The Tax Court held that a whistleblower was not entitled to an award because, although his tip prompted an examination of a taxpayer's returns, the IRS's subsequent assessment of additional tax was unrelated to the information the whistleblower had provided.
Facts: Michael Lissack alerted the IRS to a possible underreporting of taxable income by an affiliated group of entities that sold memberships to golf and beach clubs. He alleged that the group had misclassified the upfront membership fees as nontaxable deposits rather than gross income.
The IRS assigned a senior tax analyst to investigate Lissack's claim. A revenue agent found no issue with the entities' treatment of the upfront membership fees, and no adjustment to the group's tax liability was made on that basis. However, during the examination, the revenue agent discovered an issue with the entities' $60 million intercompany bad debt deduction that, with related adjustments and other items, led to an additional assessment of tax. As the proceeds did not directly relate to Lissack's information, the IRS officially denied his claim for a whistleblower award.
Issues: Sec. 7623(b)(1) requires a percentage of collected proceeds to be paid to a whistleblower if the IRS "proceeds with any administrative or judicial action ... based on information brought to the [IRS's] attention" by the whistleblower and collects money "as a result of the action" or settlement in response to it.
Regs. Sec. 301.7623-2(b) defines "proceeds based on information provided by a whistleblower" as arising from when the IRS "initiates a new action, expands the scope of an ongoing action, or continues to pursue an ongoing action, that the IRS would not have initiated, expanded the scope of, or continued to pursue, but for the information provided." The IRS does not "proceed based on" the whistleblower's tip when it simply investigates the issue raised.
The regulations include an example (Regs. Sec. 301.7623-2(b)(2), Example (2)) in which a whistleblower provides information and the IRS opens an examination based on that information. In the course of the examination, the IRS obtains additional information unrelated to the information given by the whistleblower. Any portion of the IRS's examination of the taxpayer based on this additional information does not proceed from the whistleblower, the example concludes.
Lissack argued that the Treasury regulations were contrary to Congress's intent in the statute, which was not to limit awards directly to the issues in a whistleblower's information, and were therefore invalid. He noted that Sec. 7623(b)(1) states that an award can result from "any" IRS administrative action and argued that such an action includes opening an examination. According to Lissack, the IRS opened the examination based on information he provided — the identity of the affiliated group as a possible audit candidate.
Holding: Applying the two-step test of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the court first found that Sec. 7623(b) is ambiguous in its reference to "any administrative or judicial action described in subsection (a)," noting that Sec. 7623(a) does not in fact describe such an action, nor does Sec. 7623(b) itself. Likewise, the court said, the phrase in Sec. 7623(a) "amounts collected by reason of the information provided" is ambiguous.
The court then, under the second Chevron step, found the regulation's definitions and examples did not contradict Congress's intent, were a "reasonable representation" of the statute, and were thus to be relied upon.
Even though the IRS's initial examination into the entities was prompted by Lissack's information, the resulting proceeds were unrelated to his provided facts, the court stated. Rather, the revenue agent discovered the issue. Thus, the court held that the IRS did not abuse its discretion in denying Lissack an award.
- Lissack, 157 T.C. No. 5 (2021)
— By Shannon Veyon Jemiolo, CPA, Ph.D., assistant professor of accounting, Canisius College, Buffalo, N.Y.