This blog was last updated on April 24, 2026

Insights from Sovos and TCS BaNCS on navigating modern tax compliance challenges

By Wendy Walker, VP, Regulatory Affairs, Sovos, and Aaron White, Program Director, TCS BaNCS

Tax information reporting has evolved from a routine compliance function into a strategic business imperative. The Internal Revenue Service (IRS) is sunsetting the Filing Information Returns Electronically (FIRE) system and moving to the new Information Returns Intake System (IRIS) system, which fundamentally changes the tax reporting process for every business.

In our recent joint webinar, Aaron and I explored the hidden challenges forcing financial institutions to rethink their approach to tax compliance. Through our combined experience working with banks of all sizes, we’ve identified five patterns that define success—or failure. Let’s take a look.

1. The Multi-System Tax Data Nightmare

Challenge: The typical bank operates dozens of systems (e.g., core banking, wealth management, trading platforms, CRM tools) that store reportable tax data in different formats and on different update cycles.

This fragmentation creates a compliance crisis during tax season. Teams manually consolidate data from disconnected platforms to meet increasingly tight deadlines. The problem compounds when a single customer (e.g., John Smith) exists differently across multiple systems with conflicting tax information.

Impact: Data quality varies dramatically between real-time and batch-processing systems, creating mismatches that compromise accuracy and trigger compliance failures. The problem doesn’t stop at filing. Fragmented data leads to corrections, slows audit response times, and creates customer statement discrepancies that draw regulatory scrutiny. Without integration, banks face an impossible choice: Invest heavily in manual reconciliation or accept compliance risk.

2. The Dangerous State Compliance Assumption

Misconception: Many organizations assume that filing with the IRS satisfies state requirements. However, combined federal state filing does not equal full state compliance. Each state maintains:

• Unique reporting thresholds that often differ substantially from federal requirements
• Form-specific modifications requiring different data elements
• Separate submission processes—many require direct filing through state portals even when listed in federal sharing programs
• Different filing deadlines, with most states requiring January submissions during an already intense month

Impact: Managing compliance across multiple states and form types creates exponential operational complexity. Over 41 different information returns exist, with the average US bank issuing approximately 33 different return types.

3. Manual Processes: The Hidden Operational Time Bomb

Warning: Manual processes create single points of failure. High staff turnover in compliance and operations—driven by repetitive, stressful work during tax season—leaves organizations critically vulnerable. Departing employees take undocumented institutional knowledge: process nuances, system workarounds, and compliance procedures that exist nowhere else.

Impact: Organizations lose operational continuity precisely when they need it most—during peak compliance periods and business transitions. Undocumented processes raise immediate red flags for examiners evaluating process repeatability, documentation standards, and operational resilience, which are the cornerstones of a defensible compliance program. The resulting instability creates cascading failures across the entire tax reporting function:

• Process breakdowns in critical compliance areas
• Knowledge gaps that emerge suddenly during peak periods
• Inconsistent application of regulatory requirements across departments
• Inability to scale operations as manual processes cannot accommodate business growth

These risks compound during mergers and acquisitions when multiple legacy systems and processes must be integrated quickly and accurately.

4. Third-Party Risk Management: Domain Expertise Matters

Discovery: Tax reporting often gets lumped into broader vendor management programs without true tax reporting domain expertise. It’s frequently fragmented across 4-5 different groups managing different components—with no single team possessing specialized knowledge.

Impact: Regulators now scrutinize banks’ third and fourth-party vendors with unprecedented intensity. This oversight extends across the entire vendor ecosystem: technology vendors providing reporting platforms, service providers managing data processing and filing, and data providers supplying TIN validation and address services. Each vendor relationship—and their sub-vendors—represents a potential compliance exposure point. Generic vendor management approaches fail to meet the heightened expectations for tax information reporting, exposing institutions to regulatory risk.

What regulators require:

• Demonstrated specialized knowledge in tax information reporting
• Proper compliance programs and quality assurance processes
• Active monitoring of regulatory changes
• Clear evidence of technical sophistication

Banks can no longer rely on generalist vendors or fragmented internal structures. Strategic partnerships with specialized expertise have become essential for maintaining compliance while managing costs and operational efficiency.

5. Tax Penalties Hit Your Balance Sheet—And Your Regulator’s Radar

Reality: Tax information reporting penalties aren’t just operational expenses—they’re non-deductible bottom-line hits that must be disclosed in financial reporting. When one institution disclosed mounting penalties, it immediately triggered Office of the Comptroller of Currency (OCC) scrutiny.

Impact: What begins as a compliance issue quickly escalates into a regulatory examination. The compliance and tax teams had to explain to regulators why penalties were accumulating, demonstrating that tax compliance failures don’t stay contained—they become enterprise-wide risk events. Penalties often surface years later through corrections and audits, reinforcing that tax risk is long-tail and cumulative and not just seasonal. What seems resolved during one filing season can resurface as regulatory exposure years.

What penalties signal to regulators:

• Internal controls may be inadequate
• Data quality issues exist
• Compliance programs need strengthening
• Third-party oversight may be insufficient
• The message is clear: penalties aren’t just financial—they’re red flags that invite deeper regulatory examination of your entire compliance infrastructure.

Moving Forward: From Reactive to Proactive

These five realities share a common thread: Traditional tax information reporting approaches no longer meet regulatory demands.  AI-powered enforcement enables regulators to identify patterns, detect errors, and flag systemic weaknesses with unprecedented speed and accuracy. What once took months of manual review now happens in real-time. Combined with compressed deadlines and expanding requirements, this new enforcement landscape requires fundamental operational changes. Organizations that continue to patch legacy systems and rely on manual processes face a widening compliance gap.

Success requires:

• Integrated technology creating a single source of truth across all systems
• Specialized partnerships with deep tax domain expertise
• Year-round compliance monitoring, not just seasonal scrambles
• Proactive validation that catches errors before filing
• Scalable platforms that handle peak reporting volumes and regulatory
• Built–in security and governance across integrated ecosystems in security and governance across integrated ecosystems‑in security and governance across integrated ecosystems

The question isn’t whether to transform your tax reporting operations; it’s how quickly you can act.

Want more information? Click here to learn more about the comprehensive solutions Sovos and TCS BaNCS offer for tax information reporting.