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Techniques Used by the BIR in

Tax Audit and Investigation of


Tax Payers

Ruperto P. Somera, Ph.D., DBA, CPA


Tax Consultant, Professor/Lecturer
Former Director, Bureau of Internal Revenue
Former Member of the Board of Accountancy
Fellow in Tax Management
Fellow in Tax Research
STATUTORY BASIS OF ASSESSMENT:

INTERNAL REVENUE CODE

Sec. 6 (A) – “After a return has been filed


as required under the provisions of this
code, the commissioner or his duly
authorized representative may authorize
the examination of any taxpayer and the
assessment of the correct amount of tax
xxx.“
ANY RETURN, STATEMENT OR
DECLARATION FILES IN ANY BIR OFFICE
AUTHORIZED TO RECEIVE THE SAME SHALL
NOT BE WITHDRAWN: PROVIDED, THAT
WITHIN THREE (3) YEARS FROM THE DATE
OF SUCH FILING, THE SAME MAY BE
MODIFIED, CHANGED, OR AMENDED:
PROVIDED, FURTHER, THAT NO NOTICE
FOR AUDIT OR INVESTIGATION OF SUCH
RETURNS, STATEMENT OR DECLARATION
HAS, IN THE MEANTIME, BEEN ACTUALLY
SERVED UPON THE TAXPAYER.
TAX Audit Jurisdiction

1. Large taxpayer service – top 1,300 corporation


2. Enforcement service
a) National Investigation Division – NID
b) Special Investigation Division
c) Revenue District Office (RDO)
Electronic Letters of Authority (eLA)
Under RMO 62-2010, the manual issuances of Las
for all investigating offices under the Regional
Offices, the LTS, the Enforcement Service, and the
various Task Forces and Special Teams authorized by
the CIR has been discontinued. This Order paved the
way for the issuance of electronic Las (BIR Form No.
1966) through the Letter of Authority Monitoring
System (LAMS). In said RMO, the issuance of TVNs
has likewise been stopped, and instead, eLAs were
supposed to be issued for cases to be covered by
TVNs
The Regional Director shall issue the
corresponding Letter of Authority if indications of
fraud have been established, and the same has
been confirmed by the Regional Tax Fraud
Committee (RTFC), composed of the following:
• One LA shall be issued for each taxable
year to include all internal revenue tax
liabilities of the taxpayer. However, for
purposes of verifying tax liabilities of a
decedent, one consolidated LA shall be
issued to cover the estate tax liability
and the income tax liability for the
immediately preceding year up to the
time of the death of the taxpayer.
• LA’s shall be issued only when the
duplicate copy of the tax return of the
taxpayer for the taxable year covered by
the LA is attached thereto. Where the
return of a taxpayer selected for audit
cannot be located, the LA shall be issued
only when there is a certification to that
effect by the Head-Revenue Date Center
for taxpayers covered by ITS RDO’s and
by the Assistant Commissioner,
Information Systems Operations Service
for taxpayers covered by non-ITS RDO’s.
• The same Revenue Officer/Group
Supervisor shall not be allowed to audit
the same taxpayer for two consecutive
years.
• LA’s shall be revalidated only the
Regional Directors when there is an
attached progress report of the
investigating Revenue Officer(s) duly
noted by his Group Supervisor and
approved by the Revenue District
Officer/Chief, SID.
REVENUE MEMORANDUM
CIRCULAR NO. 62-2010
Starting July 1, 2010, the manual issuance of Las
and TVNs shall be discontinued for all investigating
offices under the Regional Offices, the Large
Taxpayer Service (LTS), the Enforcement Service
(ES), and the various Task Forces and Special Teams
authorized by the Commissioner of Internal
Revenue to conduct audit/investigation.
• Last Priority status for income tax audit shall be
accorded to those taxpayers with an effective income
tax rate of eighteen percent (18%) (Gross Income x
18%).

Taxpayers with the following effective VAT rate are


also last in the priority for VAT audit:
• 3% or higher for sale of goods; and
• 6% for sale of service.

An exception to the Last Priority status shall be those


taxpayers where there are findings/suspicions of under-
declaration of sales/revenues
To be entitled to the Last Priority for audit status
enunciated under RMO No. 4-2011, the following
conditions must concur:

a. Effective Income Tax Rate of 18%;


b. Increase in Income Tax payment by at least 20% from
the immediately preceding year;
c. Full compliance with all the submission and
reportorial requirements
d. No Letter Notice issued against the taxpayer.
PRIORITY TARGET IN
TAXPAYERS AUDIT

•Top 100 taxpayers in the district in terms


of gross sales/receipts where there is no
VAT or percentage tax payment for the
current year and the immediately
preceding year.
• Those “with substantial increase in
costs of sales and expenses” will
mean at least twenty percent (20%)
increase in claimed cost of sales and
expenses over and above the increase in
costs and expenses in gross
sales/receipts.
INDUSTRY BENCMARKING
Benchmarks will be determined on a per area
(district/town/city), per industry and per tax type
basis.

Initially the top 200 taxpayers (based on gross


sales) will be audited
REVENUE MEMORANDUM
NO. 3-2010
• All taxpayers are considered as possible candidates for
audit.
• Priority shall be given to the following taxpayers who
render professional services:
• Lawyers;
• Doctors;
• Engineers;
• Accountants; and
• Other Professionals
• Last Priority status for income tax audit shall be
accorded to those taxpayers with an effective income
tax rate of eighteen percent (18%) (Gross Income x
18%).

Taxpayers with the following effective VAT rate are


also last in the priority for VAT audit:
• 3% or higher for sale of goods; and
• 6% for sale of service.

An exception to the Last Priority status shall be those


taxpayers where there are findings/suspicions of under-
declaration of sales/revenues
Types of Audit and Assessments:
Audit and Investigation Third Party Info Post Audit Review
Matching
• Audit of books of • Normally covered • Assessment arising
accounts (with LA) by LN from review
• Audit based on face • Tax reconciliation
of return (no LA and systems
limited to • Matching of
mathematical Summary Alpha list
accuracy) of withholding taxes Post Review Audit
• Table audit / alpha list of pages
• Industry audit • Matching with govt.
• Short period audit info – BOC, LGU,
• Assessment arising
• No-contact audit- BSP, IC
from post review
surveillance • Access to records –
audit
Sec. 5 of Tax Code
REVENUE MEMORANDUM
ORDER NO. 22-2011
Amended Audit Criteria for Taxable
Years 2009-2010
Short-period and issue-based audit
(RMO 18-07)

1. Covered by mission Order (Mos)


2. By way of surveillance and stocktaking
3. to corroborate findings generated from
* Premyo sa Resibo
* No OR Complaint Program
* Benchmarking Project
* Third party information gathered by BIR
* Data from investigating offices
Short-period and issue-based audit
(RMO 18-17)

4. Finding from surveillance and stocktaking


activities are analysed and reconciled with;
* The current books of accounts/accounting records, and
* The latest final returns (income/VAT)
5. LA covering the final returns (income/VAT) of
the current year is issued for a short-period or
issue-based audit if deficiencies are established
6. Deficiency assessments is issued if necessary
Industry Audit
 Audit focused on a target industry
 Probable this year are insurance, banks, pre-
need, HMO
 Normally require actual examination of the
books to understand nature of business and
transactions of an industry
 Objective: revenue and non-revenue, I.e.
issuance of audit guidelines or regulations
 Normally dealt with as an industry through
associations
 Audit is focused on taxation of transactions
peculiar to the industry
Letter of Notice
 LN based on TRS (Tax Reconciliation
System)
 LN based on Consolidated RELIEF-SLSP
 LN based on TPM-BOC Data Program
(Third Party Matching-Bureau of Customs)
Relief Program
Based on computerized matching of data available
under the Bureau’s Integrated Tax Systems(ITS)

Tax Data from others’ tax returns


returns of Data gathered from
income withholding agents on
recipients recipients of income
payments
Data from other regulatory
agencies (BOC, LGUs, etc.)
Relief Program

1701 MAP
SAWT
1702 SLSPs
2550Q Alphalist of employees (Form 1604-
CF)
2551M
Annual Information Return of
2551Q Creditable Taxes withheld –
Expanded/Income Payments Exempt
etc from Withholding tax (Form 1604-E)
List of regular suppliers
Monthly/Quarterly withholding
returns
LN- Sources of discrepancies
1. Sales reported by seller vs purchases reported by
the buyer (VAT and income tax)
2. CWT remitted by buyer vs SWT claimed by
seller/supplier (WT)
3. Income reported vs. CWT or FT paid by payor
4. Importations recorded by BOC vs importations
reported in the SLSP (VAT and income tax)
LNs vs LAs
1. LN = LA (Informal conference stage)
 LN prohibits the amendments of the return for the
period covered by the LN
 No conversion to LA
2. Taxpayer can still be issued an LA? Consolidation?
 For LN on WT, LN should be consolidated with the LA if
already issued (RMO 28-07)
 For LN on TPM-BOC, LN to proceed separately from LA
(RMO 32-07)
Linkages with Government Data
1. LGU
2. BOC
3. BSP
4. IC
5. SEC
6. Other regulatory agencies
7. Exchange of information under tax treaties
Selection Criteria
Letters of Authority (Las)/Audit Notices (ANs)
shall be issued only in the following cases:
* Mandatory
 Claims for income tax refund or issuance of tax credit
certificate exceeding One Hundred Thousand Pesos
(P100,000.00)
• Request for tax clearance of taxpayers due
to retirement/cessation of business with
gross assets exceeding Ten Million Pesos
(10,000,000.00)
• Request for tax clearance
merger/consolidation/spin-off and other
types of corporate reorganizations with
gross assets exceeding Ten Million Pesos
(P10,000,000.00)
• Taxpayers/direct exporters who filed claims
for VAT credit
2. Top Priority Taxpayers
• Taxpayers who are reporting/filing “No. Operations”
Annual Income Tax Returns
• Taxpayers with obvious basic tax deficiency
amounting to One Hundred Thousand Pesos
(P100,000.00) or more based on Third Party
Information
• Property buyers with no income tax returns (ITR)
filed or with ITP whose reported income does not
warrant acquisition of such property, where the
value of the property acquired is at least Five Million
Pesos (P5,000,000.00)
• Taxpayers with Letter Notices per
recommendation of authorized
revenue official
• Taxpayers whose tax compliance falls
below the established benchmarks
• Taxpayers who availed of Net Operating Loss Carry Over
(NOLCO)
• Taxpayers who filed break-even returns or returns
showing net loss for at least two (2) consecutive years
• Taxpayers whose tax due/VAT payable or VAT paid for
taxable year 2004 is less than that of the immediately
preceding year
• Taxpayers with increase in assets but with reported net
loss
• Taxpayers maintaining an ending inventory of 100% or
more of its gross sales during the taxable year
• Other cases with substantial tax potential subject to the
approval of the Commissioners
Taxpayers found understanding the
correct sales/income by more than 30%
as a result of authorized
surveillance/stocktaking
Requirement of Examiners in Tax Audit
• CPA Accreditation Certificate,
• Annual Registration Fee,
• Articles of Incorporation and By-Laws,
• Quarterly Income Tax Returns,
• Proof of Income Tax Credits Claimed (BIR Form
2307),
• Monthly, Quarterly and Annual Returns for
compensation, expanded and final withholding
taxes including alpha listing and proof of
payments,
• Monthly VAT declarations and Quarterly Vat
Returns,
• List of Beginning and ending Inventories duly
stamped “RECEIVED” by the BIR,
• Contracts of Lease and proof of payment of
documentary stamp tax,
• Detailed Scheduled of the following:
– Summary List of Local Purchases specifying the
following:
• Registered name of Supplier
• TIN
• Invoice Number
• Date of Invoice
• Official Receipt Number
• Date of Official Receipt
• Amount of Purchase
• Input Tax
• Total Invoice Price
• Summary List of Importation made during
the period with the following details (if
applicable)
– Date of Invoice
– Name of Supplier
– Items Imported
– AWB/BL number
– Date of Arrival
– Complete details of composition of landed
cost/cost per book entry
– VAT paid
– Date of Official Receipt
– Official Receipt Number
• Summary List of Sales with the following
information:
– Date of Sale
– Invoice Number
– Name of Customer
– Amount Sold
– Output Tax
• Schedule of Accounts Payable as of January
1, ____ and December 31,____,
• Detailed Schedule of Taxes of Licenses,
• Detailed Schedule of Depreciation
• Working paper of general ledger
accounts monthly balances/Monthly
Trial Balance,
• Authority to use computerized books
of accounts accounting system,
• The following records for
verification/examination:
– General Ledger
– Sales and Purchase Journals
– General Journals
– Cash Receipt Book
– Cash Disbursement Book
– Sales Invoices and Official Receipts
– Purchase Invoices and Official Receipts
– Check and Journal Vouchers
– Debit/Credit Memo Registers
Indirect Approach to Investigation
Reconstruction of income is generally employed
where the taxpayer keeps no record or
inadequate records.

Over the years, the Bureau of Internal Revenue


has developed the following general methods
for reconstructing a taxpayer’s income.
A. Percentage method
B. Net worth method
C. Bank deposits method
D. Cash expenditure method
E. Unit and value method
F. Third party information or access to
records method
G. Surveillance and assessment method
A. Percentage Method
This method is the equivalent of a ratio analysis
of percentages considered typical of the
business under investigation to indicate
potential areas of revenue adjustment in
examination where revenue records do not
exist.
1. Percentage Mark-Up
The percentage of mark-up can be determined from
selling prices obtained from the taxpayer. However,
if cooperation from the taxpayer is lacking, the
information should be obtained from competitive
business establishment in the same industry.

Once the gross receipts are determined, the


taxpayer should be given the opportunity to explain
the discrepancy noted between the reconstructed
gross receipts and the amounts reflected in the
books and in the tax returns.
2. Gross Profit Ratio or Gross Margin
Percentage
The gross profit is expressed as a percentage of sales.

Gross Profit Ration = Sales Less Cost of Good Sold


Sales

Note: Sales should be net of Sales Discounts, Return and


Allowances.
3. Profit Margin

Net Income
--------------- = Profit Margin
Net Sales

If the profit margin is low, this will indicate that the


firm’s sales prices are relatively low or that its costs are
relatively high or both.
4. Total Assets Turnover

Sales
-----------------
Total Assets
= Total Assets Turnover

A high rate compared to the industry would signify


sufficient volume of business and if a net loss is
declared, questions must be raised or further
investigation and analysis should be performed.
5. Inventory Turnover
The inventory turnover is computed as follows:

Inventory turnover=
Sales
Total Assets

or

Cost of Sales
Beg. Invty. + End Invty./2
B. Net Worth Method
Net worth method is most often used when one or more of
the following conditions prevail:

1. The taxpayers maintains no books and records.


2. The taxpayer’s books and records are inadequate
3. The taxpayer withholds books and records from
investigation/verification by authorized revenue
officers(s)

This is a method of reconstruction income which is based on


the theory that if the taxpayer’s net worth has increased
in a given year in an amount larger than his reported
income, he had understated his income for that year.
Net Worth Computation
Assets xxx
Less: Liabilities xxx
Net Worth xxx
Less: Prior Year’s Net Worth xxx
Increase (Decrease) in Net Worth xxx
Add:Non-deductible items Personal,
lining and family expenses xxx
Income tax payments xxx
Insurance Premiums xxx
Gifts xxx
Non-deductible contributions xxx
Net capital loss xxx
Amnesty tax payments xxx
Estate and donor’s taxes xxx
Other non-deductible items xxx xxx
Net Worth Computation
Net Income before further adjustment xxx
Less: Non-Taxable items Gifts,
donations and Inheritance received xxx
Non-taxable stock dividends
(if reflected in Assets) xxx
Retirement pay from SSS xxx
Non-recognized gains from exchange
of property under Sec. 40 of
the Tax Code xxx
Social Security benefits received from
foreign gov’t. and institutions (PD220) xxx
Other non-taxable items xxx
Total non-taxable itemes xxx
Net Worth Computation
Adjusted net income per investigation xxx
Less: Statutory Exemptions:
1. Exemption of Working Wife xxx
2. Personal and addt’l. exemption xxx
3. Special additional exemption xxx

Total Statutory exemption xxx


NET INCOME SUBJECT TO TAX xxx
===
C. Bank Deposit Method
When the taxpayer’s records are apparently
inaccurate or manifestly incomplete, the
Revenue Officer may look at the bank
deposits of the taxpayers as evidence income.
Under the bank deposit method, the bank
records of the taxpayer are analyzed and the
Revenue Officer estimate income on the basis
of the total bank deposits after eliminating
non-income items.
Computation of Gross receipts Through
Bank Deposit Method
Total Reconciled Bank Deposits xxx
Less: Non-taxable receipts deposited (sch.1) xxx
Net Deposits that resulted from
taxable receipts xxx
Add: a. Business expenses paid
in cash (sch.2) xxx
b. Capital items paid in cash xxx
c. Personal expenses paid
in cash (sch.3) xxx
d. Cash accumulated during
the year from receipts xxx
e. Increase in Accounts Receivable xxx
f. Decrease in accounts payable xxx xxx
Total xxx
Computation of Gross receipts Through
Bank Deposit Method
Less: Non-taxable cash used
in (a) thru (b) xxx
Decrease in accounts receivable xxx
Increase in accounts payable xxx xxx
Gross Receipts xxx
===

Schedule 1 Non-Taxable Receipts include:


- Checks drawn to cash that were redeposited
- Second deposits of NSF checks
- Transfer between accounts
- Proceeds from loans, social security, exempt interest, etc.
Computation of Gross receipts Through
Bank Deposit Method
Schedule 2 Business expenses paid in Cash
Total business cash outlays per returns xxx
Less: Total checks written xxx
Non-business
expenses paid by check xxx
Business expenses paid in check xxx
Business expenses paid in cash xxx
===

Schedule 3 Personal Expenses Paid in Cash


Total personal expenses xxx
Less: Business expenses paid in cash (xxx)
When to use the Expenditures
Method of Proof
•The suspect spends most of his/her money on
consumable goods, and . . .
•Maintains no books or records, or . . .
•The books and records are not available, or
•The books and records are inadequate, or
•The suspect withholds the books and records

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Expenditures Method of Proof
Formula (tax case)
Expenditures (Money Spent or Applied)
Less: Sources of Funds
Equals: Adjusted Gross Income
Less: Itemized or Standard Deduction
Personal Exemptions
Equals: Corrected Taxable Income
Less: Reported Taxable Income
Equals: Additional Taxable Income

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Applications of Funds
•Increase in assets
- Cash on hand
- Bank accounts
- Inventory
- Accounts receivable
- Equipment
- Real estate
- Personal assets
•Decrease in liabilities
- Accounts payable
- Loan principal
•Personal living expenses
•Loss on sale of personal assets 61
Example of Source and Application
Expenditures
Increase in bank balance P 200,000
Personal living expenses 15,000,000

Total expenditures P15,200,000

Sources of Funds
Gross Profit P10,000,000

Total Sources P10,000,000

Equals
Funds from illegal sources P 5,200,000
==========
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Third Party Information (Access to
Records) Method
Third party contacts are a source of
information that should not be forgotten. The
Revenue Officer should determine when to
make third inquiries.
Lifestyle Check on Individual
Taxpayers

Revenue Memorandum Order No. 19-


2010, which lays down the groundwork for
a so-called taxpayers’ lifestyle check
systems.

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The BIR would use its authority to access
public documents and would work with
agencies like the Land Transportation
Office, the Bureau of Immigration, the
Maritime Industry Authority, the Civil
Aeronautics Board, the Land Registration
Authority and the Registries of Deeds.

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Piercing the corporate veil

Under the doctrine of piercing the veil of


corporate entity, when valid grounds therefore
exist, the legal fiction that a corporation is an
entity with a juridical personality separate and
distinct from its members or stockholders may be
disregarded. (Umali, et. al. v. Court of Appeals,
GR No. 89561, September 13, 1990)

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Audit Procedures on Withholding Taxes

The audit procedures are classified according


to the classification of withholding taxes,
1. Withholding tax on Compensation
2. Expanded Withholding tax
3. Final Withholding Tax
4. Withholding Tax on Government Money
Payments
Imposition of Improperly Accumulated
Earnings Tax
A. In General – In addition to other taxes
imposed, there is hereby imposed for each
taxable year on the improperly accumulate
taxable income of each corporation, an
improperly accumulated earnings tax equal
to ten percent (10%) of the improperly
accumulated taxable income.
Requirements on Input Tax

IN GENERAL:
1. Proof that input tax was incurred in the course of
trade or business.
2. Supported by VAT invoice or receipt bearing VAT
number or seller.
3. Seller must be VAT registered.
4. Purchaser must also be VAT registered.
5. Invoice must be in the name of buyer.
6. Address of buyer is indicated.
7. Business style of buyer.
Substantiation Requirements on Input Tax

B. INPUT TAX ON INPORTATION:


1. Import entry or equivalent document
2. Payment of VAT on imported goods (official receipts)
C. TRANSITIONAL AND/OR PRESUMPTIVE INPUT TAX:
1. Inventory of unused tax credits duly accounted in the
books and returns
2. Inventory of goods filed with the BIR
D. INPUT TAX ON DEEMED SALE TRANSACTIONS:
1. Inventory filed with the BIR
VAT-Audit Pro-forma
Computation by BIR
Sales of Services

Apply the following pro-forma computation to arrive at


the gross taxable receipts during the period:

Income or billing during the period


Pxxx
Add: Accounts receivable, beginning
xxx
Retention receivable, ending
xxx
Total available for Collection
xxx
Less: Accounts receivable, ending xxx
Retention receivable, ending xxx
Manufacturing
Account for the quantity of goods actually sold in
appropriate case as a tool to further audit

Finished goods, beginning xxx


Add: Production or purchase xxx

Total available for sale xxx

Less: Finished goods, end xxx

Number of units issued xxx


Less: Samples, destroyed or lost items xxx

Number of units issued xxx


Less: Samples, destroyed or lots items xxx
Sales of Good
Cash Sales
Pxxx
Add: Collection on account receivable Pxx
Collection on notes receivable xx
(If it pertains to sale or goods)
Sales discounts granted xx
Sales returns and allowances from
Sales on account xx
Bad debts written of xx
Accounts receivable, ending xx
Notes receivables during the period xx
Total receivables during the period
Pxx
Less: Accounts receivable, beg. Pxx
Notes receivables, beg. Xx
The input tax be credited to VAT taxable
operations shall be determined by
multiplying the amount of VAT taxable sales
and/or receipts from both operations by the
amount of unattributed input taxes paid
during the quarter.

Formula:

Total Sales/receipts Input to be


VAT Taxable Operation Unattributed allocated to
--------------------------------- x Input taxes = Vat taxable
Total Sales/Receipts operations
VAT Taxable & Non-taxable
Operations
Total Sales/receipts Input
tax to be
VAT Taxable Operation Unattributed
allocated to
--------------------------------- x Input taxes = Vat
non-taxable
Total Sales/Receipts
operations
VAT Taxable & Non-taxable
Operations

Zero-rated sales Unattributed


Unaattributed Input
--------------------------------- x Input taxes = tax
allocated to
“Oplan Kandado”
Revenue Memorandum Order No. 3-2009

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REVENUE REGULATION
NO. 10-2010

Exchange of Information Regulation


Provide the necessary guidelines to enable the Bureau
of Internal Revenue (BIR) to respond to a request for
exchange of information pursuant to an existing
international convention or agreement on tax matters
and to implement Republic Act No. 10021 entitled “An
Act to Allow the Exchange of Information by the
Bureau of Internal Revenue on Tax Matters Pursuant to
International-Agreed Tax Standards.

Financial Institutions
Foreign Tax Authority
FAILURE TO SUBMIT REQUIRED
RETURNS, STATEMENTS, REPORTS
AND OTHER DOCUMENTS

When a report required by law as a basis for the


assessment of any national internal revenue tax
shall not be forthcoming within the time fixed by
laws or rules and regulations or when there is
reason to believe that any such report is false,
incomplete or erroneous, the Commissioner
shall assess the proper tax on the best
evidence obtainable.
REVENUE MERANDUM ORDER
NO. 45-2010
Revised guidelines in the requests for the
production of the books of accounts and/or other
records and documents and in the issuance of
Subpoena Duces Tecum for failure of taxpayers to
comply with the requests.
Limitation on the best-evidence rule

BIR or the Courts will not accept a


photocopy as evidence of a claim for
input VAT, expense paid or CWT, etc.
Meaning of Best Evidence
“Best evidence”

The law allows the BIR access to all


relevant or material records and data
in the person of the taxpayer
AMENDMENT OF RETURN

Returns can be amended within three (3)


years from filing. Provided, that no notice
for Audit and examination has been
actually served to the taxpayer.
FRAUDULENT RETURN

A substantial under – declaration 30% of


taxable sales, receipts or income, or a
substantial overstatement 30% of
deductions shall constitute prima facie
evidence of a false or fraudulent return.
Revalidation of Letters Authority
An LA which is over 120 days from the date of issue
loses its validity and must be revalidated. The rules
on revalidation of LA are:
1. Regional LAs shall be revalidated only by the
Regional Directors when there is an attached
progress report of the investigating Revenue
Officer(s) duly noted by his Group Supervisor and
approved by the RDO/Chief, SID.
2. Revalidation of Letters of Authority shall be
limited to only once in the regional offices and
twice in the National Office after issuance of the
original LA.
3. A revalidation shall be covered by the issuance
of a new Letter of Authority under the
name(s) of the same investigating officer(s),
and the superseded LA(s) shall be attached to
the new LA issued.
Beginning June 1, 2010, the rule on the need for
revalidation of Las for failure of the revenue
officials to complete the audit within the
prescribed period shall be withdrawn.
Accordingly, there is no need for revalidation of
the LA even if the prescribed audit period has
been exceeded. However, the failure of the RO
to complete the audit within the prescribed
period shall be subject to the applicable
administrative sanctions.
NOTICE OF INFORMAL CONFERENCE
PURPOSE:
PRESENTATION of AUDIT FINDINGS
Give taxpayer the opportunity to present his side
PERIOD of RESPONSE:
15 DAYS FROM DATE OF RECEIPT OF
NOTICE
EFFECT of FAILURE to RESPOND:
ENDORSEMENT to ASSESSMENT DIVISION
for REVIEW and ISSUANCE of DEFICIENCY
TAX ASSESSMENT
INFORMAL CONFERENCE
Revenue officers
-Will present in an informal manner their
findings to the taxpayer or his
representative
-Will verbally explain the source of
information and the bases of their findings
-May or may not sign their findings
Taxpayer may
-Listen passively to the revenue officers
-Explain his position or comment on the
revenue officers’ findings and submit
documentary evidence
-Ask for another informal conference to give
a more detailed explanation to their findings
-Request for breakdown of findings or source
of the information from revenue officers as
well as the factual and/or legal bases
PRELIMINARY ASSESSMENT NOTICE
PURPOSE:
PRESENTATION OF AUDIT PROPOSAL
Give Taxpayer the Opportunity to Present His
Side
CONTENTS:
COMPUTATION of PROPOSED DEFICIENCY
TAX;
DETAILS OF FACTS & LAW, RULES and
REGULATIONS, or JURISPRUDENCE ON
WHICH THE ASSESSMENT IS BASED
PERIOD OF RESPONSE:

15 DAYS FROM DATE OF RECEIPT OF THE


PRELIMINARY ASSESSMENT NOTICE

EFFECT OF FAILURE TO RESPOND:

ISSUANCE OF FORMAL LETTER OF DEMAND


REVENUE REGULATIONS NO. 12-99
PRELIMINARY ASSESSMENT NOTICE (PAN)

If after review and evaluation by the Assessment


Division or by the Commissioner or his duly
authorized representative, and it is determined
that there exists sufficient basis to assess the
taxpayer for any deficiency tax the Assessment
Division shall issue to the taxpayer, at least by
registered mail.
If the taxpayer fails to respond within
fifteen (15) days from date of receipt of the
PAN, he shall be considered in default, in
which case, a formal letter of demand and
assessment notice shall be caused to be
issued by the said Office, calling for
payment of the taxpayer’s deficiency tax
liability, inclusive of the applicable
penalties.
A Preliminary Assessment Notice (PAN)
for the proposed assessment, shall show
in detail, the facts and the law, rules and
regulations, or jurisprudence on which the
proposed assessment is based.
Court of Tax Appeals:
Absence of PAN does not
invalidate an assessment

Case: (Bank of Philippine


Islands v. CIR, CTA Case No.
7397, April 09, 2008)
Decision:
1. Although issuance of PAN is required, it is not
indispensable. In fact, a taxpayer is not
obligated to protest a PAN and failure on
its/his part to protest a PAN does not result in
the finality of assessment. What the law
requires is the issuance of FAN which is in
substantial compliance of what is mandated
under Section 228 of the NIRC.
FORMAL LETTER OF DEMAND AND
ASSESSMENT NOTICE
PURPOSE:
TO FORMALLY CALL for the PAYMENT of the
DEFICIENCY TAX;

TO SET THE DATE for the IMPOSITION of the


25% SURCHARGE;

TO AFFORD THE TAXPAYER THE FINAL


OPPORTUNITY TO PROTEST
ADMINISTRATIVELY.
REVENUE REGULATIONS NO. 12-99
FORMAL LETTER OF DEMAND AND
ASSESSMENT NOTICE

The formal letter of demand and assessment


notice shall be issued by the Commissioner of
his duly authorized representative. The 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 assessment notice
shall be VOID.
FORMAL LETTER OF DEMAND
AND ASSESSMENT NOTICE

Shall be sent to the taxpayer only by


registered mail or by personal delivery. If
sent by personal delivery, the taxpayer or
his duly authorized representative shall
acknowledge receipt thereof in the
duplicate copy of the letter of demand.
Prescription Period
• Date of mailing is considered the date of filling
of any petition or pleading.
• A mailed letter is deemed received by the
addressee in the ordinary course of mail.
However, a direct denial of the receipt thereof
by the addressee shifts the burden of prving
the same to the sender.
(Asia International Auctioneers v. CIR, CTA EB 276, August 03,
2007)
Prescription Period
• Failure to present registry return card. Evidence
presented:
– Registry Receipt No. xx
– Philpost Certification on the delivery and receipt by BIR
– BIR Records Division’s Receipt of Important
Communications Delivered showing RN No. xx
• Taxpayer failed to prove that the letter mailed (per
evidence provided) is the protest letter for the
subject assessment.
• BIR was able to show inconsistencies in the
chronology of events.
(Asia International Auctioneers v. CIR, CTA EB 276, August 03, 2007)
Court of Tax Appeals:
Case: (Mallari vs. RP,CTA EB Criminal Case No.
002,1-8-08)

Ruling: Where the assessment notice was released


and mailed by BIR to the taxpayer and the original was
not returned to the BIR, the taxpayer is presumed to have
received it. But such presumption is disputable. When the
same is directly denied by taxpayer, the burden to prove
receipt is shifted to the BIR.The transmittal list presented
by BIR is self serving and did not sufficiently establish
receipt of FAN.
CONTENTS:
COMPUTATION OF PROPOSED DEFICIENCY
TAX;
DETAIL OF FACTS and the LAW, RULES and
REGULATIONS, or JURISPRUDENCE on
WHICH THE ASSESSMENT IS BASED.

PERIOD OF RESPONSE:
30 DAYS FROM RECEIPT OF DEMAND

EFFECT OF FAILURE TO RESPOND:


ASSESSMENT BECOMES FINAL,
EXECUTORY AND DEMANDABLE
ASSESSMENT

The taxpayer shall be informed in writing


of the law and the facts on which the
assessment is made; otherwise, the
assessment is VOID.
The Regional Director shall approve the
assessment notices and demand letters
including the reports of investigation, for
cases falling within their respective
jurisdictions. Likewise, the Regional
Directors shall issue Termination Letters.
Assessment flow

Administrative 30 days; 180 days


Filing of
Protest
Return

30 days CTA
Final
Letter of
Assessment
Authority
(FAN)
15 days

Informal Preliminary
Conference Assessment
(PAN)
Protesting a Case
PROTESTING A CASE
1. PAN
2. FAN
3. PROTEST within 30 days – FAILURE: FAN IS FINAL AND
EXECUTORY
4. FDDA – Whether appealed or not
5. CTA appeal (division level) within 30 days – FAILURE TO
APPEAL FAN IS FINAL AND EXECUTORY
6. CTA decision – whether appealed or not
7. En Banc (appeal)
8. En Banc decision – whether appealed or not
9. Supreme Court (appeal)
10. Supreme Court (final decision)
Defenses on Assessments
1. Validity of the assessment
2. Prescription periods
3. Legal and factual basis
4. Validity of the regulations/rulings
5. Immunities under tax amnesty and other
programs
6. Procedural issues
REVENUE REGULATIONS
NO. 12-99

The taxpayer or his duly authorized


representative may protest
administratively against the aforesaid
formal letter of demand and assessment
notice within thirty (30) days from date of
receipt thereof.
• OTHER ADMINISTRATIVE REMEDIES
-Request for change of revenue officers
-Change of venue for settlement of tax
assessment case
-Collection Division
-Legal Division
• CONSEQUENCES OF ABSENCE OF
VALID AND TIMELY PROTEST
- Makes assessment final and executory
- Appeal to CTA is no longer available; CTA
cannot acquire jurisdiction over the case
- Compromise of assessment is still possible
DISPUTED ASSESSMENT

If the Commissioner of his duly authorized


representative fails to act in the taxpayer’s
protest within one hundred eighty (180) days
from date of submission, the taxpayer, of the
required documents in support of his protest.
The taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the
lapse of the said 180-day period, otherwise,
the assessment shall become final,
executory and demandable.

If the protest is denied, in whole or in part,


by the Commissioner, the taxpayer may
appeal to the Court of Tax Appeals within
thirty (30) days from date of receipt of the
said decision, otherwise, the assessment
shall become final, executory and
demandable
Revenue Memorandum
Circular No. 39-2013
Receipt of Protest Letter on Final
Assessment Notices and Final
Decision on Disputed Assessments
All letters of protest, requests for
reinvestigation/reconsideration and similar
correspondences shall only be filed by the taxpayers or
their duly authorized representatives, in person or
through registered mail with return card, with the Office
of the concerned Regional Director (RD), Assistant
Commissioner-Large Taxpayers Service (ACIRLTS) and
Assistant Commissioner-Enforcement Service (ACIR-ES),
who signed the Preliminary Assessment Notices (PANs),
FANs and Formal Letters of Demand, for proper recording
of the protests, and evaluation if the same is in
accordance with Section 228 of the NIRC, as implemented
by Revenue Regulations No. 12-99. If the aforesaid
procedures are not followed, then the letters of protest,
requests for reinvestigation/reconsideration and similar
correspondences shall be considered void and without
force and effect.
• Any letter of protest, request for
reinvestigation/reconsideration, or other similar
communication allegedly filed by any taxpayer but
are not included in the aforementioned database
shall be deemed as not officially filed with the
Bureau and shall not be used as basis for the grant of
any request for reinvestigation/reconsideration of
any FAN or Final Decision on Disputed Assessment
(FDDA) issued against the taxpayer.
• All letters of protest, requests for
reinvestigation/reconsideration or similar
correspondences that will be accepted from
taxpayers beginning April 29, 2013 shall be guided by
this Circular.
DISPUTED ASSESSMENT

PROTEST:

SHALL CONTAIN
THE FACTS THE APPLICABEL LAW,
RULES AND REGULATIONS OR
JURISPRUDENCE ON WHICH THE
ASSESSMENT IS BASED.
EFFECT OF FAILURE TO APPEAL ON
TIME

ASSSESSMENT BECOMES
FINAL,
EXECUTORY, and
DEMANDABLE
DEFINITION AND NATURE OF SURCHARGE

Surcharge is a civil penalty imposed by law as


addition to the main tax required to be paid.

It is not a criminal penalty but a civil administrative


sanction

DEFINITION OF DELINQUENCY

Delinquency is the failure of the taxpayer to pay


the tax due on the date fixed by law or indicated in
the assessment notice or letter of demand.
EFFECT OF PARTIAL PROTEST:

TAXPAYER IS ASKED TO PAY THE TAXES ON


THE UNDISPUTED ISSUES.

NO ACTION SHALL BE TAKEN ON THE


DISPUTED ISSUES UNTIL THE TAXPAYER
HAS PAID THE DEFICIENCY TAXES ON THE
UNDISPUTED ISSUES.
EFFECT ON PROTEST:

IF QUESTION OF FACT IS INVOLVED AND


RE-INVESTIGATION IS GRANTED, TAXPAYER
SHALL HAVE 60 DAYS TO SUBMIT THE
REQUIRED DOCUMENTS FOR FURTHER
SCRUTINY; IF QUESTION OF LAW IS
INVOLVED, A RULING ON LEGAL ISSUES
WILL BE REQUIRED. PRESCRIPTION IS
SUSPENDED
60-day period for submission of
documents
Non-submission of documents within 60 days does not
render the assessment final. Petitioner only lost is
chance of further contesting the assessment
Petitioner decides whether or not to submit
documents. Non-submission may mean that:
• Petitioner finds no need to submit additional
documents; protest letter is sufficient; or
• Petitioner failed to comply, thus it can no longer give
justification with regard to its objections as to the
correctness of the assessment.
(CTA Case 6557 as quoted in Prulite UK v. CIR, CTA Case 6774, Sept. 11, 2007)
EFFECT OF DENIAL OF PROTEST:

APPEAL THE DECISION OF THE


COMMISSIONER WITHIN 30 DAYS TO THE
COURT OF TAX APPEALS.

EFFECT OF INACTION ON THE


PROTEST WITHIN 180 DAYS:

APPEAL THE DECISION OF DENIAL


DIRECTLY TO THE COURT OF TAX APPEALS
B. In the Regional Offices
1.The Revenue District Officer with respect to tax cases still pending
investigation and the period to assess is about to prescribe regardless of amount.
2. The Regional Director, the Assistant Regional Director, the Chief,
Assessment Branch or the Chief, Legal Branch with respect to cases still pending
review and the period to assess/collect is about to prescribe, regardless of
amount.
3. The Regional Director, the Assistant Regional Director, the Chief,
Collection Branch or the Chief, Legal Branch with respect to cases still pending
collection and the period to assess/collect is about to prescribe regardless of
amount.
The prescriptive periods
Prescriptive Start of running of period
Period
1. Assessment of tax liability 3 years From filing of return in case of late
filing or as of last day of filing if filed
on or before the deadline
2. Request for reconsideration/protest of 30 days From receipt of assessment
assessment
3. Submission of documents supporting 60 days From filing of protest
protest
4. Appeal to the CTA 30 days From receipt of denial of request for
reconsideration or protest
5. Claim for refund with CIR 2 years From date of payment or from final
payment if paid in installment
6. Appeal to CTA on denial of claim for 30 days; From receipt of denial
refund with CIR w/n 2 yrs. From date of payment of tax
7. Collection of tax 5 years From the date of assessment
Doctrine of Imprescriptibility
The stature of limitation for assessment of tax if
a return is filed is within three (3) years from the
last day prescribed by law for the filing of the
last day prescribed by law for the filing of the
return or if filed after the last day, with-in three
years from date of actual filing. If no return is
filed or the return filed is false or fraudulent, the
period to asses is within ten years from
discovery of the omission, fraud or falsity.
Thank You
and
May GOD Bless You in
all the days of your life

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