Tax Audit and Investigations: Assessment Process and Taxpayers' Remedies

TAX AUDIT AND INVESTIGATIONS: ASSESSMENT PROCESS AND TAXPAYERS’ REMEDIES Atty. Pierre Martin D. Reyes

ASSESSMENT PROCESS

1. Letter of Authority from BIR The Letter of Authority (LoA) is an official document given to a Revenue Officer which empowers him 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 (CIR v. Sony Philippines, G.R. No. 178697, November 17, 2010). The LoA is issued by (1) the Commissioner of Internal Revenue) or his duly authorized representatives after a return has been filed; or by the Regional Director for all audit cases within his jurisdiction except in cases involving civil or criminal tax fraud under the jurisdiction of the Tax Fraud Division of the Enforcement Service and in policy cases under audit by Special Teams in the National Office (RMC No. 36-99)

A LOA ISSUED TO COVER AN AUDIT OF “UNVERIFIED PRIOR YEARS” IS INVALID A letter of authority should cover a taxable period not exceeding one taxable year. If the BIr intends to audit a taxpayer for more than one taxable year, it should indicate the specific years. (RMO 43-90). If a LoA was issued to cover “unverified prior years,” it is invalid and any assessment made on the basis of that is likewise invalid. (CIR v. Sony Philippines, G.R. No. 178697, November 17, 2010)

The LoA must be served within 30 days from its issuance. Otherwise, it shall become null and void. The LoA can be revalidated through the issuance of a new LoA. (RMO No. 38-88). Revalidation can be done only once if the LoA was issued by the Regional Office and twice if issued by the National Office.

2. Tax Audit of Taxpayer General Rule: A Taxpayer’s books of accounts shall be subjected to examination and inspection only once for a taxable year. Exceptions: 1. CIR determines that fraud, irregularities, or mistakes were committed by the taxpayer; 2. Taxpayer himself requests a re-investigation or re-examination of his books of accounts; 3. To verify compliance with withholding and other internal revenue taxes 4. To verify capital gains tax liabilities of the taxpayer 5. CIR exercise power to obtain information relative to the examination of other taxpayers (Secs. 5 and 235, NIRC)

A Revenue Officer has only 120 days from the date of receipt of the LoA to conduct the audit and submit the required report of investigation. If the Revenue Officer finds no deficiency, the audit ends. If there is any deficiency, the Revenue Officer submits his report to the Revenue District Office (RDO) and the case is endorsed to the Revenue Regional Office (RRO) or CIR NO MORE NOTICE OF INFORMAL CONFERENCE Previously, under RR 12-99 (September 6, 1999), a taxpayer shall receive what is called a “Notice of Informal Conference” and a copy of the tentative findings. The taxpayer may agree or disagree with the findings. If the taxpayer is not amenable, there will be an Informal Conference with provides the taxpayer an opportunity to air his side. RR 18-2013 (November 28, 2013) dispenses with the requirement of an informal conference.

3. Preliminary Assessment Notice If the BIR finds no sufficient basis to assess the taxpayer, the case is dismissed. However, if there is sufficient basis, a Preliminary Assessment Notice (PAN) is issued, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based. The taxpayer must respond to the PAN within 15 days from date of receipt of the PAN. Otherwise, he shall be considered in default and a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued calling for the payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. If the taxpayer responds that he/it disagrees with the findings of deficiency tax or taxes, FLD/FAN shall be issued within fifteen (15) days from filing/submission of the taxpayer’s response, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties .RR 12-99 (September 6, 1999), as amended by RR 182013 (November 28, 2013)

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DISTINCTION BETWEEN A DEFICIENCY ASSESSMENT AND A JEOPARDY ASSESSMENT Deficiency Assessment is an assessment made by the BIR after the conduct of an investigation or audit when it finds that the tax return filed by the taxpayer contains an underdeclaration of income or when the taxpayer does not at all file a tax return

Jeopardy Assessment is a tax assessment which was assessed without the benefit of a complete or partial audit by an authorized revenue officer who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with audit and investigation requirements to present his books of accounts and/or pertinent records or substantiate all or any of the deductions, exemptions, or credits claimed in his return

PRESCRIPTIVE PERIOD TO ASSESS TAXPAYER

WHEN PAN IS NOT REQUIRED

Assessment must be made within 3 years from the last day prescribed by law for the filing of the tax return. If the return was filed beyond the period prescribed by the law, the 3-year period shall be counted from the day the return was filed (Section 203, NIRC),

Generally, a PAN must be issued by the BIR before issuing the FLD/FAN. (CIR v. Metro Star Superama, G.R. No. 185371, December 8, 2010)

However, in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed within 10 years from discovery of the falsity, fraud, or omission.

1. Assessment is purely mathematical error 2. Excise tax on excisable article not paid 3. Discrepancy between tax withheld and remitted 4. Goods imported by tax-exempt entity are sold to a taxable entity 5. Claim for refund is filed when it was previously carried over.

Any assessment made beyond the prescriptive period is invalid (Tupaz v. Ulep, G.R. No. 127777, October 1, 1999), The prescriptive period of assessment may be extended if the taxpayer executed a Waiver of the Statute of Limitations

In the following cases, a PAN is not required:

REQUIREMENTS OF A WAIVER OF THE STATUTE OF LIMITATIONS A waiver of the statute of limitations under the Tax Code must conform strictly with the provisions of RMO 20-90 (April 4, 1990) in order to be valid and binding. Philippine Journalist v. CIR, G.R. No. 162852, December 16, 2004 As provided in RMO No. 20-90: 1. 2. 3. 4. 5.

The waiver must be in the proper form The waiver shall be signed by the taxpayer himself or his duly authorized representative. Signature of the proper authority indicating that the BIR has accepted and agreed to the waiver The date of the acceptance by the BIR should be indicated. Both the date of execution by the taxpayer and the date of the acceptance by the BIR 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. The waiver must be executed in 3 copies, the original to be attached to the docket, the second copy for the taxpayer and the third copy for the Office accepting the waiver. Taxpayer must be furnished a copy of the waiver in order to perfect the agreement since the waiver is not a mere unilateral act

4. Formal Letter of Demand and Final Assessment Notice The Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued by the CIR or his duly authorized representatives. 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 will be void. RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013). It is important to note that while RR 18-2013 requires the PAN to state the facts, the law, rules and regulations or jurisprudence on which the proposed assessment is based, failure to comply with such does not render the PAN void. This is because the PAN is not the final assessment contemplated by the Tax Code which can be protested. The only

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consequence of failure to file a reply to the PAN is that the taxpayer shall be considered in default and the BIR can now make a final assessment. The requirement that the FAN must first state the facts and the law on which the assessment is based is not merely a procedural requirement but a substantive requirement which determines the taxpayer’s ability to protest. (CIR v. Gonzalez, G.R. No. 177279, October 13, 2010; CIR v. Reyes, G.R. No. 159694 & G.R. No. 163581, January 27, 2006). The FLD/FAN calls for the payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties (additions to the tax). ADDITIONS TO THE TAX

SURCHARGES

INTEREST

25% surcharge

20% deficiency interest

It is imposed when there is:

It is imposed when there is any deficiency in the tax due. It shall be assessed from the date prescribed for its payment until the payment thereof. (Section 249, IRC)

1. Failure to file a return and pay tax due thereon 2. Filing with unauthorized revenue office 3. Failure to pay deficiency tax within time prescribed in assessment notice 4. Failure to pay full or part of the amount shown in ITR required to be filed 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 (Section 248, NIRC)

20% delinquency interest It is imposed when there is: 1. Failure to pay the amount of tax due on any return required to be filed 2. Failure to pay the amount of tax due for which no return is required 3. Failure to pay a deficiency tax or surcharge or interest thereon

50% surcharge It is imposed when there is: 1. Willful neglect to file the return within the period prescribed 2. False or fraudulent return is willfully made (Section 248, NIRC)

It shall be assessed from the due date appearing on the notice and demand of the CIR until the payment thereof. (Section 249, NIRC)

Not e: RR 18-2013 (November 28, 2013) provides that the deficiency tax assessed shall be paid by the taxpayer within the time prescribed in the notice and demand, otherwise, the taxpayer shall be liable for delinquency interest. Previously, under RR 1299 (September 6, 1999), the taxpayer shall be liable only for civil penalties or surcharges.

PROTEST

5. Protest the Letter of Demand/Final Assessment Notice The taxpayer or its authorized representative or tax agent may protest administratively against the aforesaid FLD/FAN within thirty (30) days from date of receipt thereof. The taxpayer protesting an assessment may file either a written request for reconsideration or reinvestigation. RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013).

It is the FLD/FAN that must be administratively protested or disputed within 30 days, and not the PAN (Allied Banking Corp. v. CIR, G.R. No. 175097, February 5, 2010)

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FORMS OF PROTEST A Request for Reconsideration refers to a plea of reevaluation 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. (RR 12-85)

A Request for Reinvestigation refers to a plea of reevaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both. (RR 12-85)

Note: It is the request for reinvestigation acted upon which suspends the prescriptive period to collect. A request for reconsideration does not toll the prescriptive period BPI v. CIR, G.R. No. 139736, October 17, 2005

The taxpayer shall state in his protest (1) the nature of protest whether reconsideration or reinvestigation, specifying newly discovered or additional evidence he intends to present if it is a request for reinvestigation, (2) date of the assessment notice, and (3) the applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect. RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013). SUBMISSION DOCUMENTS

General Rule: No prior payment of assessed internal revenue tax is required when protested or disputed. Exceptions: 1. 2.

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 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

OF

RELEVANT

SUPPORTING

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” refer 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 requests for reconsideration.

EFFECT IF TAXPAYER DOES NOT FILE A VALID PROTEST 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. RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013).

5. Final Decision on Disputed Assessment The Final Decision on Disputed Assessment (FDDA) of the Commissioner or his duly authorized representative shall state the (1) facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, and (2) that the same is his final decision. PERIOD FOR THE CIR TO ACT ON THE PROTEST The CIR or his duly authorized representative may act on the taxpayer’s protest within one hundred eighty (180) days counted from the date of filing of the protest in case of a request reconsideration or within 180 days from the date of submission by the taxpayer of the required documents in support of his protest in case of a request for investigation. RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013). There are three actions that can be done by the CIR with regard to the protest of the taxpayer:

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DENY

GRANT THE PROTEST This means that the request for reconsideration or reinvestigation, as the case may be is granted.

THE

NO ACTION

PROTEST

This means that the request for reconsideration or reinvestigation, as the case may be is denied. The FLD/FAN stands.

The CIR may opt not to take any action at all. In such case, the FLD/FAN stands.

Not e: In case of denial of protest or inaction by the CIR, the judicial remedy of appeal is now available to the taxpayer.

APPEALS IF PROTEST IS DENIED OR NOT ACTED UPON BY THE CIR’S DULY AUTHORIZED REPRESENTATIVE

DENIAL OF PROTEST

INACTION

1. Appeal to the Court of Tax Appeals (CTA) within thirty (30) days from date of receipt of the said decision 2. 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.

1. Appeal to the CTA within thirty (30) days after the expiration of the one hundred eighty (180)-day period; or 2. Await the final decision of the Commissioner’s duly authorized representative on the disputed assessment.

IF PROTEST IS DENIED OR NOT ACTED UPON BY THE CIR

DENIAL OF PROTEST

INACTION

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.

1. Appeal to the CTA within thirty (30) days from after the expiration of the one hundred eighty (180)-day period; or 2. 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.

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. See also Fishwealth Canning Corp. v. CIR, G.R. No. 179343, January 21, 2010

The option here is mutually exclusive and resort to one bars the application of the other. See also Lascona Land v. CIR, G.R. No. 171251, March 5, 2012

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The CTA in division has the exclusive appellate jurisdiction to review the decision of the CIR in cases involving disputed assessments and inaction by the CIR where the NIRC provides a specific period of action. Republic Act No. 1125, as amended by Republic Act No. 9282; A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)

REMEDY IF THE DECISION OF THE CTA IN DIVISION IS ADVERSE TO TAXPAYER File a Motion for Reconsideration or New Trial with the CTA in division within 15 days from receipt of decision. The taxpayer cannot appeal directly to the CTA en banc without seeking a prior reconsideration or moved for a new trial with the concerned CTA division. A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)

Appeal to the CTA en banc within 15 days. It may be extended to an additional period not exceeding 15 days from receipt of decision. A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)

Appeal to the Supreme Court within 15 days from receipt of decision. A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)

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Tax Audit and Investigations: Assessment Process and Taxpayers' Remedies

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