The Bureau of Internal Revenue (BIR) has the authority to audit all taxpayers and render assessments for deficiency taxes.
During audits, the BIR effectively uses a fraction of the government’s resources against a single taxpayer. Meanwhile, the taxpayer still has to carry on his or her business operations while the audit is taking place. The balancing factor, according to the Supreme Court, is ensuring that all audits are properly authorized.
In G.R. Case No. 222743, Medicard Philippines, Inc. was issued assessments without being issued a Letter of Authority (LOA) from the BIR. This lack of adherence to due process effectively voided the assessments.
The ruling was later reiterated by BIR Revenue Memorandum Circular No. 75-2018.
To avoid being taken advantage of by corrupt revenue officers, taxpayers need to learn the process of a BIR audit or investigation, and what validates or invalidates such audit.
The BIR audit begins with the issuance of a LOA.
Prior to that, the taxpayer can be issued a letter notice to notify the taxpayer of any discrepancy in the reports. Letter notices cannot replace LOAs, and as such do not authorize further examinations or assessments.
This applies even if the letter notice already contains the exact deficiency determined via the BIR’s database. In such cases, letter notices will need to be converted into letters of authority before assessments can be issued.
LOAs need to be specific, containing which types of taxes will be audited and for what taxable year. While sanctioning the audit of all types of taxes is allowed, LOAs can only cover one taxable year. For audits of multiple years, separate LOAs need to be issued.
The LOA needs to be served to the taxpayer within 30 calendar days of its issuance, otherwise it is voided and will need to be revalidated.
Once the LOA has been issued, the actual audit can begin. The LOA will contain which documents need to be submitted to the BIR. Failure to provide the requested documents will subject the taxpayer to the issuance of Subpoena Duces Tecum.
After the audit is finished, the BIR will issue a Notice for Informal Conference (NIC), containing the taxpayer’s liabilities. The taxpayer can then contest the assessment through an informal conference within 30 days from the issuance of the notice. If the BIR is not convinced by the taxpayer’s argument, it will proceed with the issuance of a Preliminary Assessment Notice (PAN).
The taxpayer will have 15 days to respond to the PAN, and only after the said period prescribes can the BIR issue the Formal Letter of Demand (FLD) and the Final Assessment Notice (FAN).
These documents (NIC, FLD, PAN, and FAN) need to be received by an authorized representative of the taxpayer.
In the case of Mannasoft Technology Corp. vs Commissioner of Internal Revenue (CTA Case No. 8745), the foregoing documents were received by persons not authorized by the taxpayer. The Court of Tax Appeals (CTA) ruled that such receipt does not count. As such, the CTA ruled that since the documents were not received by the proper authorized representatives, the assessments issued for that audit are deemed void as well.
Further, the burden of proving that the assessments were in fact received by the taxpayer lies with the BIR. In the case of Commissioner of Internal Revenue vs Bank of the Philippine Islands (G.R. Case No. 224327), the BIR failed to prove the receipt of the final assessment. The SC ruled that, essentially, “no assessment was issued.”
There is also a 120-day period prescribed for the duration of audit, but this is apparently not part of the due process. Even if the audit were to exceed the prescribed period, it will not be invalidated.
The government needs to implement this period strictly, and limit the types of investigation based on the size of the taxpayer’s business.
Microbusinesses, which will not be able to provide much in the way of assessments anyway, should only be subjected to a tax mapping—with a one-week prescribed period. Small, medium, and large enterprises will then be liable to tax mapping, regular audits, and Run Against Tax Evaders (RATE) cases.
The audit should only last three months for small enterprises, six months for medium enterprises, and nine months for large enterprises. RATE cases could be recommended longer periods—six months for small enterprises, one year for medium enterprises, and one to two years for large enterprises.
Conducting long audits that continually drain the taxpayer’s finances hurts only the taxpayers and often used by corrupt revenue examiners. As such, violation of this period should be grounds for the invalidation of the audit.
Currently, there are still procedures that are open to exploitation. There are currently no limits to being audited, and it usually means businesses are audited yearly. If done correctly, the audit should already address all violations. The taxpayer should then have ample time to comply with regulations.
The BIR should only audit a particular business once every three years. Currently, the BIR throws around guesswork assessments, accusing the same companies over and over again.
Examiners need to be made accountable for the assessments they make. If they are not able to collect a certain portion of their imposed assessment, then they should face strict administrative measures. This would act as a safeguard against corrupt officers.
Once an audit is finished, even if it was rendered void, the BIR cannot examine those same parameters (i.e. same tax types and taxable year). In other words, the BIR has every reason to follow the due process to ensure that it will be able to collect from its investigations.
However, this does not mean that taxpayers should rely on such invalidations all the time. It should only be a last resort against harassing audits.
In the long run, it is better to learn how to avoid the discrepancies that warrant an audit in the first place. Creating a comprehensive tax plan and ensuring tax compliance are key to saving more on taxes. Without fines and penalties, businesses will be able to earn more.
The Asian Consulting Group offers the Citizen Tax Planning program to relieve taxpayers of the unnecessary burdens of fines and penalties. Being subjected to an audit not only causes financial strain but also undue stress. ACG’s expert tax advisory specializes in addressing issues with BIR audit and preventing any exposures.
To learn more about CTP, contact us at [email protected] or call us at (02) 622-7720.
This article was originally published in the Philippine Daily Inquirer.