Why managing tax compliance and tax controversy should be co-sourced

Tax functions are under sustained pressure from multiple directions. Businesses are reshaping supply chains, operating footprints and governance models at speed. Regulatory scrutiny is intensifying and data requirements are expanding. Tax authorities are now using technology to identify risk faster and with greater precision.

Despite spending a significant portion of their tax and finance function budget on compliance activities to manage the exponential increase in pressure, businesses still spend significant amounts on tax controversy. Data collected as part of the EY Tax and Finance Operations (TFO) survey in 2025 shows that the people cost of internal time spent combined with external spending on compliance averages at 21.2% of a tax function’s annual budget (excluding time spent on the income tax provision). They then spend on average almost the same amount again (20.7%) on tax controversy across internal resource and external support to manage the risk of tax adjustments, interest and penalties. 

This presents a paradox: if investment in compliance is intended to reduce risk, arguably those figures should not aggregate to such a high total of a tax function spending. Unless we see a new norm of both high compliance spending and high controversy spending, it raises some questions: is the investment and effort up front in data quality and tax compliance too little versus the rate of increase in demands? Are the right investments in compliance and tax audit readiness being made? Is the investment structured in a way to increase ROI by achieving high-quality compliance while reducing the possibility of a tax audit?

It’s likely not an issue of commitment or technical capability. One could conclude it’s more likely about “how” the function sets itself up to deliver high-quality compliance. 

The tax operating model is already being re-examined

Over the last several years, the TFO survey has found that tax function operating models are entering a period of structural change. In 2025, 81% of organizations expected to make moderate to significant changes to how they run their business over the next two years, driven by geopolitical pressures, regulatory change and supply chain transformation.

Execution capability has moved to the center of the agenda. Eighty‑six percent of tax and finance leaders rank data, AI and technology as a top priority, reflecting the growing gap between what tax functions were traditionally expected to deliver and the models many still rely on to deliver it.

That gap is already forcing decisions. More than half of tax leaders (54%) report that they are rethinking their operating models, with co-sourcing identified as the most significant structural change under consideration.

Controversy risk is rising, even as technology adoption accelerates

The 2025 EY Tax Risk and Controversy Survey reinforces this conclusion. Ninety percent of tax leaders expect an increase in tax disputes in the coming years, driven by enforcement activity, global tax reform and rising transparency.

Organizations are responding with technology. Nearly 70% of tax functions have implemented or integrated at least one GenAI tool focused on tax controversy management and 87% of senior tax executives believe these tools will make audits and dispute resolution more efficient, less time‑consuming and more accurate.

Yet outcomes remain uneven. Only 31% of respondents say they are very satisfied with their current controversy management approach and just 9% report full visibility over disputes across the organization. Tools are being added, but operating models are not keeping pace.

Across both surveys, the same constraints appear. Sixty‑four percent of CFOs and tax leaders cite the inability to execute a sustainable data and technology strategy as their largest barrier to success.

At the same time, 91% of tax leaders plan to strengthen tax governance frameworks as scrutiny increases. Governance is no longer a background consideration. It is increasingly used by tax authorities to assess risk and determine the intensity of review.

Why co-sourcing is moving from option to necessity

Co-sourcing addresses these challenges by changing how tax work is delivered. The most effective models move beyond transactional outsourcing into a co-sourcing model which seeks to have in-house tax teams complemented by an external global provider to drive an integrated people, process and technology model across the tax lifecycle — with an increasingly healthy infusion of AI.

Internal tax teams retain responsibility for strategy, technical judgment and engagement with business partners and other key stakeholders. Co-sourcing partners provide standardized execution, scalable capacity and access to advanced tax technology platforms. The result is greater consistency and predictability and win-win outcomes vs. a loss of control.

The TFO survey reflects this shift. Eighty‑three percent of tax and finance leaders say that working with AI‑enabled tax and finance service providers unlocks the greatest value.

The peloton is working hard, the leaders are working differently

When it comes to the compliance or controversy paradox, however, the transformation efforts of various tax functions is analogous to a cycling race like the Tour de France. There is the peloton, a large group of cyclists who move forward in a pack, doing similar things without much appetite for change or risk, and the race leaders, who consistently push forward day after day, with a persistent focus to innovate and transform.

Most tax functions are still bunched in the peloton, the main pack of riders. While they reap some benefits from transformation, their compliance is often handled internally, country by country, with limited global visibility. When providers are leveraged, it is often through outsourcing on a country-by-country basis. However, this approach is a poor substitute for co-sourcing, given the interconnected nature of business and the ever-changing application of tax laws. These complexities require a co-dependent and collaborative approach to effectively manage quality compliance.

There are breakaways, early adopters who, for example, rushed to embrace AI but do that without addressing some of the structural, data and governance issues needed to maximize success.

The race leaders are doing something else: they are co-sourcing compliance strategically and globally with structure, creating governance, consistency, and transparency at scale. They are also thinking end-to-end from data to compliance to tax audit to increase the ROI — quality in data and compliance to minimal audit attention and disruption. Leveraging people, processes, enabled by technology, end-to-end with a vested win-win approach through in-house team to external co-source provider.

In other words, the leaders invest earlier and operate differently, so they can spend less later. And they link data and compliance execution excellence directly to controversy prevention.

Shifting the balance from response to prevention

A core advantage of co-sourcing is the ability to manage data quality, compliance and controversy as part of a single continuum. Global platforms and centralized dashboards improve visibility across jurisdictions, enabling leaders to see data quality issues, filing status, audits and emerging risks in one place.

Standardized data and documentation improve audit readiness and reduce the effort required to respond to information requests. Many disputes arise not from aggressive positions, but from inconsistent data or unclear documentation. Co-sourcing helps to address those issues upstream.