Good afternoon and thank you for that kind introduction and that warm welcome.

It is great to be with so many fellow tax administrators. 

I am only about two-and-a-half months into my 5 year term and, frankly it was my intent to keep a low profile during the early part of my tenure as Commissioner.

Rather, I wanted to spend my time listening and learning, getting to know the people at the IRS and understanding better the issues facing the institution. 

However, it became clear very early on that there were certain groups — such as the FTA — with which with I should interact as soon as possible. FTA is one of the organizations with which IRS has historically had a strong, strategic relationship.

As a result, it was an easy decision for me to be here today.

What I would like to do today is to thank all of you for the partnership that we have had on several strategic issues and stress my commitment to work closely with you in the future. I also want to discuss what I think will be some of the future challenges that we will face as tax administrators.

IRS staff members have described for me the cooperative relationship that we have with FTA on numerous issues. That relationship is premised on mutual respect and the willingness of the leaders of each organization to listen to the other.

Some of the areas where I am told we have achieved great success include:

• Working together to promote e-filing. The IRS receives and forwards state returns filed through the e-file program. As of May 19th, the IRS has forwarded over 44 million state individual returns. This is about a nine-and-a-half percent increase in state electronic individual returns received over last year. In the last year, we more than doubled the number of corporate and partnership returns that we forward to states electronically.
  
  
• The electronic transfer of data between the IRS and the states. We can currently send IRS data to states electronically, but we have been unable to accept data back from you. We have formed a high-level working group to engineer and deploy a method of accepting data from states electronically.
  
  
• We also appreciate your support for the state income tax levy program. Currently, 27 states that assess income taxes are in the program, and in 2007 the IRS collected over $103 million dollars using state refunds as a levy source for those taxpayers who owe a federal tax debt.
  
  
• We are also using state filing information to identify federal non-filers and underreporters. I want to thank the 15 states that are sending non-filer and underreporter data to us this year through the State Reverse File Match Initiative.  

I look forward to continuing the dialog and partnership between federal and state tax administrators.

Now I wanted to share a few impressions from early in my tenure. Over my first few months, I have taken every opportunity to listen and learn — both internally with the IRS workforce and externally with important constituencies: Congress, taxpayers, tax practitioners, foreign tax authorities and other colleagues in government.

As I’ve engaged with important stakeholders, one of the most common questions that I get is whether as commissioner I will focus on services or enforcement.

I believe this is a false choice — the IRS must do both, and do both very well. 

Stated another way, IRS should do everything in its power to make it as seamless and easy as possible for those taxpayers who are trying to pay the right amount of taxes to navigate our organization, get their questions answered, pay their taxes and get on their way.   

But for those who understand their tax obligation, but fail to comply, we must have an aggressive enforcement program. 

To accomplish these objectives, we must deal with several critical issues that are common to everyone involved in effective tax administration.

First, we must continue on the path to modernization. When I think of modernizing, I am not merely speaking about building new technology. We need to ensure that our systems, processes and people reflect the changing environment in which both individual taxpayers and businesses operate.

This means that we will need to focus on providing our employees with better information and tools to serve taxpayers, as well as target and pursue compliance initiatives. It also means that we need to give taxpayers the right information at the right time, whether through the Web or other media.

We also must deal with the challenge of maintaining strong leadership and a dedicated workforce. This will form the foundation of our success in the future.

I believe that the job of any leader is to support the team around him, hold them accountable and make sure they have the skills needed to do their job. We will be competing for talented people with the private sector — so we must focus on developing the workforce of tomorrow. 

Another challenge is the increasing globalization of tax administration. Businesses are no longer defined by national borders. The cross-border migration of capital and people has made this a more integrated world and we all need to ensure that we have the tax administration capabilities to deal with the fast pace of change. This is an area where there are a number of vexing issues without easy answers. 

For example, we are now focusing significant resources on very complex issues, such as valuing intellectual property, services and other intangibles, or identifying and dealing with foreign tax credit generators. These kinds of international tax issues are of great importance to the integrity of tax administration. 

Another critical issue is our need to target the root causes of noncompliance and look for opportunities to improve voluntary compliance rates. I am looking closely at all of our compliance tools and resources, including taxpayer services and outreach, guidance, automated systems, examination, enforcement and collection efforts. We need to make sure we are using our resources in the most strategic way possible.

For example, flow-through entities are the fastest growing segment of the filing population and present unique challenges to federal and state tax administrators. The IRS is working with FTA to explore ways to address compliance issues associated with the use of flow-through entities to avoid federal and state tax.

An IRS/FTA pilot is under development to provide states access to IRS data analysis tools used to visualize flow-through relationships created by partnerships, trusts, Subchapter S corporations and corporations.

Yet another challenge we all face is data security. As tax administrators, we are entrusted with handling very sensitive taxpayer information every day. We have an obligation to America's taxpayers to protect this information and maintain their trust. 

I have made safeguarding taxpayer information a top priority at the IRS. We are currently running a program called Operation R.E.D. that will take every employee off-line for specialized training on data security and safeguarding. Since you, the states, are significant users of IRS data, I hope that you will join me in making the security of taxpayer data a top priority for all of us. We must also ensure that potential breaches of IRS data are quickly surfaced to our inspector general — TIGTA — for appropriate investigation and follow-up. Times have changed. Taxpayer expectations have changed, and we owe it to them to make sure that we are prepared.

Now that I’ve touched on some important focus areas, I wanted to turn to some more general observations about the direction of tax administration.

The IRS’s responsibility to administer the nation’s tax code is enormous. As its leader, a significant part of my job is to set priorities and allocate resources to high priority issues. We will never have a big enough budget, or enough people to look at every issue, and so we need to be strategic about our approach to tax administration.

Take, for example, our tiered issue process in our Large and Mid-Size Business Division. We have prioritized issues in one of three tiers based on their prevalence across industry lines and the level of compliance risk that they represent. Tier I issues are deemed to have high strategic importance, and we ask our agents to look at each Tier I issue if they present themselves during an exam. I have heard from some corporate taxpayers that they believe agents think that if an issue is a Tier I issue, that it should be per se disallowed. This is not the intent. 

When we decide that a certain type of transaction can be an indicator of a high risk compliance issue, such as a Tier I issue, and direct agents in the field to look at it, our people need to use it as an indicator that sparks further dialog. The key ingredient that needs to accompany prioritization is judgment. I know that the LMSB leadership team is working hard to ensure that its agents know that a Tier I issue should trigger further analysis, but is not necessarily a problem.

We won’t always get it right — and we must always evolve and adapt — but I believe strongly that we must not shy away from prioritizing our attention and resources.

There are some broader dynamics at work here too. The power to collect taxes comes with an awesome responsibility to operate with high levels of integrity and fairness. Too often the relationship between tax authorities and taxpayers becomes mired in mutual suspicion. This is not productive for taxpayers, and it’s not productive for the IRS.

No one wins.

In my view, a crucial part of the path forward is through increased transparency. When all parties are working from the same information, the opportunity for miscommunication and misunderstanding decreases dramatically. But transparency alone is not sufficient. With transparency comes the need for trust among the players in the tax system, and a responsibility of the tax authorities to use information appropriately.

Let me explain what I mean in a few different contexts.  

The Administration and Congress have been discussing legislation to require banks to report payments to merchants for credit and debit card transactions. There are also similar ongoing discussions about reporting of cost basis on sales of securities. 

Philosophically, I am inclined to support information reporting regimes that allow the taxpayer and tax administrator to start the process with transparent and consistent information. With this information, the IRS can focus its time and resources on thoughtful and considered analysis, rather than on the labor-intensive tasks of requesting, collecting and formatting one-off information from taxpayers.  

While I fully appreciate that implementing these proposals would be a significant undertaking for everyone involved, I would welcome the day that a taxpayer needing to report capital gains would get that information on a year-end form, in a consistent format, rather than doing it himself and worrying whether the data that he uses is correct. 

Another example of the power of transparency is the Form 990. Federal law affords non-profit organizations the economic benefit of being tax exempt. The IRS has the responsibility to ensure that this benefit is not improperly used by organizations or by individuals. Tax exempt organizations — hospitals, schools, and religious institutions to name a few — are an integral part of this country’s social fabric. In this area, it is absolutely essential that the IRS be seen for what we are: an impartial administrator of the tax laws. 

The Form 990 allows for an open and transparent dialog among non-profit organizations, state regulators, the IRS, and the public at large. Unlike other taxpayers — whose information is highly confidential — virtually all Form 990 information is public by law in order to promote public trust. We have been focused on the continued evolution of Form 990 and its broad dissemination. When this information is available in a standard, easily accessible format, the non-profit sector can work more effectively, and the level of honest dialog about the use of tax benefits to support societal goals will increase. As the nation’s tax administrator, we welcome and encourage this kind of dialogue.

At the federal level, we have made significant steps in improving transparency for the large corporate taxpayers in recent years.

The Schedule M-3 form was revised to make it easier for the IRS to reconcile book-tax differences. This enables the IRS to identify and focus more quickly and precisely on those tax returns and issues that present the highest potential compliance risk.

To improve both currency and transparency, the IRS created the Compliance Assurance Program (CAP). CAP is a real-time approach to compliance review that allows us, working in conjunction with the taxpayer, to determine tax return accuracy prior to filing. 

This is a win-win program that greatly reduces taxpayers’ compliance burden and their need for contingent book tax reserves. At the same time, the CAP program is a more efficient use of IRS resources by getting agreement up front, rather than debating issues well after the fact.

As I mentioned earlier, transparency can only create an environment of trust where all parties accept elevated responsibility to appropriately manage information. IRS personnel must not confuse greater transparency of information with greater authority over taxpayers. More than ever, the IRS will need consistent procedures, training, and an organizational commitment to using data in a way that is fair to taxpayers. 

I want to thank you again for the invitation to be here this morning. I want to reiterate my desire to work closely with you.

Now, before I close, I was informed last week that FTA’s Executive Director — Harley Duncan — has decided to move on after 20 years of service. I met Harley 12 years ago, when I was involved with the IRS Restructuring Commission, but I haven’t had a chance to work with him in my new capacity as IRS commissioner. 

Suffice it to say that it is impossible to measure the contributions that Harley has made to tax administration, and the close partnership he established with the IRS will be sorely missed. Because of all of Harley’s contributions to IRS, on behalf of myself and Linda Stiff, I am pleased to present Harley with a Commissioner’s Award in recognition of his many years of service. The Commissioner’s Award is the highest honor that the agency can bestow. 

I hope the rest of your conference is successful, and I look forward to an ongoing dialogue.