State of Tax 2026
The world of tax compliance has taken on a new level of complexity for businesses. This report combines the observations of Sovos’ team of regulatory experts and data mined from the more than 70 billion annual transactions we conduct globally each year.
The compliance intelligence gap is not a future risk. It’s today’s operational reality for multinational
enterprises. To combat this, tax and finance teams need the same view of their data that the tax
authority has, continuously.
Real-time source data has replaced after the fact declarative reporting.
Insight
Today’s reality is that the tax authority has more data about your business and transactions than you do. It is imperative that businesses track data the same way to dispute figures provided by the tax authority if needed.
The days of non-stop delays are over. Countries are now pushing deadlines up, not back.
Insight
More than 60 countries are expected to add, update or modify tax compliance mandates in the coming year. These mandates will be centered around the need for more data, faster and through government approved technology systems.
The days of a minor slap on the wrist and a small fine are over.
Insight
The tool at the disposal of government tax authorities used to be a post-filing audit. Today, with the advent of real-time, comprehensive reporting, that has all changed. Governments are accelerating penalties for non-compliance both in expediency and severity. What used to amount to a small fine today can result in the loss of licensure and the inability to operate within the jurisdiction.
Large and mid-sized companies must issue and receive e-invoices from 1 September 2026, routed through a government-approved Plateforme Agréée (PA).
Mandatea Peppol-based e-invoicing from 1 January 2027. Norway accelerated its timeline by a full year – a signal that governments are pulling deadlines forward, not extending them.
Mandates Peppol-based e-invoicing from 1 January 2027.
All VAT-registered businesses must submit structured e-invoices through Poland’s centralized KSeF platform – paper and PDF invoices are no longer valid for B2B.
Singapore’s InvoiceNow program, built on Peppol’s PINT-SG format, scales to all GST-registered entities by 2031.
Spain is evolving from a real-time reporting model to full mandatory B2B e-invoicing, building on existing frameworks such as SII and public sector e-invoicing requirements. Spain’s Royal Decree establishing mandatory B2B e-invoicing was adopted in March 2026, with rollout mandated ~12 months after parliament approval (expected October 2026, meaning proposed go-live is estimated October 2027).
Law No. 227/2026 does not impose immediate new obligations on taxpayers, however it confirms that IBS will operate under a centralized, standardized, and highly coordinated administrative model, with direct implications for audits, enforcement, and data cross-checking in the future.
The IRS is retiring Filing Information Returns Electronically (FIRE) and replacing it with the Information Returns Intake System (IRIS). This isn’t a surface-level system upgrade; it’s the most significant structural change to U.S. information reporting in four decades.
Based on independent research, enterprise companies view these as the biggest risks and challenges facing their organization as it relates to tax compliance.
Pace of new government mandates and regulatory changes
Increasing complexity of global operations (e.g. expansion into new jurisdictions)
Rising cost of compliance technology and staffing
Lack of readiness in adopting AI-enabled solutions
Inability to recruit or retain specialized compliance talent
Artificial intelligence is emerging as a strategy for organizations to respond to regulatory speed and operational complexity.
Independent research indicates strong interest in AI enabled capabilities, prioritizing accuracy and precision over speed. Over half of respondents mentioned accuracy in data and insights as the most important AI capability, followed by balancing efficiency and security concerns, with approximately a third looking at factors like the ability to track changing regulations.
Responses also imply that AI could help with growth strategies and digital transformation initiatives. More than half of respondents said that tax and compliance systems influence decisions related to adopting or scaling AI enabled solutions in addition to strategic insights, such as expanding geographies and introducing new products to market.
Significant or moderate impact:
Accuracy of tax compliance insights
Providing data that informs business decisions
Data security and privacy
Alignment with regulatory requirements
The IRS has officially confirmed a plan to sunset the FIRE system, marking one of the
most significant transformations in information return filing in decades.
After serving as the backbone of electronic tax reporting since the
1980s, the Filing Information Returns Electronically (FIRE) system
will be decommissioned in January 2027.
| Aspect | FIRE System (Legacy) | IRIS System (New) |
|---|---|---|
| Status | Sunsets 12/31/26 | Required for tax year 2026 filings |
| File Format |
1220 flat file 100MB compressed |
XML |
| File Size Limit | 100MB compressed | 250MB uncompressed |
| Software & Transmission | Physical login & file upload |
Web portal or API for 100+ records key changes in IRIS information return filing requirements |
| TCC Requirements | Separate TCC for 1099s & 1042s | Separate TCC for API vs. manual filing |
| Validation | Post-filing (after acceptance) | Real-time (before acceptance) |
| Error Correction | Requires entire replacement files submitted | Supports targeted corrections |
| Testing Environment | Limited availability | Year-round visibility |
Global tax jurisdictions
Average changes per month
Insight
The global tax landscape shifts on a daily, weekly and monthly basis, forcing businesses to adjust in real-time to ensure compliance with all local tax laws for the regions where they conduct operations.
Global Hot Spots
Jurisdictions supported
Bills analyzed during the height of season
Sales tax forms tracked
Total goods & service codes
Entity/use codes with exemption logic
Sales tax rate changes in 2025
Tax form changes in 2025
The United States has the highest number of independent tax jurisdictions of any country in the world and frequently introduces new tax laws while changing forms, rates and tax codes. It is the responsibility of the business to stay current.
of all Tax Identification Numbers (TINs) submitted for verification were incorrect.
Insight
In 2024, Sovos conducted over 55 million tax identification number checks for customers, with one in five found to be incorrect. Verifying this information before filing reduces IRS notices and eliminates red flags.
Insight
In 2025, Sovos conducted nearly 60 million tax identification number checks for customers, with one in five found to be incorrect. Verifying this information before filing reduces IRS notices and eliminates red flags.
Select lists to verify against
TIN/Name Matching
Death Master File
Global Watchlists
Predictive Modeling and Data Analytics
Industry Targeting
Incongruous Periodic Returns
Inconsistent Filing History
Inconsistent Filing Approach
Flow Down/Flow Up Audits
Conspicuous Presence
Random Selection
Whistleblowing
Prior Audit History
States use data mapping, target high-fraud industries, or sometimes it’s just bad luck. If an audit is “productive,” expect repeated audits until full compliance is demonstrated.
Failure to recognize a nexus obligation
Failure to request or maintain exemption certificates
Tax rate errors and product taxability rule errors
Failure to assess the use tax on purchases
Failure to remit taxes collected from customers
Once identified as the target of an audit and the audit has commenced, these are the top five areas in which most businesses are flagged for noncompliance.
Although these four states are the most aggressive in their audit approach, increased audit activity is occurring across all 50 states due to advancements in technology
If you reside or conduct business in one of these states, you have a higher likelihood of an audit being launched
Although these four states are the most aggressive in their audit approach, increased audit activity is occurring across all 50 states due to advancements in technology
Temporary 13% reduced rate on transportation services, restaurant and catering services, non-alcoholic drinks, movie tickets, tourism; 6% reduced rate on face masks and gloves.
Zero-rate on food and reduced rates on energy and fuel.
Transactions previously subject to 9% (certain sugary foods and drinks) increasing to 19%; increases from 5% to 9% for high quality food, housing, photovoltaic supplies, use of sporting facilities, transportation (other than taxis).
VAT rates can change unexpectedly in any country or jurisdiction. Businesses must ensure they always apply the current rates.
Digital Services
Energy & Utilities
Hospitality & Tourism
Pharmaceuticals
Transportation and Logistics
VAT is a complex tax system that places responsibility on the seller at each stage of the supply chain. Businesses in these industries are likely to face increased scrutiny from tax authorities.
Many transactions are exempt from VAT. Businesses must track which products are exempt and in which tax authorities. These countries have the most exempt products.
Germany
France
Ireland
United Kingdom
Sweden
4 Reasons E-invoices are Likely to be Rejected
Missing information
Invoice Timing
Format Errors
Failure to Report in Real-Time
Correct information, such as VAT numbers, invoice dates, and currency, is essential for e-invoice acceptance. E-invoices filed too early, too late, or not meeting real-time standards will be rejected.
4 Most Common VAT Penalties and Fines Issued by EU Tax Agencies
Late VAT registration
Late filing of the VAT Return
Late payment of the VAT due to the Tax Office
Incorrect VAT treatment
Most penalties and fines stem from procedural issues. Meeting deadlines and maintaining accurate data keeps you off the tax authority’s radar.
Sovos processed more than three and a half billion transactions for customers all across Latin America in calendar year 2024.
All transactions require real-time reporting to tax authorities to ensure adherence to applicable tax rules.
Latin America leads globally in e-invoicing, with Chile, Colombia, Mexico, and Peru having the most robust compliance initiatives in the region.
E-invoicing initially implemented
1995
Compliance complexity
Systems interoperability
Visibility and information transparency
Strategic scalability
Unique e-invoicing regulations and technologies in different countries make compliance challenging. Constantly evolving regulations pose a risk of non-compliance, requiring continuous monitoring and adaptation to local rules.
Inconsistent
Reporting
High Refund
Claims
Non-compliance with E-invoicing Regulations
Unusual Transaction Patterns
Industry-specific Risks
Discrepancies in sales and purchases, large VAT refund claims, non-compliance with e-invoicing, irregular transaction patterns, and high-risk industries like construction or pharmaceuticals can trigger audits to verify legitimacy and prevent fraud.
The standard penalty for unpaid taxes in Brazil is 75%, increasing to 115%, 150%, or 225% if fraud or lack of cooperation is found.
Brazil’s tax environment is the most complex in the world, requiring businesses to use automated systems for compliance.
5 Reasons for NF-e and NFS-e Rejections by Tax Authorities in Brazil
Errors in the digital signature
Inconsistencies in product or service codes
Incorrect or missing recipient information
Discrepancies in tax calculations
Non-compliance with the required XML schema standards
Brazil has some of the tightest compliance controls globally. Any inconsistent, erroneous, or potentially fraudulent data will be flagged, resulting in transaction rejection and increased audit potential.
Although only 4% of companies are closely audited, they account for 34% of the total tax burden and 98% assertiveness in tax assessments.
Of finance leaders prioritize lowering or maintaining compliance costs
Say investing in additional technology to automate tax and compliance processes
Are focused on better preparing for future e-invoicing mandates
Of leaders say ensuring accurate real-time data reporting within and outside of their company is critical.
Of finance executives have seen a positive return on investment (ROI) on centralized indirect tax platforms
Fortune 500
Line Items Processed on Cyber Monday
Spotlight on the U.S. Regulatory Environment
Spotlighting EMEA and VAT Compliance
Spotlighting VAT Compliance in LATAM
Brazil Stands Alone in the World of Global Compliance
Tax Compliance Acoording to Finance Leaders
