Secrets to Prevent BIR Audit and Eliminate Tax Assessments_R1_v2

ABOUT THE AUTHORS “Our MISSION is to help Taxpayers comply with BIR tax laws and regulations.” The Power Duo NEIL U. SISON AND ALINA CORILLO-SISON are the first TAX and BUSINESS POWER DUO who have integrated Tax and Information Technology Systems (Tax-IT Systems) in business and accounting profession. Their mission is to help SMEs (corporate and individuals/professionals) to establish, expand and grow their businesses with paramount compliance with BIR’s tax laws and regulations using the most cost-effective approach in management and tax planning, through the implementation and use of information technology.

They have established www.philtaxwindow.com www.philtaxwindow.com,, the first and only website and soon a mobile-based apps solution offering FREE: a.) tax consultations and advise, b.) E-books, c.) tax tax updates/ articles, d.) videos and audios related related to tax. They have spearheaded spearheaded the development of various accounting-related softwares such as payroll systems (Aktus Payroll Suite), Point-of-Sale-System (APOS), computerized accounting systems for professionals and SMEs, and web-based tax audit solutions such as Taxpirin (www.taxpirin.com www.taxpirin.com)). Together, they have established businesses and and franchises engaging engaging close to 400 personnnel. NEIL U. SISON, CPA CISA CIA CFE MCP RFA CRB Neil U. Sison is the CEO-Strategist and Innovator, Entrepreneur. His expertise include taxation, information technology, systems implementation and audit, business risk management, financial and business fraud audit, business process outsourcing, and business set-up and registration. He has over 20 years extensive experience, experience, 9 years of which was gained from the leading auditing firms in the country.

He established the accounting firm, Sison Corillo Parone & Co. (SCP) in 2001 together with Alina CorilloSison, of which he is currently its Managing Managing Partner. Likewise, he holds position as Director of various various companies and President/CEO of certain companies. He graduated from the University of the Philippines with a degree of Bachelor in Business Administration major in Accounting. He is a Certified Public Accountant (CPA), (CPA), Certified Information System System Auditor (CISA, based in USA), Certified Internal Auditor (CIA, based in USA), Certified Fraud Examiner (CFE, based in USA), Microsoft Certified Professional (MCP) for various IT Certifications, Registered Financial Advisor (RFA), and Certified Real Estate Broker (CRB). ALINA CORILLO-SISON, CPA CIA MCP RFA CRB Ms. Sison is the COO-Tax and Business Business Strategist, Entrepreneur. Entrepreneur. She has over over 20 years extensive experience in Taxation, Operations, Finance, Controllership, Internal and External Audit, Systems Implementation, Administration and Human Resources.

She is currently a Partner of Sison Corillo Parone & Co., heading engagements in tax, accounting, internal and external audit, and systems systems implementations in various industries. She also holds position as Director of various companies and Chief Operating Officer (COO) of certain companies. She was previously Finance and Administration Head of multinational companies, and Internal Audit Head and Accounting Head of the No. 1 convenience convenience store in the country. She was also previously connected with the leading Auditing Firm in the country as Financial Auditor and Consultant prior to the set-up of Sison Corillo Parone & Co. She graduated from University of the Philippines with a degree of Bachelor in Business Administration major in Accounting. She is a Certified Public Accountant Accountant (CPA), Certified Certified Internal Auditor (CIA, based in USA), Microsoft Certified Professional (MCP) for various IT Certifications, Registered Financial Advisor (RFA) and Certified Real Estate Broker (CRB).

FREE Online Checking of Tax FREE Online Returns (ITR) for Errors Before Filing With BIR.

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aims to help taxpayers to prepare and submit error-free tax returns, and accordingly, comply with BIR regulations, thus, prevents BIR audit and eliminates tax assessments.

TAXPIRIN

SECRETS TO PREVENT BIR AUDIT AND ELIMINATE TAX ASSESSMENTS “Knowing the corrective approach is good. good. But applying the PREVENTIVE approach is always the BEST. Preventive+ Preventive+Corrective Corrective approach is our key and unique unique advantage.” The POWER DUO

We cannot avoid tax, but we can avoid tax tax audit. Based on experience experience of tax consultants, 99% of taxpayers audited by the BIR have tax findings/assessments. Aside from the taxpayers’ regular voluntary tax remittances, the Bureau of Internal Revenue (BIR) generates revenue through collections coming from tax assessments. Thus, it is not surprising that the BIR is is strenghtening its audit programs to aggressively conduct audit of taxpayers’ records or run after after possible possible tax evaders. The pressure pressure is continuously on for all taxpayers. It is common that the BIR’s initial assessment would be P200 million, P100 million, or P50 Million. Million. Even small companies would initially get get P2 million million tax assessment for just just one taxable year! That is why, accountants would think that their bosses will fire them right away upon receipt of initial initial tax findings. On the other hand, hand, owners would be discouraged to grow their businesses because the initial tax assessments are sometimes greater than their Companies’ networth. Taxpayers have fear in dealing with the BIR officers because of significant tax assessments. Others even hate the BIR officers for inflicting so much anxiety and sleepless nights to the owners and accountants. Fear no more! The secrets in removing your fear and worries, how to reduce or even eliminate tax assessments, and even how to avoid tax audit will be discussed. There are three (3) main secrets in preventing the BIR audit, and winning your BIR audit, audit, should it happen. The acronym is PBA which stands stands for (1st) Be Prepared, (2nd) Build Good G ood Relationships, and (3rd) Automate. Page 1 of 47 Visit www.taxpirin.com for Free Account

SECRET No. 1

BE PREPARED

Most taxpayers are are not prepared for the Audit of BIR. Once the taxpayers taxpayers or the taxpayers’ accountants have filed the tax returns, the same are filed in the cabinets or storage boxes hoping that BIR will not knock on their doors to examine their books. Sadly, some taxpayers may have resorted to “areglo” with BIR officers because of the very high tax assessments and their companies could not afford. Some may have even resorted to “no “no opening of books” and just negotiate the amount to be paid. However, Taxpayers may no longer be able to negotiate or make “areglo” as they were used to in the past. Why? Because it is apparent that the BIR is gearing towards computerized audit. BIR issued Revenue Audit Memorandum Order (RAMO) 1-2008 which provides guidelines to the BIR revenue officers or examiners on the use of computer-assisted audit tools and techniques (CAATTS). In conducting an audit through CAATTS, BIR Examiners use audit tools to analyze and evaluate the financial transactions of the taxpayers. Even if the Examiner Examiner will not visit the taxpayer’s taxpayer’s office to request for various documents and returns he can generate already the tax assessment. Welcome to the “no-contact audit approach” by the BIR!

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Years ago, some of the operations of the BIR were already done electronically, such as filing of tax returns and payments through the Electronic Filing and Payment System (eFPS). Revenue Regulation (RR) No. 1-2014 requires all companies to submit electronically their December 31, 2013 BIR Form 1604CF–Alphabetical List of Employees/Payees of Income Payments. Also, RR No. 2-2014 requires individuals and corporate taxpayers to use new tax forms effective year ended December 31, 2013. These new tax forms are Optical Character Recognition (OCR), therefore, these are convertible into electronic format. Again, the taxpayers’ data will be stored in BIR’s database regardless if the said taxpayers are filing electronically or manually. However, there is good news! There is no need actually to worry about BIR audit if a taxpayer is prepared for it. “Areglo” or “compromised” payment could be avoided if the taxpayer’s accounting records and tax returns could stand the audit of the BIR. If a taxpayer has thoroughly prepared, there is a high probability that he will not even be audited by the BIR since tax returns with less errors and exposures are less prioritized in the audit. In case such taxpayer will be audited, zero or minimal tax assessments will be uncovered by the BIR.

To be PREPARED a taxpayer needs to do or know the following: a.)

Assign or Hire Tax Accountant

b.)

BIR’s Directions and Issuances

c.)

Assessment Rules and Stages

d.)

BIR’s Rights and Remedies

e.)

Taxpayers’ Rights and Remedies

f.)

BIR’s Common Audit techniques

g.)

BIR’s Common Audit Findings

h.)

Taxpayers’ Pre-audit Techniques and Preparations

i.)

Tax Planning and Tax Compliance


Assign or Hire Tax Accountant

The General Accountant’s main focus are normally to record all transactions in the books, generate financial statements on time and be able to explain the figures to the bosses, prepare and release payments to creditors and collect receivables from customers (if there is no finance department). With the volume of tasks assigned to General Accounting, tax functions would just be an “add-on” if handled by the General Accountant. This set-up usually results to high tax asssessments. Several companies particularly small to medium size ones do not assign or hire tax accountant who will focus on its tax concerns. Large corporations normally maintain tax department composed of lawyers and CPAs who are expert in taxation. For small companies, the function of tax accounting may be assigned to existing staff so that someone will devote a portion of his/her time to taxation. Companies try to save on the cost of assigning or hiring tax accountants only to be slapped later on with high tax assessments which is more than the cost of 20 or even 100 tax accountants. A tax accountant’s task includes but not limited to the following: •

•

• • •

•

conduct tax planning and compliance review to ensure that the company will avoid high taxes and tax exposures legally. On the lighter note, tax avoidance is legal while tax evasion is illegal. Tax planning and compliance procedures are tax avoidance; review all tax returns and reports before filing with the BIR to ensure that the same are accurate, properly presented and reconciled against records and documents at hand; ensure that tax reports are filed and paid on time; review the tax implications of the Company’s transactions; study tax laws, rules and regulations applicable to the company and ensure company’s compliance thereto; update every now and then with new tax regulations and issuances.

So, is it beneficial to have a tax accountant on board? Always!


What are the 2014 Directions of BIR?

What is the Collection Target of BIR?

The Bureau of Internal Revenue has set its collection target at P1.456 trillion for the year 2014 which is 16.11% higher than its 2013 collection goal of P1.254 trillion. The collection target for year 2015 will be P1.6 trillion. These targets keep on increasing every year. With these high collection goals and aggressive audit programs of BIR, Taxpayers are always under extreme pressures. However, while the BIR is pressured to intensify its assessment and collection efforts to meet its revenue target, the taxpayers, on the other hand, should be well prepared for BIR examination anytime.

What are the Possible Audit Related Notices that I will Receive?

1. Letter of Authority (eLA) 2. Letter Notice (LN) – issued for taxpayers with discrepancies on their income, sales and purchases, including third-party matching (see RMO 28-2007, 4-2008, 30-2003). 3. Tax Verification Notice (TVN) (replaced with eLA through RMOs 62-2010, 69-2010) – issued for specific tax examination such as verification and processing of capital gains tax, withholding tax returns, estate and donors tax returns, claims for tax credit, protested cases under re-investigation. (see RMOs 33-99, 36-99,66-99, 192000, 24-2000, 30-2000, 13-01, 62-2010, 69-2010)


4. Quarterly VAT Audit – specific audit for VAT (see RMO 20-2012) 5. LA from Special Investigation Division (SID) – LA for Run After tax Evaders (RATE) and possible fraud case audit issued by the Special Investigation Division (SID or Fraud Division). This can be issued even after the 3 year prescription period. 6. Mission Order – for possible violation of bookkeeping rules and regulations, particularly on non-issuance of sales or receipts and governing use of Point-of-sale machines (RMO-3-2009); 7. Memorandum of Assignment with a system generated number shall be issued through the LAMS under the following instances (RMO62-2010): a. Reassignment for the continuation of the audit/investigation to another revenue officer (RO). b. Assignment to the original RO of returned cases by the reviewing office and reassignment to another RO. c. Reassingment to another RO due to referral of the case to anohter investigating office (e.g., cases referred to SID by the RDO) d. Protested cases/cases for reinvestigation.

Is it possible that a Taxpayer will still receive LA after he has received/completed the LN, VAT Quarterly Audit and other audits?

YES. The LA is the most comprehensive audit of all.

Will All Taxpayers Receive LA every year?

Not all as of now. This is due to shortage of tax examiners (currently at only 2,500 nationwide) and the related cost of conducting the audit. However, with the IT Audit Programs of the BIR, 100% LA issuance and audit of ALL taxpayers will happen sooner than taxpayers expected. Related discussion of this topic is covered by Ebook titled: How to Prevent BIR Audit by Being Ahead of BIR IT Audit Programs. Please visit www.taxpirin.com or www.philtaxwindow.com to get a FREE copy.


Who are the Priority in the Audit of BIR?

The BIR under Revenue Memorandum Order No. 4-2013 dated March 8, 2013 issued policies and guidelines that should be observed in the continuing audit of tax returns by the Revenue District Offices: 1. All taxpayers are considered as possible candidates for audit. 2. Priority shall be given to the following taxpayers: a. Professionals and sole proprietorships whose – •

•

•

income tax due is less than two hundred thousand pesos (P200,000.00) per annum; gross revenue is less than forty percent (40%) compared to the previous year’s reported gross revenue; tax payment for each tax type is less than thirty-five percent (35%) as compared to the previous year’s tax payment;

b. Those engaged in but not limited to the industries as follows: •

•

•

•

•

•

Importers/manufacturers/wholesalers/retailers of wrist watches and jewelry Petroleum/gasoline dealers Hotels, motels, pension dormitories/boarding houses

houses/lodging

houses/inns,

Real estate industry Schools, particularly for foreigners (e.g. English School for Koreans), review centers Contractors of NGAs, LGUs and government owned and controlled corporations

•

Retailers/wholesalers

•

Restaurants, fast food chains, catering services, bars, coffee shops

•

Hospitals, clinics, medical/dental laboratories

•

Establishments/clinics for beauty enhancements Page 7 of 47

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•

Manufacturers/dealers of beauty and health supplement

•

Amusement/entertainment/event centers

•

Advertising agencies

•

Business processing outsourcing companies

•

E-commerce industry

•

Manpower and other recruitment services agencies

•

Other industries peculiar to the area of jurisdiction of the district office;

c. Those who fall below the established benchmarks of tax compliance; and d. Those who maintained an ending inventory with value of 100% or more of its gross sales. It appears in the above priority list that all Taxpayers whether big or small, corporate or individuals, are effectively targets of BIR audit.

What are the Other Criteria for Selecting a Taxpayer for Audit?

Other than the priority list mentioned in RMO 4-2013 (above), the BIR conducts benchmarking, matching against third party declarations, whistleblower or third party information, results of surveillance and verification drives, and other studies in selecting taxpayers to be sent with LAs. Benchmarking is the process of determining and comparing the performance level of taxpayers in a given line of industry as far as Net VAT Due and Net Income Tax Due are concerned in relation to gross sales/receipts vis-a-vis profit margin rate for the purpose of setting an industry standard of taxpayer’s performance/compliance. (RMO 4-2006).


What is the Purpose of Audit?

The purpose of auditing a tax return is to determine the taxpayer's substantially correct tax liability. A quality audit is the examination of the taxpayer's books and records in sufficient depth for the purpose of ascertaining the correctness and validity of entries and the propriety of application of tax laws. To ensure quality audit of tax returns, revenue officers are enjoined to utilize their technical skills, trainings and experiences, and follow the minimum audit procedures prescribed in the Handbook on Audit Procedures and Techniques (Revenue Audit Memorandum Order No. 100) Taxpayers are given enough time to prove that they have paid the right amount of taxes. Tax audit is a long process and it does not mean that a taxpayer is presumed guilty of evading his tax obligation once he is audited.


What are the Tax Assessment Stages and Related Rules?

ASSESSMENT RULES & STAGES LA (30 days)

Audit/ Deficiency

Notice for Informal Conference 15 days

1st Notice

2nd Notice

3rd Notice

(10 days)

(10 days)

(10 days)

RDO

Subpoena Duces Tecum Dept of Justice

X

PAN

FLD/FAN

15 days

(30 days- Protest; 60 days – docs)

Commissioner

Supreme Court

Court of Tax Appeals 30 days

180 days

The audit process commences upon the issuance of a Letter of Authority (LA) or Tax Verification Notice (TVN) to a taxpayer who has been selected for audit. A taxpayer is given 30 days to reply. If there is no reply to the LA, the first notice which is effectively a follow-up letter is issued. If there is no reply to the 1st notice within 10 days, the second notice will be issued. If again there is no reply to the 2nd notice within 10 days, the final notice will be issued. A subpoena duces tecum is issued by the Legal Division of the Regional or National Office of BIR should there be no reply to the 3rd or final notice within 10 days.


Once the taxpayer’s case is with the Legal Division of BIR, it is more difficult to settle and it involves additional cost because of the payment to the Legal Division to return the taxpayer’s case to the same Revenue Officer handling the examination. So instead of ignoring the LA and the notices, it would be better for the taxpayer to communicate and cooperate with the BIR prior to the issuance of subpoena duces tecum. On the other hand, once the taxpayer has submitted the requirements, the Revenue Officer will proceed with the audit. After the examination, BIR will issue the PAN. If the taxpayer does not reply within 15 days or does not agree with the assessment, the BIR will issue the Formal letter of Demand and Final Assessment Notice (FLD/FAN). If a taxpayer disputes the assessment, he can protest the assessment to the Commissioner of BIR, Court of Tax Appeals and even to the Supreme Court. Take note that effective December 15, 2013, Revenue Regulation 18-13 eliminated the Notice for Informal Conference stage and will immediately proceed with the issuance of PAN after the examination stage. Therefore, presentation of supporting documents and justification of balances should be made exhaustively during the audit or examination stage.

The detailed rules of each stage will be discussed in the succeeding pages. What is a Letter of Authority?

A Letter of Authority (LA) 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. Who issues the Letter of Authority?

The 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.


Who serves the LA?

The electronic LA shall be served by anyone of the ROs whose names appear on the LA (RMO No. 044-10). 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. A Taxpayer may also receive the LA for documentation purposes because there is limit to the number of revalidation and service of LA as discussed in the next pages.

How does the BIR issue an LA?

Effective July 1, 2010, the manual issuance of LAs and TVNs are discontinued for all BIR investigating offices. In accordance with the Computerization endeavors of the the BIR efforts are underway to expand the functionalities of the Letter of Authority Monitoring Systems (LAMS). A number of manual procedures, therefore, are being automated in order to improve operational efficiency and provide management with up-to-date information on audit activities. Among those significant developments of these endeavors is the electronic issuance of LAs, mandating the investigation of taxpayers by the BIRs various investigaiting offices, task forces and special teams (RMO Nos. 044-2010, 62-2010, 69-2010)


How does an LA Revalidated?

A Letter of Authority is revalidated through the issuance of a new LA. How often can an LA be revalidated?

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). What are the Revalidation Procedures?

RMO 38-88 issued the following guidelines for a more effective and efficient investigation and reporting on cases: 1. Revalidation of LA shall be limited to only once in the regional offices and twice in the National Office after issuance of the original LA. 2. A revaluation shall be covered by the issuance of a new LA under the name(s) of the same investigating officer(s), and the superseded LA(s) shall be attached to the new LA issued. 3. Request for revalidation shall be supported with a progress report on the case and a justification for said revalidation. 4. The Division Chief/RDO shall indorse the request for revalidation which shall be duly approved or disapproved by the Assistant Commissioner or Regional Director. 5. The Division Chief/RDO shall be responsible for the monthly monitoring of LAs issued to ensure that reports are rendered within the reglamentary 120-day period. The Division Chief/RDO shall be jointly responsible with the Revenue Officers for cases with LA pending beyond the 120-day period. 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, failure of the RO to complete the audit within the prescribed period shall be subject to applicable administrative sanctions (RMO NO. 044-10).


6. It shall be the duty of the Division Chief/RDO to report immediately to the Inspection Service any tax case for which no report of investigation has been rendered 120 days after the issuance of an LA. Who are authorized to receive a Letter of Authority?

For individual taxpayer, LA shall be received by the taxpayer or his duly authorized representative. For corporate taxpayer, the following may receive the LA: (a) Owner/proprietor, (b) President, (c) Finance Manager, (d) corporate secretary (e) or any duly authorized representative otherwise the LA is null and void. How many taxable year is covered in an LA?

A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing LAs covering audit of "unverified prior years" is hereby prohibited. (RMO 43-90) Is a Letter of Authority with erasures valid?

Erasures shall render the LA null and void. (RMO 28-83). Any manually written character (alphabetical or numeric), notation or erasure shall render the eLA invalid (RMO No. 044-10). Can the same Revenue officer audit a Taxpayer for consecutive years? The same Revenue Officer/Group Supervisor shall not be allowed to audit the same taxpayer for two consecutive years. (RMO 36-99) How long should an Audit be Conducted?

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 which is the Final Assessment Notice and Formal Letter of Demand. 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, subject to the changes as provided in RMO 044-10 (see page 13). Page 14 of 47 Visit www.taxpirin.com for Free Account

Another 120 days will be allowed for the Revenue Officer to complete the examination and submit his final report, otherwise, he cannot anymore continue with the audit unless a waiver is signed by the taxpayer. Reports submitted beyond this period are null and void. After the second 120-day period, BIR cannot continue the audit of the Company legally. Most examinations are not completed within the first 120 day period or even during the second 120 days. BIR’s recourse is to request the taxpayer to sign a Waiver of Statute of Limitations so that the period of examination will be extended. Unfortunately, most taxpayers sign such waiver for various reasons (such as BIR might immediately issue the PAN or get back on them on next taxable year’s audit) so the audit will still proceed even if legally BIR cannot continue with the audit.

How many times should a Taxpayer be examined per 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 reexamination 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 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.

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). What is a Pre-Assessment Notice (PAN)?

Revenue Regulation (RR) No. 18-13 provides that if after review and evaluation by the Commissioner or his duly authorized representative as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer a PAN for the proposed assessment. It shall show in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based. If the taxpayer fails to respond within 15 days from date of receipt of PAN , he shall be considered in default , in which case, a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. If the taxpayer, within fifteen (15) days from date of receipt of PAN responds that he/it disagrees with the findings of delinquency tax or taxes, an FLD/FAN shall be issued within 15 days from the filing/submission of the taxpayer’s response, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties.


What are the exceptions to issuance of PAN?

The PAN shall not be required in any of the following cases: •

•

•

• •

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.

In the above-cited cases, a FLD/FAN shall be issued outright. What are Formal Letter of Demand and Final Assessment Notice (FLD/FAN)?

RR 18-13 provides that the Formal Letter of Demand and Final Assessment Notice (FLD/FAN) and shall be issued by the Commissioner or his duly authorized representative. The FLD/FAN 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 assessment shall be void. (RR-12-99)


Administrative Rights and Remedies of Taxpayers What are the taxpayer’s remedy if he disputes the assessment?

The taxpayer or his duly authorized representative may protest administratively against the aforesaid FLD/FAN within 30 days from date of receipt thereof. The taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation as defined as follows: Request for reconsideration – refers to plea or re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. Request for reinvestigation – refers to a plea of re-evaluation of an assessment on the basis of newly discovered or additinal evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both. The taxpayer shall state in his protest (i) the nature of protest whether reconsideration or reinvestigatioin, specifying newly discovered or additional evidence he intends to present if it is a request for reinvestigation, (ii) date of the assessment notice, and (iii) the applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force or effect. If there are several issues involved in the FLD/FAN but the taxpayer only disputes or protests against the validity of some of the issues raised, the assessment attributable to the undisputed issue or issues shall become final, executory and demandable; and the taxpayer shall be required to pay the deficiency tax or taxes attributable thereto, in which case, a collection letter shall be issued to the taxpayer calling for payment of the said deficiency tax or taxes, inclusive of the applicable surcharge and/or interest.


If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the assessment attributable thereto shall become final, executory and demandable; and the taxpayer shall be required to pay the deficiency tax or taxes attributable thereto and a collection letter shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and/or interest. For requests for reinvestigation, the taxpayer shall submit all relevant supporting 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. The term “ relevant supporting documents” refers to those documents necessary to support the legal and factual bases in disputing a tax assessment as determined by the taxpayer. The sixty (60)-day period for the submission of all relevant supporting documents shall not apply to request for reconsideration. Furthermore, the term “ the assessment shall become final” shall mean the taxpayer is barred from disputing the correctness of the issued assessment by introduction of newly discovered or additional evidence, and the FDDA shall consequently be denied. If the taxpayer fails to file a valid protest against the FLD/FAN within thirty (30) days from date of receipt thereof, the assessment shall become final, executory and demandable. No request for reconsideration or reinvestigation shall be granted on tax assessments that have already become final, executory and demandable.


If the protest is denied, in whole or in part, by the Commissioner’s duly authorized representative, the taxpayer may either: (i) appeal to the Court of Tax Appeals (CTA) within thirty (30) days from date of receipt of the said decision; or (ii) elevate his protest through request for reconsideration to the Commissioner within thirty (30) days from date of receipt of the said decision. No request for reinvestigation shall be allowed in administrative appeal and only issues raised in the decision of the Commissioner’s duly authorized representative shall be entertained by the Commissioner. If the protest is not acted upon by the Commissioner’s duly authorized representative within one hundred eighty (180) days counted from the date of filing of the protest in case of a request for reconsideration; or from date of submission by the taxpayer of the required documents within sixty (60) days from the date of filing of the protest in case of a request for reinvestigation, the taxpayer may either: (i) appeal to the CTA within thirty (30) days after the expiration of the one hundred eighty (180)-day period; or (ii) await the final decision of the Commissioner’s duly authorized representative on the disputed assessment. If the protest or administrative appeal, as the case may be, is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the CTA within thirty (30) days from date of receipt of the said decision. Otherwise, the assessment shall become final, executory and demandable. A motion for reconsideration of the Commissioner’s denial of the protest or administrative appeal, as the case may be, shall not toll the thirty (30)day period to appeal to the CTA. If the protest or administrative appeal is not acted upon by the Commissioner within one hundred eighty (180) days counted from the date of filing of the protest, the taxpayer may either: (i) appeal to the CTA within thirty (30) days from after the expiration of the one hundred eighty (180)-day period ; or (ii) await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within thirty (30) days after the receipt of a copy of such decision.


It must be emphasized, however, that in case of inaction on protested assessment within the 180-day period, the option of the taxpayer is to either: (1) file a petition for review with the CTA within 30 days after the expiration of the 180-day period; or (2) await the final decision of the Commissioner or his duly authorized representative on the disputed assessment and appeal such final decision to the CTA within 30 days after the receipt of a copy of such decision, are mutually exclusive and the resort to one bars the application of the other. What should be Stated in the Final Decision on a Disputed Assessment (FDDA)?

The decision of the Commissioner or his duly authorized representative shall state the (i) facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void , and (ii) that the same is his final decision.

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 preceding three (3) taxable year. b.) Nature of request whether reconsideration or reinvestigation specifying newly discovered evidence he intends to present. c.) The taxable periods covered. d.) Assessment number. e.) Date of receipt of assessment notice or letter of demand. Page 21 of 47 Visit www.taxpirin.com for Free Account

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 laws, rules and regulations or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect in 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 the 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. 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. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is not acted upon?

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 Page 22 of 47 Visit www.taxpirin.com for Free Account

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). 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. What is the Recourse of the Taxpayer if the Protest is Denied by the Commissioner?

If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the court of tax appeals within 30 days from the date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable. Provided, however, that if the taxpayer elevates his protest to the Commissioner within 30 days from date of receipt of the final decision of the Commissioner’s duly authorized representative, the latter’s decision shall not be considered final, executory annd demandable, in which case, the protest shall be decided by the Commissioner. What is the Recourse of the Taxpayer if BIR Failed to Act on the Taxpayer’s Protest?

If the Commisioner or his duly authorized representative failed to act on the taxpayer’s protest within 180 days from the date of its submission, the taxpayer, with the required documents in support of his protest, may appeal to the Court of Tax Appeals within 30 days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable.


What are the Contents of BIR’s Decision?

The decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable laws, rules and regulations, or jurisprudence on which such decision was based, otherwise the decision shall be void, in which case, the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. What are the Modes of Service or Delivery of LA, Notices and Assessments?

The notice (PAN/FLD/FAN/FDDA) to the taxpayer herein required may be served by the Commissioner or his duly authorized representative through the following modes: (i) The notice shall be served through personal service by delivering personally a copy thereof to the party at his registered or known address or wherever he may be found. A known address shall mean a place other than the registered address where business activities of the party are conducted or his place of residence. In case personal service is not practicable, the notice shall be served by substituted service or by mail. (ii) Substituted service can be resorted to when the party is not present at the registered or known address under the following circumstances: The notice may be left at the party’s registered address, with his clerk or with a person having charge thereof. If the known address is a place where business activities of the party are conducted, the notice may be left with his clerk or with a person in-charge thereof. If the known address is the place of residence, substituted service can be made by leaving the copy with a person of legal age residing therein.


If no person is found in the party’s registered or known address, the revenue officers concerned shall bring a barangay official and two (2) disinterested witnesses to the address so that they may personally observe and attest to such absence. The notice shall then be given to said barangay official. Such facts shall be contained in the bottom portion of the notice, as well as the names, official position and signatures of the witnesses. Should the party be found at his registered or known address or any other place but refused to receive the notice, the revenue officers concerned shall bring a barangay official and two (2) disinterested witnesses in the presence of the party so that they may personally observe and attest to such act of refusal. The notice shall then be given to said barangay official. Such facts shall be contained in the bottom portion of the notice, as well as the names, official position and signatures of the witnesses. “ Disinterested witnesses” refers to persons of legal age other than employees of the Bureau of Internal Revenue. (iii) Service by mail is done by sending a copy of the notice by registered mail to the registered or known address of the party with instruction to the Postmaster to return the mail to the sender after ten (10) days, if undelivered. A copy of the notice may also be sent through reputable professional courier service. If no registry or reputable professional courier service is available in the locality of the addressee, service may be done by ordinary mail.


The server shall accomplish the bottom portion of the notice. He shall also make a written report under oath before a Notary Public or any person authorized to administer oath under Section 14 of the NIRC, as amended, setting forth the manner, place and date of service, the name of the person/barangay official/professional courier service company who received the same and such other relevant information. The registry receipt issued by the post office or the official receipt issued by the professional courier company containing sufficiently identifiable details of the transaction shall constitute sufficient proof of mailing and shall be attached to the case docket. Service to the tax agent/practitioner, who is appointed by the taxpayer under circumstances prescribed in the pertinent regulations on accreditation of tax agents, shall be deemed service to the taxpayer.”

What is a Constructive Service?

If the notice to the taxpayer herein required is served by registered mail, and no response is received from the taxpayer within the prescribed period from the date of the posting thereof in the mail, the same shall be considered actually or constructively received by the taxpayer. If the same is personally served on the taxpayer or his duly authorized representative who, however, refused to acknowledge receipt thereof, the same shall be constructively served on the taxpayer. Constructive service thereof shall be effected by leaving the same in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least 2 revenue officers other than the revenue officer who constructively served the same. The revenue officer who constructively served the same shall make a written report of this matter which shall form part of the docket of this case.


What are the Interest, Civil and Criminal Penalties for Tax Violations? (RR No. 12-99)

Taxpayer shall be subjected to the following: 1. Twenty percent (20%) interest. Assessment shall be subject to 20% interest per annum computed from the last day prescribed by law for the filing of the tax return. 2. Twenty five percent (25%) surcharge . There shall be imposed, in addition to the basic tax required to be paid, a penalty equivalent to twenty-five percent (25%) thereof, in any of the following cases: Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or •

•

•

•

Failure to pay in full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.

3. Fifty percent (50%) surcharge

In case of willful neglect to file the return within the priod prescribed by the Code, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be 50% of the tax or deficiency tax.


4. Criminal Liability

Section 254 of the Tax Code provides that any person who willfully attemps in any manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Thirty thousand pesos (P30,000) but not more than One hundred thousand pesos (P100,000) and suffer imprisonment of not less than two (2) years but not more than four (4) years. Can tax returns be amended after receipt of LA? (RR No. 12-99)

No. Section 6 (A) of the Code provides that any tax return filed by a taxpayer “maybe modified, changed or amended” by the taxpayer within 3 years from the date of such filing provided, however, that no notice for audit or investigation of such return, statement or declaration has in the meantime, been actually served upon the taxpayer. 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.

What is the Effect if assessment is issued after the Prescription Period?

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.


What is Waiver of the Statute of Limitation (RMO 20-90)?

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. Pursuant to Section 223 of the Tax Code, internal revenue taxes may be assessed or collected after the ordinary prescriptive period, if before its expiration, both the Commissioner and the taxpayer have agreed in writing to its assessment and/or collection after the said period. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. This written agreement between the Commissioner and the taxpayer is the so-called Waiver of the Statute of Limitations. The execution of the waiver should comply with RMO No. 20-90, otherwise it is null and void. In the execution of said waiver, the following procedures should be followed: 1. The waiver must be in the prescribed BIR form. This form may be reproduced by the Office concerned but there should be no deviation from such form. The phrase "but not after ______ 19 ___" should be filled up. This indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription. 2. The period agreed upon shall constitute the time within which to effect the assessment/collection of the tax in addition to the ordinary prescriptive period. 3. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In case of a corporation, the waiver must be signed by any of its responsible officials.


Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed. 4. The waiver should be signed by the Regional Director or Commisioner for cases handled by the National Office and for cases involving more than 1 million pesos. 5. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy. Can a Taxpayer be assessed without the audit?

Yes. It is called Jeopardy Assessment which 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: a) Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or b) Substantiate all or any of the deductions, exemptions or credits claimed in his return. (BIR web)


What is required of a taxpayer who is being audited?

A Taxpayer who is being audited is obliged to: a.) 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. b.) 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 c.) Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable period of time from his (Taxpayer’s) receipt of the Letter of Authority. 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. (BIR website- Taxpayer rights) What are the means available to the Bureau to compel a Taxpayer to produce his books of accounts and other records?

A Taxpayer shall be requested in writing, to produce his books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayer’s receipt of the Final written request, he still fails to comply with the requirements of the notice, the Bureau shall then issue him a Subpoena Duces Tecum.


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

Distraint of personal property; Levy of real property belonging to the Taxpayer; Civil Action; and Criminal Action.

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. 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.


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. What is the safekeeping Period for Books of Accounts and other Accounting Records?

RR 17-2013 requires all taxpayers to preserve their books of accounts, including subsidiary books and other accounting records for a period of ten (10) years reckoned from the day following the deadline of filing a return or if filed after the deadline, from the date of filing of the return, for the taxable year, when the last entry was made in the books of accounts. If the taxpayer has any pending protest or claim for tax credit/refund of taxes paid, and the books and records concerned are material to the case, the taxpayer is required to preserve his/its books of accounts and other accounting records until the case is finally resolved. BIR’s Common Audit Procedures

BIR has standard audit procedures for each account. Discussed below are common audit procedures/techniques of BIR: 1. Check registrations BIR usually requests the Company’s registration documents with Securities and Exchange Commission (SEC) to determine the Company’s nature of business. Registration papers with the BIR would show the Company’s business activity and tax type; VAT or Non-VAT registration; branches, if any; and, type of tax returns required to be filed with the Bureau. Taxpayer should be able to provide updated and correct registration papers otherwise penalties will be imposed.


2. Summarize, Compare and Derive Variances (within Taxpayer’s Data). These are the major audit procedures of the BIR and most tax assessments result from these. BIR would requests the taxpayer to submit the following: Audited financial statements (FS) duly filed with the BIR Audited Income Tax returns (ITR) duly filed with the BIR All tax returns (monthly, quarterly, annual) filed with the BIR Schedule or details of accounts Trial balance General ledger Subsidiary ledger, in some cases • • • • • • •

The BIR officer will do these procedures: Compare the audited ITR figures with audited FS Summarize the monthly and quarterly tax returns and compare with annual returns/alphalists Compare annual Alphalists with ITR & FS Compare ITR & FS figures with details or schedules of accounts, trial balance, general and subsidiary ledgers • •

• •

For instance monthly 1601C will be summarized then compared with the figures in BIR Form 1604CF (alphalist). The ITR and FS figures will be compared with BIR Form 1604CF and schedules. The same procedures will be followed for Expanded Withholding Taxes, Final Taxes, VAT and other taxes. Take note: Tax exposures will be computed for whatever variances uncovered in the above matching and tie-up procedures. Therefore, taxpayer should ensure that all figures in the above returns and reports tieup. Any variance should be reconciled.

3.

Benchmarking and matching against third-party declarations (with Third Party Data/Information). BIR will obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC). The taxpayers data or information will be matched against industry benchmarks. Furthermore, the taxpayers return declaration will also be matched against another taxpayers whom they dealt business either as supplier or customer. Page 34 of 47


Both supplier and customer figures should match or tie-up. Any significant discrepancies or variances are basis for the issuance of the letter notice and subsequent audit. 4. Analytical review (within Taxpayer’s Data) The BIR Officer will do horizontal and vertical analysis. Horizontal Analysis looks at amounts on the financial statements over the past year(s). BIR will check the increase or decrease of each account between the current year as against the previous year. Any account with material movement will further be scrutinized. Vertical analysis reports each amount on a financial statement as a percentage of another item. For example, the vertical analysis of the balance sheet means every amount on the balance sheet is restated to be a percentage of total assets. This allows BIR to compare the company's balance sheet to another company's balance sheet or to the average of its industry. Vertical analysis of an income statement results in every income statement amount being presented as a percentage of sales. This allows BIR to compare the company's income statement to another company's or to the industry average. Any account with material increase or decrease as against previous year will be scrutinized further. The resulting percentages on horizontal and vertical analysis will be compared with average of the Company’s industry. 5. Inquiry/Interview BIR will conduct interview regarding the nature of business, accounts and transactions and anything about the financial statements and tax returns. Page 35 of 47 Visit www.taxpirin.com for Free Account

6. BIR will also check the taxes on: •

7.

transactions with nonresident foreign corporation/s or citizens, if any

•

salaries, wages and benefits of key officers

•

related party transactions

On a case to case basis BIR personnel may conduct these: Check completeness of books, OR and invoices Check compliance with the invoicing requirements. This is to ensure that ORs and Invoices supporting revenues, costs and expenses are registered with BIR and conform with the other requirements. Check if there are fraudulent transactions. Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC). Fieldwork. In some cases, BIR officers will visit the Company a few times but will not vouch or check the hard copies of vouchers, ORs or invoices. However, Taxpayer should be ready anytime these are required to be presented. • •

• •

•

BIR’s Common Audit Findings

Below are the most common audit findings: 1. Un-reconciled variances, errors and inconsistent balances between the documents, books, schedules, tax returns and financial statements. Significant tax assessments of most companies results from these findings. 2. Un-reconciled variances, errors and inconsistent balances with third parties such as customers, suppliers, government agencies and other institutions where the transactions of the Company could be verified. Significant tax assessments of most companies results from these findings. 3. Incorrect application of tax laws and rates


4. Non-withholding and under withholding on: • •

•

Purchases of top 20,000 corporations. Tax shields particularly allowances of owners and Company officers Transactions with Nonresident Foreign Corporations

5.

Undeclared or under-declared revenue

6.

Other income or miscellaneous income are not subjected to VAT

7.

Bloated miscellaneous expenses and other accounts

8. Noncompliance with substantiation and invoicing requirements 9.

Incomplete certificates for creditable withholding tax

10. No summary lists of sales and purchases (VAT relief) 11. Unremitted DST on contracts, loan docs and capital 12. Incomplete and missing tax returns and documents 13. Improper presentation in the tax returns 14. Unregistered books of accounts

Taxpayer’s Pre-audit Techniques and Preparations

1. Comply with all registration requirements. Ensure that your Company’s registration with BIR is updated. Official Receipts, Invoices and Books of Accounts should also be properly registered. 2. Maintain good accounting records. Implement a computerized accounting system and systematic safekeeping of documents and records. Manual accounting or accounting using excel is timeconsuming and prone to errors. A report which takes hours for the accountant to prepare is generated in the accounting system only in minutes. Consider investing in an accounting software. Un-reconciled variances, errors and inconsistent figures which are the major findings of BIR results from “messy” accounting records and files. Page 37 of 47 Visit www.taxpirin.com for Free Account

3. Issue BIR-registered OR for all income 4. Support all expenditures with BIR-registered ORs and Invoices 5. Declare correct income 6. Claim only valid expenses 7. Pay correct taxes on time 8. Do tax planning and tax compliance procedures. In tax planning, taxpayers avoid or minimize taxes. Tax avoidance is legal whereas tax evasion is illegal.

Tax Planning and Tax Compliance Procedures

These are the major procedures on tax planning and tax compliance: 1. Know the major tax laws that apply to your Company, to each account and transactions 2. Examine ALL accounts with Tax implications (VAT, withholding taxes, income tax) 3. Re-compute or test compute balances. For instance, rent expense in the books could be re-computed by multiplying the monthly rate times the number of months. The resulting figure should tie-up to the rent expense per books, FS and tax returns. 4. Summarize and Compare: •

•

Summarize tax returns - income tax, VAT, EWT, FWT, CWT, others (monthly, quarterly, annual) Compare figures and ensure tie-up of figures found in: - Documents - General ledger/subsidiary ledger - Trial balance Schedules and details Financial statements (Audited) Income Tax Return (Audited) VAT, Withholding Taxes, Income Tax (Monthly, Quarterly, Annual) Page 38 of 47


For instance, if sales in the Financial Statements is P100 Million, the figures found in the VAT and income tax returns, books and documents should also be P100 Million. Discrepancies should be justifiable otherwise a tax assessment will be imposed. Consider the Client Adjusting Journal Entries (CAJEs), Proposed Adjusting Journal Entries (PAJEs) of external auditor, and reconciling items between Financial Statements and Income Tax Returns 5. 6. 7. 8. 9.

Evaluate the tax effects of discrepancies Do vertical and horizontal analysis Check tax effects of material movements from prior period Check tax effects of nonmoving accounts Give recommendation: whether to amend and correct tax returns or leave as is, whichever is favorable or offers less tax exposure to the company.


SECRET NO. 2 BUILD GOOD RELATIOSHIPS

The audit of the BIR is also all about relationships. There are hundreds of ways to build good relationships with tax officers. However, only two main points will be given emphasis here as follows: •

•

Communicate. If required, taxpayer should communicate with BIR either verbally or in writing otherwise legal consequences (such as issuance of subpoena duces tecum, garnishment of bank accounts) may be imposed on him. Take note of the legal deadlines to submit reply, request and protest. Cooperate. BIR requires so many returns, reports, documents and schedules during examination. Taxpayer should cooperate and submit such requirements. However, every requirement for submission to BIR should have gone thorough tax compliance review and procedures.

Show respect in case the BIR officers will visit your office. Consider treating them to lunch or dinner or serving coffee.


SECRET NO. 3

AUTOMATE

The volume of work involved in reconciling all figures from documents, books of accounts, financial statements, schedules and tax returns is tremendous. This is time-consuming and prone to error if done manually. Manual accounting and reconciliations even when using excel program is not advised. 1. Automate your Accounting System. Pls refer to page 37, paragraph 2. Maintain good accounting records. If you want to request for a demo, please visit www.taxpirin.com and fill-up the “contact us” page. 2. Automate your review and pre-audit of tax returns . Most taxpayers do not pre-audit their tax returns. Thus, BIR tax assessments are inevitable. Shown below is the normal Taxpayer’s and BIR’s processes with suggested use of Taxpirin (online tax audit solution) to ensure error-free tax returns:


Taxpayer’s Processes:

1. A Taxpayer’s process starts when he sells or buys goods or services. 2. As required by BIR regulations, the taxpayer issues BIR registered invoices and official receipts for the collections. 3. These documents are summarized and financial reports are generated which are usually done by bookkeepers or accountants. 4. From the summarized financial records, accountants and bookkeepers will prepare the tax returns for filing with the BIR. 5. Tax returns are then filed with the BIR or submitted to accredited banks for payment.

BIR’s Audit Processes 6. The BIR performs matching audit and other pre-audit electronic procedures of taxpayers’ returns by matching all information within and with other tax returns/reports and financial statements submitted. When there are errors, variances or findings, a Letter of Authority or Letter Notice (LA/LN) is created and issued to the taxpayer. Based on our experience, 99% of taxpayers audited by BIR have tax findings. Therefore, the probability that a taxpayer have tax exposure is high.

7. If there are no errors, variances or findings, the probability for BIR audit is very slim. 8. Upon completion of the examination, a pre-assessment notice is issued to the taxpayer. After 15 days, Formal Letter of Demand and Final Assessment Notice (FLD/FAN) are issued. Other procedures and rules have been discussed already in the previous parts of this Ebook.


When does Taxpirin play a role in the process?

Errors, variances, inconsistencies and findings on the tax returns, reports and financial statements will trigger the issuance of LA. Thus, a taxpayer should ensure that all amounts and figures of related accounts in various tax returns, reports, schedules and financial statements submitted to the BIR are consistent, error-free and reconciled . Therefore, Taxpirin should be used before the tax returns are filed with the BIR as shown in the illustration below. Taxpirin will pre-empt or uncover errors and inconsistencies supposedly detected by the BIR, had the taxpayer not used Taxpirin. The new process with the use of Taxpirin will substantially change as the error, inconsistencies or variances are identified and corrected. Thus, no LA or LN is issued to the taxpayer. The taxpayer is classified as low priority in the audit, thus, practically preventing BIR audit. The revised process is shown below:

New Process with the Use of Taxpirin

Financial Reports

Tax Returns

Taxpirin

(Income, VAT, EWT, FBT, WHTC, FT)

Set-up Generate Reconcile (SGR)

Pre-Audit/ Matching

Filing & Payment

BIR

ARCHIVE

with

Matching Pre-Audit

(No LOA/ LN)

BIR

No/Low Findings


It should be noted that Taxpirin uses similar approach to BIR’s Pre-audit Electronic Procedures. Thus, a Taxpayer can rectify his errors beforehand. It should be noted that Taxpirin does not replace the work of the Accountant or bookkeeper. Rather, it makes them more confident with their work as Taxpirin enhances and confirms the reliablity of the tax returns for filing. The use of Taxpirin is very simple and easy as S-G-R. Setup, Generate and Reconcile. Shown below illustrates this simple and easy process:

Taxpirin’s Easy & Simple SGR Process

Setup

Company Info Tax Types Import Accounts Mapping

   

Generate

Import balances Encode tax returns Generate variances, errors & possible tax assessments

  

Reconcile

Questions Adjustments Final Report Final Tax Returns

   

What are the processes in using Taxpirin?

As an online tax solution, Taxpirin follows SGR (Setup, Generate, Reconcile Process), a very easy 2 Step + Reconcile system. The process is discussed in more detail below: 1. Setup. It starts with Setup, wherein all taxpayer’s information and applicable tax types are accomplished. (A Taxpayer may also opt to withhold certain information such as Name, TIN and address for confidentiality).


Then, the Company’s Chart of Accounts are imported to excel format and each account are mapped to the corresponding specific account in the Standard Chart of Accounts available in the system. This process is done only once. Succeeding month’s process will start immediately with importing of balances under GENERATE. 2. Generate. This process starts with importing of the company’s specific month’s trial balance (in excel format) that you want to be pre-audited. This process will take only a few minutes. Then you can now encode the details of the tax returns’ balances that you prepared. After encoding the tax returns’ balances, a report is generated that shows the errors, inconsistencies, variances and possible tax assessments. In the said report, numbers in red font are findings or possible tax deficiencies and numbers in black font are over-declaration or payments. 3. Reconcile. When there are errors, variances or findings, a series of questions will prompt and guide the user to make adjustments to correct the errors or inconsistencies. After eliminating the errors and inconsistencies, a final report may be generated to ensure that all variances are corrected . The user may generate from the system the final tax returns for submission to the BIR.

These are the additional features and benefits of Taxpirin: 1. Prevents BIR Audit Headache. It identifies and corrects tax errors or findings before filing your tax returns with the BIR (present and future tax returns). Then you can reconcile and adjust to eliminate the errors and inconsistencies. 2. Cures Tax Stress and Hassles. It identifies and computes for tax errors, inconsistencies or findings for previously filed tax returns (prior year tax returns). Then you can reconcile and adjust to eliminate the errors. Thus, Taxpirin prepares you for the BIR audit, if it happens. Page 45 of 47 Visit www.taxpirin.com for Free Account

3. Save at least P100,000 per year . No need to hire expensive tax consultants. Taxpirin is a tax expert at your fingertips. Taxpirin will guide you on the proper tax treatments of certain transactions based on BIR updated guidelines and rulings. 4. Avoid costly changes of accounting personnel . Taxpirin retains records for 10 years so you will avoid the effects of accounting personnel changes. Such personnel changes disrupts the tax knowledge continuity which results to unexplained tax variances and costly tax assessments. 5. Avoid penalties by filing on time . A tax calendar which reminds you through email of tax deadlines. 6. Save more money by not hiring a tax consultant who will manage your tax compliance . The Tax Audit Checklist is available. The checklist will guide you on your tax planning and compliance and how to manage the BIR audit, if it happens. 7. Confidentiality of Information, Security and Availability. a. Taxpirin’s server uses high security encryption and hosted in the USA. b. Taxpirin is privately managed and not related to any government agencies, particularly the BIR. c. Taxpayer’s information (like taxpayer’s name, TIN, address, etc.) are only optional. A subscriber may opt to use different name or totally leave the field blank. d. Available anytime (24/7, 365 days in a year), anywhere. 8. Tax In cooperation with Alerts and Updates. www.philtaxwindow.com, subscribers will receive regular tax updates and articles. Like us on Facebook (fanpage: www.facebook.com/taxpirinofficial) and follow us on Twitter (www.twitter.com/taxpirin) for more updates.


Secrets to Prevent BIR Audit and Eliminate Tax Assessments_R1_v2

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