. Organizations need to fill these talent gaps, while also improving efficiencies, reducing errors and optimizing their outputs. The right AI technology can support all of these goals.
Using AI to Analyze K-1s
Within each K-1, there is complete federal, state and foreign information combined into a single, generally unstructured packet that requires knowledge and expertise to digest. Nearly all data in the K-1 is trapped in a PDF, which is a print format, ill-suited for distributing digital data to the multiple parties who need it. Adding to the complexity is that it’s not just form data following an IRS-published template. In fact, the whitepaper statements are hugely variable and essentially free-form text which is why AI is best suited for this problem, rather than an off-the-shelf form recognizer tool.
Nearly all data in the K-1 is trapped in a PDF, which is a print format, ill-suited for distributing digital data to the multiple parties who need it.
With average portfolios ranging from hundreds to thousands of K-1s received, automation is the only way to stay on top of the sheer volume and complexity of the process.
Automating the receiving of K-1s using commercial AI software:
Beyond general purpose AI models and freeware, alternative investment organizations are investigating commercial AI solutions. As the leader in its category, K1x provides purpose-built AI software that processes IRS Schedule K-1s. Its K-1 Analyzer product helps K-1 recipients, such as institutional investors including family offices, funds of funds, banks and sovereign wealth organizations, and others, to simplify their K-1 aggregation process. The K1x AI-powered reader extracts K-1 data in mere seconds per K-1 compared to hours using prevailing analog processes.
K1x AI models have been specifically trained for more than 2,190 days (six years) using more than 90 extraction models, to create a comprehensive and 99.5% accurate AI extraction model for Schedule K-1s, K-3s, and state K-1s.
While not based on OpenAI or affiliated with ChatGPT, K1x AI models have been specifically trained for more than 2,190 days (six years) using more than 90 extraction models, to create a comprehensive and 99.5% accurate AI extraction model for Schedule K-1s, K-3s, and state K-1s. K1x is the only AI-powered software that supports all legal entity types, extracting federal whitepaper details, Schedule K-3s, and all state K-1s.
Once the mind-numbing, manual work has been streamlined with AI, users can access collaborative tools within K1x software to make analyzing complex tax issues easier. This is the real power that AI unleashes–the power of people to cooperate and think strategically.
Transforming K-1 processing with AI
Limited impact expected from LLMs like ChatGPT on tax and accounting.
LLMs like ChatGPT are fundamentally trained to produce plausible text that follows an initial prompt. Note that “plausible” is not the same as “correct”! For this reason, the current crop of LLMs will have a limited impact on accounting (and other fields where accuracy matters, e.g. auditing or law), at least for the foreseeable future. LLMs simply have no reliable method for ensuring that the model doesn’t just make things up. So much for “creative accounting”! Also LLMs are also famously bad at arithmetic, which is especially problematic for accounting work.
Massive improvements from purpose-built AI on Tax and accounting
Headline-grabbing LLMs like ChatGPT may have limited impact on accounting and tax compliance. However, purpose-built AI solutions like K1x will transform the industry by helping organizations tame their tax compliance chaos while also driving efficiency and accuracy within their increasingly strapped tax and accounting teams.
The key is finding the right solution to support the unique needs of your organization and your specific accounting and tax compliance needs. Trusted by 24 of the top 100 accounting firms and 37 of the top 100 university endowments in the US, K1x offers AI-powered K-1 automation software that is changing the way K-1s are created and analyzed.