Overview of Handling BIR Tax Audit in the Philippines

By: Atty. Pearl Fatima L. Evardone

Philippines tax system is anchored on voluntary compliance under pay-as-you file as it is the taxpayer who is responsible for its tax compliance determining which tax should be paid, how to comply with various reports, and when to pay the same. It has a check and balance mechanism where the tax authority (Bureau of Internal Revenue or BIR) has the right to conduct tax assessment or examination within three (3) years from required filing or from late filing (or 10 years, for false or fraudulent returns with intent to evade taxes or if no tax return filed) to determine the extent of compliance of taxpayers. Under this, the BIR is clothed with such power to require taxpayers to submit to its authority for the purpose of determining such tax compliance and do such acts for collection of taxes due from taxpayers. Hereunder is an overview of how tax assessment in the Philippines or BIR tax audit operates in the Philippines constituting how due process is served upon taxpayers involved in BIR tax investigation in accordance with Revenue Regulations No. 12-1999, as amended.

Letter of Authority (LOA)

Under the Tax Code of the Philippines, a Letter of Authority (LOA) is issued to authorize specific Revenue Officer/s (RO) of a Tax Assessment Group headed by a Group Supervisor (GS) to conduct the tax examination. LOA with attached Checklist of Documentary Requirements will be served within thirty (30) days from date and carries a request for documentation. LOA will specify which tax types will be examined like all internal revenue taxes, income and value added tax, or withholding taxes. It will likewise state the taxable year to be examined and it will only cover for one taxable year. Without a LOA in Philippines, a BIR personnel cannot conduct a valid tax examination or audit of taxpayers books of accounts and other accounting records in Philippines.

Documentation and Sub Poena Duces Tecum

After the service of LOA, BIR RO will proceed with the requested documents enumerated in the attached Checklist of Requirements to the LOA. Such documents, tax returns, reports and accounting records will be used as the basis of their tax examination. You are ought to present such documents for the RO to come-up with its findings. A First Notice will be sent to remind you of such submissions and upon failure, a Second and Final Notice will be sent with threat of legal action for further failure to provide. Should you still fail, BIR may issue a Sub Poena Duces Tecum to mandatorily require you to submit specific documents and papers, within a specified time (normally 14 days from receipt) and place.

Failure to obey said Sub Poena is a ground for criminal prosecution for Disobeying Summons under the Tax Code, as amended, though an action with the Prosecutors Office. Once the Prosecutor or Fiscal determines a probable cause, it may recommend filing an action with the Criminal Court for your prosecution. During such process, the assessment process will have to proceed, otherwise, BIR’s right to assess will prescribe.

Notice of Discrepancy (formerly Notice for Informal Conference)

Upon the documents made available bu the taxpayer along with other information that the RO may have gathered from the BIR system and the third parties, if any, the RO and the GS will then submit their preliminary findings with the Revenue District Officer (RDO), head of the Revenue District Office for approval. Upon approval, a Notice of Discrepancy under Revenue Regulations No. 20-2020, amending Revenue Regulations No. 12-1999, as amended, (formerly Notice For Informal Conference under Revenue Regulations No. 7-2018 ) will be issued with the proposed assessment and an opportunity to explain its side along with presentation of documents to support them. You may either attend the discussion of discrepancy with BIR or submit a Position Paper within the same period with your disagreements based on facts and the applicable laws, rules and regulations. You may submit supporting documents to substantiate your claim. Alternatively, you may pay the proposed assessment. Should you feel the need for more time, you may execute and submit BIR a Waiver from the Defense of Prescription (Waiver) that will extend the three (3) year period of the BIR to assess. This will have to be approved by the BIR and a copy duly signed and notarized will be furnished to you.

In reply, RDO may revise the proposed assessment or may simply forward to the Assessment Division of the Revenue Region (RR), a higher office than the district office of the RDO.

Preliminary Assessment Notice

Based on the docket of the assessment forwarded from the RDO, the Assessment Division of the RR will study the same to determine the need for furtherance of the assessment. Once convinced, then, it will issue a Preliminary Assessment Notice (PAN) with the proposed assessment, unless PAN is no longer necessary. Normally, PAN issued contains material items of the preliminary findings or notice for informal conference.

You may file Protest letter to PAN within fifteen (15) days from receipt thereof with your arguments and discussions of your disagreements based on the facts of your circumstances and the applicable laws, rules, and regulations. Supporting documents may also be submitted along with the Protest or shortly thereafter to substantiate your claims. Alternatively, you may pay the assessment if you feel the need, or you simply disregard if you do not have the feel to act on it.

Formal Assessment Notice – Formal Letter of Demand

After going through your Protest to PAN, BIR will evaluate and if the same finds no basis to cancel the assessment, it will issue an Assessment Notice or Formal Assessment Notice with Formal Letter of Demand (AN-FLD). This AN-FLD must be issued within the three-year (3-year) period from date a tax return is required by law to be filed or from date of late filing. For fraudulent assessment or when no return is filed, the same shall be issued withing ten (10) years from discovery. For failure to issue the AN-FLD within the 3-year or 10-year period, the BIR’s right to assess will prescribe or terminate releasing the taxpayer of its potential tax liabilities for such taxable year.

If you disagree with the tax assessment under the AN-FLD, you must file a Protest, either for reconsideration or for re-investigation within thirty (30) days from receipt thereof. For protest for reinvestigation, you must also submit supporting documents within sixty (60) days from filing the protest. Failure to file a Protest within 30 days or submit documents within 60 days will make the assessment final and executory losing your every right to contest the assessment and ending up with no other option but to pay. If you admit tax liability or if you missed protesting an issue on the AN-FLD, the same will be deemed an implied admission and BIR will proceed to collect tax thereon.

BIR Final Resolution

Based on your Protest, BIR may either grant or deny through a formal communication, say a Final Decision on Disputed Assessment (FDDA). It may even just simply proceed to collection proceedings, without any forma reply to your Protest to AN-FLD. In such case, it may issue a Preliminary Collection Letter (PCL). In either case, this would mean you lost your case with the BIR administrative level, but, does not mean the game is over.

In case the above final decision of the BIR is signed or issued by the Commissioner’s authorized representative like Regional Director, you can opt to file an administrative appeal with the Office of the Commissioner for reconsideration of matters taken up on such final decision.  The Commissioner will normally revert back the case to the BIR Region of origin then to the BIR District Office until final decision of the BIR Commissioner. In case of denial by the Commissioner, you do not need to file a motion for reconsideration (MR) with the Office of the Commissioner and the recourse is an appeal to Court of Tax Appeals, otherwise, it becomes final, executory and demandable.

Court of Tax Appeals (CTA)

Within thirty (30) days from receipt of the final resolution of the BIR (FDDA or PCL), you must file an appeal through a Petition for Review with the Court of Tax Appeals – Division. In case BIR failed to act within 180 days from filing protest for reconsideration or from submission of relevant supporting documents within 60 days from filing protest for reinvestigation, you can opt to file an appeal with the CTA as well, within 30 days from lapse of such 180-day period. At CTA, you will need a counsel of your choice, pay the filing fees based on the amount of disputed assessment. If the case is much of factual issues, the CTA may opt to appoint an Independent Certified public Accountant (ICPA) as an officer of the court for the factual verification and evaluation. The case may drag for some time.

Should you lose on the CTA-Div, you may file a Motion for Reconsideration (MR) with the Court of Tax Appeals – En Banc within fifteen (15) days from receipt thereof. Should you further lose with the CTA-En Banc, do not loss hope as the game is far from being over.

Supreme Court (SC)

Within thirty (30) days from receipt of the final resolution of the CTA-En Banc, you must file an appeal through a Petition for Review with the Supreme Court – Division. You will also need a tax lawyer during the proceedings with the Supreme  Court. Should you lose your case with the SC-Division, then, you could also file an MR with the Supreme Court – En Banc within fifteen (15) days from receipt of such decision of the SC Division.

Finality and Settlement

Upon finality of the decision of the SC-En Banc or upon such other instances where the tax assessment will become final and executory (e.g. failure to file a Protest to AN-FLD, failure to submit documents within 60-days after Protest An-FLD) you may have no other option to pay in full the entire assessment, inclusive of interest and penalties. If you are financially incapable of paying in full and your financials would clearly demonstrate, then, you may apply for a compromise settlement based on financial incapacity where you will pay only 10% of the basic tax due upon BIR approval.

During any stage of the proceedings, you may opt to pay or settle the assessment. Another are of compromise that you may explore is one based on doubtful validity where you will be required to pay 40% of the basic tax due upon BIR approval.

 Summary

In sum, the tax assessment process of the BIR is not something you should be afraid of. You just need a good working knowledge in dealing with them and in protecting your rights as a taxpayer. You can always have a helpline and in case you need a hand, a number of tax practitioners are within your reach. Its bottom line is tax compliance so that if your books of accounts are in order and all taxes were fully accounted for, then, the entire process may just be a formality. The best preparation for the assessment is during the maintenance of the books of accounts and filing and payment of tax returns. You may hire bookkeepers with better exposure to tax compliance that will assist you all the way in avoiding penalties. We go with the notion that in tax examinations, prevention is better than cure.

(Atty. Pearl Fatima L. Evardone is a Legal Consultant and Resource Speaker with Tax and Accounting Center, Inc. on technical areas and special topics.  She is a young and energetic lawyer actively engaged in the practice of law with various fields (e.g. taxation, corporate, civil, criminal, immigration, and other areas) in the Philippines. She is now connected with Trinidad Law Firm as Litigation Lawyer, Office of Congressman Ben P. Evardone as consultant, and with UNESCO as Youth Ambassador for Peace.  For comments, you may please send mail at in**@ta************.ph.

• Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.See our quality seminars, workshops, and trainings…See how we can help you with our other professional services : company registrations; Ph Working Visa; and HR Services

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