By: Atty. Pearl Fatima L. Evardone
Philippines tax system is anchored on voluntary compliance under pay-as-you file as it is the taxpayer who is responsible for its tax compliance determining which tax should be paid, how to comply with various reports, and when to pay the same. It has a check and balance mechanism where the tax authority (Bureau of Internal Revenue or BIR) has the right to conduct tax assessment or examination within three (3) years from required filing or from late filing (or 10 years, for fraudulent returns or if no tax return filed) to determine the extent of compliance of taxpayers. Under this, the BIR is clothed with such power to require taxpayers to submit to its authority for the purpose of determining such tax compliance and do such acts for collection of taxes due from taxpayers. Hereunder is an overview of how tax assessment in the Philippines or BIR tax audit operates in the Philippines constituting how due process is served upon taxpayers involved in BIR tax investigation.
Letter of Authority (LOA)
Because there are a lot of BIR Revenue Officers, a Letter of Authority (LOA) is normally issued to authorize specific Revenue Officer/s (RO) of a Tax Assessment Group headed by a Group Supervisor (GS) to conduct the tax examination. LOA will be served within thirty (30) days from date and carries a request for documentation. LOA will specify which tax types will be examined like all internal revenue taxes, income and value added tax, or withholding taxes. It will likewise state the taxable year to be examined and it will only cover for one taxable year.
Documentation and Sub Poena Duces Tecum
After the service of LOA, BIR RO will proceed with the requested documents enumerated in the attachment to the LOA. Such documents, tax returns, reports and accounting records will be used as the basis of their tax examination. You are ought to present such documents for the RO to come-up with its findings. A Second Request will be sent, and in further failure to provide, a Final Notice will be served. Should you still fail, BIR may issue a Sub Poena Duces Tecum to mandatorily require you to submit specific documents and papers, within a specified time and place.
Failure to obey said Sub Poena is a ground for criminal prosecution though an action with the Prosecutors Office. Once the Prosecutor or Fiscal determines a probable cause, it may recommend filing an action with the Criminal Court for your prosecution. During such process, the assessment process will proceed.
Preliminary Findings or Informal Conference
Upon the documents made available along with other information that the RO may have gathered from the BIR system and the third parties, if any, the RO and the GS will then submit their preliminary findings with the Revenue District Officer (RDO), head of the the Revenue District Office for approval. Upon approval, a Preliminary Findings or Notice For Informal Conference will be issued with the proposed assessment with an invitation for an informal conference. You may either attend the scheduled informal conference or submit a Position Paper within the same period with your disagreements based on facts and the applicable laws, rules and regulations. You may submit supporting documents to substantiate your claim. Alternatively, you may pay the proposed assessment. Should you feel the need for more time, you may execute and submit BIR a Waiver from the Defense of Prescription (Waiver) that will extend the three (3) year period of the BIR to assess. This will have to be approved by the BIR and a copy duly signed and notarized will be furnished to you.
In reply, RDO may revise the proposed assessment or may simply forward to the Assessment Division of the Revenue Region (RR), a higher office than the district office of the RDO.
Preliminary Assessment Notice
Based on the docket of the assessment forwarded from the RDO, the Assessment Division of the RR will study the same to determine the need for furtherance of the assessment. Once convinced, then, it will issue a Preliminary Assessment Notice (PAN) with the proposed assessment, unless, PAN is no longer necessary. Normally, PAN issued contains material items of the preliminary findings or notice for informal conference.
You may file Protest letter to PAN within fifteen (15) days from receipt thereof with your arguments and discussions of your disagreements based on the facts of your circumstances and the applicable laws, rules, and regulations. Supporting documents may also be submitted along with the Protest or shortly thereafter to substantiate your claims. Alternatively, you may pay the assessment if you feel the need or you simply disregard if you do not have the feel to act on it.
Formal Assessment Notice
After going through your Protest to PAN, BIR will evaluate and if the same finds no basis to cancel the assessment, it will issue an Assessment Notice or Formal Assessment Notice with Formal Letter of Demand (AN-FLD). This AN-FLD must be issued within the three-year (3-year) period from date a tax return is required by law to be filed or from date of late filing. For fraudulent assessment or when no return is filed, the same shall be issued withing ten (10) years from discovery. For failure to issue the AN-FLD within the 3-year or 10-year period, the BIR’s right to assess will prescribe or terminate releasing the taxpayer of its potential tax liabilities for such taxable year.
If you disagree with the tax assessment under the AN-FLD, you must file a Protest within thirty (30) days from receipt thereof. You must also submit supporting documents within sixty (60) days from filing the protest. Failure to file a Protest within 30 days or submit documents within 60 days will make the assessment final and executory losing your every right to contest the assessment and ending up with no other option but to pay. If you admit tax liability, you will have to pay the assessment.
BIR Final Resolution
Based on your Protest, BIR may either grant or deny through a formal communication, say a Final Decision on Disputed Assessment (FDDA). It may even just simply proceed to collection proceedings, without any forma reply to your Protest to AN-FLD. In such case, it may issue a Preliminary Collection Letter (PCL). In either case, this would mean you lost your case with the BIR administrative level, but, does not mean the game is over. You do not need to file a motion for reconsideration (MR) with the Office of the Commissioner.
Court of Tax Appeals (CTA)
Within thirty (30) days from receipt of the final resolution of the BIR (FDDA or PCL), you must file an appeal through a Petition for Review with the Court of Tax Appeals – Division. You will need a counsel of your choice, pay the filing fees based on the amount of disputed assessment. If the case is much of factual issues, the CTA may opt to appoint an Independent Certified public Accountant (ICPA) as an officer of the court for the factual verification and evaluation. The case may drag for sometime.
Should you lose on the CTA-Div, you may file a Motion for Reconsideration (MR) with the Court of Tax Appeals – En Banc within fifteen (15) days from receipt thereof. Should you further lose with the CTA-En Banc, do not loss hope as the game is far from being over.
Supreme Court (SC)
Within thirty (30) days from receipt of the final resolution of the CTA-En Banc, you must file an appeal through a Petition for Review with the Supreme Court – Division. You will also need a tax lawyer during the proceedings with the Supreme Court. Should you lose your case with the SC-Division, then, you could also file an MR with the Supreme Court – En Banc within fifteen (15) days from receipt of such decision of the SC Division.
Finality and Settlement
Upon finality of the decision of the SC-En Banc or upon such other instances where the tax assessment will become final and executory (e.g. failure to file a Protest to AN-FLD, failure to submit documents within 60-days after Protest An-FLD) you may have no other option to pay in full the entire assessment, inclusive of interest and penalties. If you are financially incapable of paying in full and your financials would clearly demonstrate, then, you may apply for a compromise settlement based on financial incapacity where you will pay only 10% of the basic tax due upon BIR approval.
During any stage of the proceedings, you may opt to pay or settle the assessment. Another are of compromise that you may explore is one based on doubtful validity where you will be required to pay 40% of the basic tax due upon BIR approval.
In sum, the tax assessment process of the BIR is not something you should be afraid of. You just need a good working knowledge in dealing with them and in protecting your rights as a taxpayer. You can always have a helpline and in case you need a hand, a number of tax practitioners are within your reach. Its bottom line is tax compliance so that if your books of accounts are in order and all taxes were fully accounted for, then, the entire process may just be a formality. The best preparation for the assessment is during the maintenance of the books of accounts and filing and payment of tax returns. You may hire bookkeepers with better exposure to tax compliance that will assist you all the way in avoiding penalties. We go with the notion that in tax examinations, prevention is better than cure.
(Atty. Pearl Fatima L. Evardone is a Legal Consultant and Resource Speaker with Tax and Accounting Center, Inc. on technical areas and special topics. She is a young and energetic lawyer actively engaged in the practice of law with various fields (e.g. taxation, corporate, civil, criminal, immigration, and other areas) in the Philippines. She is now connected with Trinidad Law Firm as Litigation Lawyer, Office of Congressman Ben P. Evardone as consultant, and with UNESCO as Youth Ambassador for Peace. For comments, you may please send mail at email@example.com.)
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion or a legal advice. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.
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