Thank you for that kind introduction and warm welcome.

It’s been six months since I had the honor and pleasure to first meet and speak with TEI’s members. And it’s not a time in my life I will easily forget.

The ink was barely dry on my official papers when, against all good advice from the former Commissioners, I took the job with two weeks left in the filing season and during the distribution of the economic stimulus checks. Thankfully, I didn’t suffer too many bruises.

During these six months, some things have changed dramatically and others have remained constant.

What hasn’t changed is that I’m still listening to and learning from taxpayers, practitioners and professionals like you.

What also hasn’t changed is my strong desire to foster mutual respect and cooperation between the IRS and TEI.

However, you and I also know that since last April the world is a very different place…different in profound and fundamental ways that we’re still trying to understand.

There is a supposed curse I’m sure many of you have heard – “May you live in interesting times.”

If anything, these past few months have been interesting – just like experiencing an 8.2 magnitude earthquake is interesting. I think all of us would welcome a healthy dose of boredom – and most of all stability.

Few could have predicted the tectonic changes in the financial landscape we’ve witnessed. And the topography keeps changing before our eyes every day.

Now, I’m not in the business of predicting the future. I don’t have a crystal ball on my desk.

I can’t tell you what the tax code will look like 10 years from now…what the corporate tax rate will be ….or if the Chicago Cubs will ever win a World Series.

But I can tell you this. I firmly believe in being open to and ready for whatever the future may hold.

The great American scientist Stephen Jay Gould wrote that, “Nothing is more dangerous than a dogmatic world view – nothing more constraining, more blinding to innovation, more destructive of openness to novelty.”

And I believe too that the IRS must recognize when the world changes…when the old paradigms no longer fit …and when familiar practices no longer work.

We don’t operate in a vacuum. To be effective, we must understand the economic realities of the environment in which taxpayers and businesses like yours operate.

The IRS must be flexible, agile and nimble enough to detect and adapt to emerging trends. But it must also use them as opportunities for continuous improvement in overall performance and compliance. If we stand still, we actually fall behind.

In this regard, I believe a large part of my leadership role as Commissioner is to help steer and position the IRS… to bring new approaches, vision and strategies … to help harness the innovative thinking that will take us well into the 21st century.

I would like to talk today about three emerging trends that really stand out – trends that we ignore at our collective peril but could also take us to new levels of success.

Let’s start out with the global economy and the globalization of tax administration.

It wasn’t that long ago – 30 or 40 years – that “international” was the emblem that signaled the world’s premiere business players.

America’s largest corporations had major presences in Europe, the large South American nations, the Middle East, Japan and some in what were then considered far-flung outposts in the Far East that evolved into the Four Asian Tigers.

However, with the exception of an elite few, most corporations could not claim to be truly global in nature.

Enter the revolutions in communications and transportation.

The Telex machine was replaced by the Internet and e-mail. Orders and financial transactions now raced across vast oceans and continents in the blink of an eye.

And seamlessly choreographed global transportation networks brought the world’s marketplace directly to America’s door – and vice versa.

Businesses were no longer defined by national borders drawn up centuries ago. And the United States was no exception.

U.S.-based corporations more than tripled their foreign profits between 1994 and 2004, rising from $89 billion to $298 billion – with 58 percent of that profit earned in low tax or no tax jurisdictions.

And it wasn’t just corporations getting their financial passports stamped. The percentage of Americans’ personal income originating from foreign sources doubled between 2001 and 2006.

And with this rapid global expansion came the global-sized challenge for the IRS of dealing with the cross border migration of capital and people. And while progress has been made, I’m the first to admit that there are still a number of vexing issues… issues without easy answers.

The international transactions confronting the IRS are extremely complex. They often involve multiple taxpayers, some of whom are foreign citizens located outside of the U.S. 

And to complicate matters, some of these transactions are conducted offshore between counterparties that are both foreign entities, raising thorny jurisdictional questions.

The IRS knows all too well that we have to be at the top of our game when playing in the international business arena. And we currently have cooperative agreements for information exchanges with over 70 jurisdictions and have expanded the program in recent years to even include some famous offshore ones, such as the Cayman Islands and the Bahamas.

Let me take a few minutes to dive deeper into some of the global initiatives we believe are producing real results.

One of our best tools is the Qualified Intermediary Program. QI gives the IRS an important line of sight into the activities of foreign banks and other financial institutions. It also provides detailed information reporting that the IRS did not previously receive.

Indeed, the QI program is critical to facilitating sound tax administration in a global economy. By bringing foreign financial institutions more directly into the U.S. tax system, we can better ensure that U.S. persons are properly paying tax on foreign account activity, and that foreign persons are subject to the proper withholding tax rates. 

Admittedly, the QI program is relatively new, and as with any new and complex program, there will be flaws that must be addressed. I became convinced early in my tenure that we needed to shore up the QI program and continuously enhance, improve and strengthen it. And we did.

Just last week, we issued a set of proposed QI amendments for comment which I believe will make  QI audits more useful and  help give us that clear line of vision and transparency we need in tax administration. This is similar to some of our other efforts to improve transparency – whether it’s simple document matching or a book-to-tax difference in a corporate return’s Schedule M3.    

Under the proposed changes, financial institutions that are QIs must provide early notification of material failure of internal controls. They must also improve evaluation of risk of circumvention of U.S. taxation by U.S. persons. And they must include audit oversight by a U.S. auditor. I certainly look forward to your comments and suggestions after you review this important proposal.

Let’s look at another initiative producing positive returns. As most of you know, the IRS designated LILOs as ‘listed transactions’ in 2000 and SILOs in 2005.  Since then, the government has gone to court and successfully challenged these deals as having no other purpose than creating tax benefits. 

To refresh everyone’s memory, LILOs and SILOs involved complex and convoluted purported leasing arrangements in which some of the nation’s largest corporations supposedly leased or purchased large assets, such as foreign rail systems or sewer systems, and immediately leased them back to their original owners. 

Under the arrangement, these corporations, which include Fortune 500 companies, buoyed their balance sheets by gaining billions of dollars of tax deferrals. Using LILOs and SILOs, these companies, also including many of the nation’s top financial institutions, put off the recognition of current income for tax purposes for many years.

I’m very pleased to announce today that most of the corporate taxpayers with LILOs and SILOs accepted our settlement offer and have decided to put these LILO and SILO transactions behind them. More than two-thirds of corporations that received the LILO/SILO settlement offer have decided to take the IRS up on the initiative. Those accepting the offer had more than 80 percent of the total number of LILO and SILO leases.  These leases involved about 80 percent of the dollars in dispute and will require the corporations to concede billions of dollars in tax deferrals. These numbers remain preliminary until final closing agreements are reached between the individual corporate taxpayers and the IRS.

This broad response from LILO and SILO participants is yet another positive step in the IRS’ campaign against abusive tax shelters. Corporations who have chosen to settle have done the right thing by putting this behind them. What about those who failed to take us up on this offer? They can be assured that we will vigorously pursue their examinations and cases. 

Let me say one further thing about these kinds of global settlement initiatives.  As the IRS Commissioner, I believe that settlement initiatives are a vital tool for good tax administration.  The LILO/SILO settlement initiative is the latest in a series of efforts to detect, deter and resolve individual and corporate tax shelters. Over the past eight years, the IRS has attacked through examination, litigation and guidance efforts to twist and distort the tax code in order to reduce or eliminate income taxes. Where appropriate, we will use settlement initiatives to help put issues behind us.  If used correctly, these kinds of offers can resolve multiple cases with multiple taxpayers, bringing finality to an issue and freeing up valuable IRS resources.

Let me also speak about an IRS program that allows us to better identify and focus on high-risk tax compliance issues and ensures that we utilize a strategic approach to manage them. Our Issue Focused Examinations and Tiered Issue Strategies are designed to do just that.

We identify potential compliance issues through examinations, Schedule M-3 reviews and other data sources. These issues are then assessed for risk and prioritized to determine the audit approaches that will be employed.

This strategic approach allows us to make better use of precious resources to tackle high-risk compliance issues. It also sends a clear signal to large corporations that these are the issues on their return upon which we would most likely focus. 

I have had a lot of discussion with the corporate tax community about the tiering of issues, and particularly the designation of Tier I issues. Tier I Issues, in our view, are of high strategic importance. They often represent a high level of tax uncertainty and significantly affect one or more industries. This makes resolution of these issues very important. In addition to listed transactions, the non-listed LMSB Tier I compliance issues cover the compliance waterfront – ranging from Foreign Tax Credit/Generators to cost sharing arrangements where intangibles are shifted offshore to low or no tax jurisdictions.
Now, I have also heard from some corporate taxpayers who believe that if a revenue agent thinks that an issue is a Tier I issue, it should be per se disallowed. This is not our 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 that does not mean that there will be an automatic adjustment proposed.

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.

Let me now turn to the second big trend – and it’s not a pleasant one. I’m speaking of the nation’s budget deficit. The Treasury Department now pegs the budget deficit for FY 2008 at $455 billion.

The nexus between the budget deficit and the IRS is clear. Along with spending cuts, the only meaningful way to bring the deficit down is by bringing in more revenue.

Even before the current economic crisis, policymakers were focusing on the tax gap as one way to shrink the budget deficit.

So looking forward to next year, I believe that there will be increased pressure on the IRS to collect more of the money that is legally owed the government. However, the IRS will also be confronted with taxpayers in economic distress who need help working through their tax obligations.   

Now, you and I know that when it comes to closing the tax gap, there’s no easy solution or silver bullet. As I have said on numerous occasions, we cannot audit our way to full compliance. But we can enhance our enforcement presence through greater use of innovation and new tools.  Information reporting will be one key to our future success, and recent bills passed by Congress which require brokerage firms to report basis on stock sales and credit card companies to report payments to merchants will be important to our enforcement efforts. 

Another enforcement and compliance approach, specifically in the large corporate arena, is the CAP (or Compliance Assurance Program).   It is the type of innovative, forward-thinking program that I embrace.

Although we are still working out some of the kinks and concerns in this pilot stage, I believe CAP breaks down the whole enforcement paradigm. If executed correctly, it provides certainty and clarity to corporate filers who then don’t have to worry about audits and contingent liabilities hanging over their heads. And by spending more time up front, it allows everyone to move precious resources to other pressing issues.

One interesting issue that arises with CAP is that it doesn’t fit neatly into traditional IRS measures.  The effectiveness of our exams is often measured by proposed dollar adjustments.  In the CAP program, there is no post-filing exam so there are no dollar adjustments in our exam program for CAP taxpayers.  With a larger number of CAP case closures, we will see a decline in proposed dollar adjustments for large corporate taxpayers.  Some will criticize us for this decrease, but I believe this criticism is misguided.  In essence, we have changed the game—there are no adjustments, because we are making sure that the right amount of tax is paid on the front-end to avoid adjustments on the back end.  .

It is my firm belief that we should not allow old and rigid thinking to stifle innovation. This will require us to come up with new ways and measures that capture the value of CAP and other new programs but also let taxpayers know that we are still on the job.

And again, let me recognize and thank TEI for not only its constructive suggestions but the collaborative spirit it has brought to making CAP a better program that works for both of us – the corporate tax community and the IRS.   

The third and last trend is IRS’ greatest resource: its workforce. Ultimately, our success in improving service and enforcement depends upon our people.

As I mentioned in April, I’ve been enormously impressed by the dedication, hard work and caliber of our workforce and leadership team. And I now believe more than ever that they will form the foundation of the new heights we will achieve in the future.

However, we cannot take this for granted. We face major challenges with the large number of employees likely to retire in the next few years and with the competition we face with the private sector for critical talent.

Growing the workforce and leaders of the future is one of my top priorities, and one of my first actions was creating the Workforce of Tomorrow task force to ensure that five years from now we have the leadership and workforce ready for the next 15 years at the IRS and to make the Service the best place to work in government.

Although it hasn’t been officially released, our 2009-2013 Strategic Plan calls for training employees to identify and understand issues in an increasingly complex environment. Even basic issues such as correctly reported income might require our employees to understand returns prepared under the International Financial Reporting Standards.

We also need to increase our hiring of employees with specialized skills, such as valuation experts, actuaries and financial product specialists.

Here, too, I want to thank TEI for its training efforts on our behalf. I sincerely believe that both of our organizations and the entire tax administration system benefit from such cooperation and collaboration.  

In conclusion, let me underscore that I view TEI and the corporate tax community as an integral part of the integrity of our tax administration system.

And after spending the better part of the last decade dealing with complex markets and financial instruments, I believe that any time there are truly complex issues that require markets and government authorities to adapt, the majority of the community engages in honest dialogue about how to do so in a responsible manner. But sadly, there are those few who exploit complexity to push the envelope beyond acceptable boundaries.   My expectation is that those of you in this room who have made your careers in this profession, and care deeply about its reputation — as I know you do — will work with us to better and quickly understand when the troublesome behavior of a few bad actors begins to emerge.

Let me thank TEI and its members for inviting me to share some thoughts with you today. I greatly value the dialogue we have established and hope to strengthen it throughout my term in office as together we build the tax administration system of the 21st century. I would be happy to take your questions.