GENERAL AUDIT PROCEDURES AND DOCUMENTATION

1. When does the audit process begin?The audit process commences with the issuance of a Letter of Authority to
a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a
Revenue Officer to examine and scrutinize a Taxpayer’s books of accounts and other accounting
records, in order to determine the Taxpayer’s correct internal revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under
the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal
Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the
Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the
concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null
and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is
revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through
the issuance of a new LA. However, a Letter of Authority can be revalidated—

Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit?A Revenue Officer is allowed
only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the
Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue
Officer is unable to submit his final report of investigation within the 120-day period, he must then
submit a Progress Report to his Head of Office, and surrender the Letter of Authority for
revalidation.

7. How is a particular taxpayer selected for audit?Officers of the Bureau (Revenue District Officers,
Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy
Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list
of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order
issued by the CIR to establish guidelines for the audit program of a particular year. The list of
taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and
to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-
approved by the Regional Director and finally approved by Assistant Commissioner, Assessment
Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the same taxable
year? A taxpayer’s books of accounts shall be subjected to examination and inspection only once for
a taxable year, except in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes were committed by
Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;

When there is a need to verify the Taxpayer’s compliance with withholding and other internal
revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of
Internal Revenue.
When the Taxpayer’s capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to the
examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process?In addition to the
authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is
being audited, the Commissioner may also:

Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC);
and

Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6,
NIRC).

10. What is a Notice for Informal Conference ?A Notice for Informal Conference is a written notice
informing a Taxpayer that the findings of the audit conducted on his books of accounts and
accounting records indicate that additional taxes or deficiency assessments have to be paid.
If, after the culmination of an audit, a Revenue Officer recommends the imposition of deficiency
assessments, this recommendation is communicated by the Bureau to the Taxpayer concerned
during an informal conference called for this purpose. The Taxpayer shall then have fifteen (15)
days from the date of his receipt of the Notice for Informal Conference to explain his side.

11. Within what time period must an assessment be made?An assessment must be made within
three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is
being subjected to assessment or from the day the return was filed if filed late. However, in cases
involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within
which to make the assessment.
Any assessments issued after the applicable period are deemed to have prescribed, and can no
longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of
Statute of Limitations.

12. What is "Jeopardy Assessment"? A Jeopardy Assessment is a tax assessment made by an

authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief
that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the
Taxpayer’s failure to:

Comply with audit and investigation requirements to present his books of accounts and/or pertinent
records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his return.

13. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued
by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who
has been audited of the findings of the Revenue Officer, following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen (15) days
from his receipt of the PAN to file a written reply contesting the proposed assessment.

14. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be
required in any of the following cases, in which case, issuance of the formal assessment notice for
the payment of the taxpayer’s deficiency tax liability shall be sufficient:

When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax appearing on the face of the tax return filed by the taxpayer; or
When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.

15. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to

respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN
was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and
that the report of investigation submitted by the Revenue Officer conducting the audit shall be given
due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state
the facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and the notice of assessment shall be void.

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TAXPAYER’S OBLIGATIONS AND PRIVILEGES

16. What is required of a taxpayer who is being audited?A Taxpayer who is being audited is obliged
to:

Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation by the
Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority the name of
the recipient and the date of receipt.

Present within a reasonable period of time, his books of accounts and other related accounting
records that may be required by the Revenue Officer; and

Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable
amount of time from his (Taxpayer’s) receipt of the Letter of Authority.

17. What is the recourse of a Taxpayer who cannot submit the documents being required of him
within the prescribed period of time? If a Taxpayer, believing that he cannot present his books of
accounts and/or other accounting records, intends to request for more time to present these
documents in order to avoid the issuance of a Jeopardy Assessment, the Taxpayer may execute
what is referred to as a Waiver of the Statute of Limitations.

18. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations is a
signed statement whereby the Taxpayer conveys his agreement to extend the period within which
the Bureau may validly issue an assessment for deficiency taxes. If a Taxpayer opts to execute a
Waiver of the Statute of Limitations, he shall likewise be, in effect, waiving his right to invoke the
defense of prescription for assessments issued after the reglementary period.

No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly
authorized Bureau official.
19. If a Taxpayer does not agree with the assessment made following an audit, can he protest this
Assessment?Yes, he can. A Taxpayer has the right to contest an assessment, and may do so by
filing a letter of protest stating in detail his reasons for contesting the assessment.

20. What are the characteristics of a valid protest? A protest is considered valid if it satisfies the
following conditions:

It is made in writing, and addressed to the Commissioner of Internal Revenue;

It contains the information, and complies with the conditions required by Sec. 6 of Revenue
Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the immediate past three (3) taxable year.

b.) Nature of request whether reinvestigation or reconsideration specifying newly discovered

evidence he intends to present if it is a request for investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or letter of demand.

f.) Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax
due, which amount should be paid immediately upon the filing of the protest. For this purpose, the
protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid
first.

g.) The itemized schedule of the adjustments with which the taxpayer does not agree.

h.) A statement of facts and/or law in support of the protest.

The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence on which
his protest is based, otherwise, his protest shall be considered void and without force and effect on
the event the letter of protest submitted by the taxpayer is accepted, the taxpayer shall submit the
required documents in support of his protest within sixty (60) days from date of filing of his letter of
protest, otherwise, the assessment shall become final, executory and demandable.

It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of Assessment and formal
Letter of Demand.

21. In the event the Commissioner’s duly authorized representative denies a Taxpayer’s protest,
what alternative course of action is open to the Taxpayer? If a protest filed by a Taxpayer be denied
by the Commissioner’s duly authorized representative, the Taxpayer may request the Commissioner
for a reconsideration of such denial and that his tax case be referred to the Bureau’s Appellate
Division. The Appellate Division serves as a "Court", where both parties, i.e. the Revenue Officer on
one hand, and the Taxpayer on the other, can present testimony and evidence before a Hearing
Officer, to support their respective claims.

22. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is
not acted?
Should the Taxpayer’s request for reconsideration be denied or his protest is not acted upon within
180 days from submission of documents by the Commissioner, the Taxpayer has the right to appeal
with the Court of Tax Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the Taxpayer’s receipt of the
Commissioner’s decision denying the request for reconsideration or from the lapse of the 180 day
period counted from the submission of the documents. (Sec. 228 of the Tax Code, as amended).

23. If the Taxpayer is not satisfied with the CTA’s decision, can he appeal the decision to a higher
Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed with the Court of
Appeals within fifteen (15) days from the Taxpayer’s receipt of the CTA’s decision. In the event that
the Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he may appeal this
decision with the Supreme Court.

24. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes? Yes, he
can. The Taxpayer may file such a claim with the Commissioner of Internal Revenue (Sec.229,
NIRC), within two (2) years from the payment of the tax or penalty sought to be refunded. Failure
of the Taxpayer to file such a claim within this prescribed period shall result in the forfeiture of his
right to the refund or tax credit.

25. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision on this
claim, can the Taxpayer elevate his claim to the CTA?

Yes, he can, if the two (2) year period stated above is about to end, and the Commissioner has yet
to render a decision on the claim. (Gibbs v. Collector, L-13453, February 29, 1960).

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REMEDIES OF THE BUREAU IN THE AUDIT PROCESS AND COLLECTION OF DELINQUENT

ACCOUNTS

26. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts
and other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to
produce his books of accounts and other pertinent accounting records, for inspection. If, after the
Taxpayer’s receipt of the second written request, he still fails to comply with the requirements of
the notice, the Bureau shall then issue him a Subpoena Duces Tecum.

27. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena
Duces Tecum?

If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena
Duces Tecum, the Bureau may:

File a criminal case against the Taxpayer for violation of Section 5 as it relates to Sections 14 and
266, of the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised
Rules of Court.

28. What alternatives are open to Government for the collection of delinquent accounts?

Once an assessment becomes final and demandable, the Government may employ any, or all, of
the following remedies for the collection of delinquent accounts:

Distraint of personal property;

Levy of real property belonging to the Taxpayer;

Civil Action; and

Criminal Action.

29. What is "Distraint of Personal Property"? Distraint of personal property involves the seizure by
the Government of personal property - tangible or intangible - to enforce the payment of taxes,
followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily.

30. What is "Levy of Real Property"? Levy of real property refers to the same act of seizure, but in
this case of real property, and interest in or rights to such property in order to enforce the payment
of taxes. As in the distraint of personal property, the real property under levy shall be sold in a
public sale, if the taxes involved are not voluntarily paid following such levy.

31. In what time period must collection be made? Any internal revenue tax, which has been
assessed within the period prescribed shall be collected within three (3) years from date of
assessment. However, tax fraud cases may be collected by distraint or levy or by a court proceeding
within five (5) years from assessment of the tax or from the last waiver.