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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 A LOA ISSUED TO COVER AN AUDIT OF
Revenue Officer which empowers him to examine and scrutinize a UNVERIFIED PRIOR YEARS IS INVALID
Taxpayers books of accounts and other accounting records, in order
to determine the taxpayers correct internal revenue tax liabilities (CIR A letter of authority should cover a taxable
v. Sony Philippines, G.R. No. 178697, November 17, 2010). period not exceeding one taxable year. If the
BIr intends to audit a taxpayer for more than
The LoA is issued by (1) the Commissioner of Internal Revenue) or one taxable year, it should indicate the specific
his duly authorized representatives after a return has been filed; or by years. (RMO 43-90). If a LoA was issued to
the Regional Director for all audit cases within his jurisdiction except cover unverified prior years, it is invalid and
any assessment made on the basis of that is
in cases involving civil or criminal tax fraud under the jurisdiction of
likewise invalid. (CIR v. Sony Philippines, G.R.
the Tax Fraud Division of the Enforcement Service and in policy cases No. 178697, November 17, 2010)
under audit by Special Teams in the National Office (RMC No. 36-99)

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 Taxpayers books of accounts A Revenue Officer has only 120 days from the date of receipt of
shall be subjected to examination and inspection the LoA to conduct the audit and submit the required report of
only once for a taxable year. investigation. If the Revenue Officer finds no deficiency, the audit
ends. If there is any deficiency, the Revenue Officer submits his
Exceptions: report to the Revenue District Office (RDO) and the case is
1. CIR determines that fraud, irregularities, or endorsed to the Revenue Regional Office (RRO) or CIR
mistakes were committed by the taxpayer;
2. Taxpayer himself requests a re-investigation or NO MORE NOTICE OF INFORMAL CONFERENCE
re-examination of his books of accounts;
3. To verify compliance with withholding and other Previously, under RR 12-99 (September 6, 1999), a taxpayer shall
internal revenue taxes receive what is called a Notice of Informal Conference and a copy of
4. To verify capital gains tax liabilities of the
the tentative findings. The taxpayer may agree or disagree with the
taxpayer
5. CIR exercise power to obtain information relative findings. If the taxpayer is not amenable, there will be an Informal
to the examination of other taxpayers (Secs. 5 Conference with provides the taxpayer an opportunity to air his side.
and 235, NIRC) 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 taxpayers 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 taxpayers 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 18-
2013 (November 28, 2013)
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TAX AUDIT AND INVESTIGATIONS:
ASSESSMENT PROCESS AND TAXPAYERS REMEDIES

Atty. Pierre Martin D. Reyes



DISTINCTION BETWEEN A DEFICIENCY ASSESSMENT AND A JEOPARDY ASSESSMENT

Deficiency Assessment is an assessment made by the BIR Jeopardy Assessment is a tax assessment which was
after the conduct of an investigation or audit when it finds that assessed without the benefit of a complete or partial audit by
the tax return filed by the taxpayer contains an under- an authorized revenue officer who has reason to believe that
declaration of income or when the taxpayer does not at all file the assessment and collection of a deficiency tax will be
a tax return jeopardized by delay because of the taxpayers 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 Generally, a PAN must be issued by the BIR
prescribed by law for the filing of the tax return. If the return was before issuing the FLD/FAN. (CIR v. Metro Star
filed beyond the period prescribed by the law, the 3-year period Superama, G.R. No. 185371, December 8, 2010)
shall be counted from the day the return was filed (Section 203,
NIRC), In the following cases, a PAN is not required:

However, in the case of a false or fraudulent return with intent to 1. Assessment is purely mathematical error
evade tax or of failure to file a return, the tax may be assessed 2. Excise tax on excisable article not paid
within 10 years from discovery of the falsity, fraud, or omission. 3. Discrepancy between tax withheld and
remitted
Any assessment made beyond the prescriptive period is invalid 4. Goods imported by tax-exempt entity are sold
(Tupaz v. Ulep, G.R. No. 127777, October 1, 1999), to a taxable entity
5. Claim for refund is filed when it was previously
The prescriptive period of assessment may be extended if the carried over.
taxpayer executed a Waiver of the Statute of Limitations

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. The waiver must be in the proper form


2. The waiver shall be signed by the taxpayer himself or his duly authorized representative.
3. Signature of the proper authority indicating that the BIR has accepted and agreed to the waiver
4. 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.
5. 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 taxpayers 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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TAX AUDIT AND INVESTIGATIONS:
ASSESSMENT PROCESS AND TAXPAYERS REMEDIES

Atty. Pierre Martin D. Reyes



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 taxpayers 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 taxpayers 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
1. Failure to file a return and pay tax due thereon its payment until the payment thereof. (Section 249,
2. Filing with unauthorized revenue office
IRC)
3. Failure to pay deficiency tax within time prescribed
in assessment notice
4. Failure to pay full or part of the amount shown in 20% delinquency interest
ITR required to be filed or the full amount of tax
due for which no return is required to be filed on or It is imposed when there is:
before the date prescribed for its payment (Section
248, NIRC) 1. Failure to pay the amount of tax due on any return
required to be filed
50% surcharge 2. Failure to pay the amount of tax due for which no
return is required
It is imposed when there is: 3. Failure to pay a deficiency tax or surcharge or
interest thereon
1. Willful neglect to file the return within the period
prescribed It shall be assessed from the due date appearing on
2. False or fraudulent return is willfully made (Section the notice and demand of the CIR until the payment
248, NIRC) 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 12-
99 (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 It is the FLD/FAN that must be
administratively against the aforesaid FLD/FAN within thirty (30) days administratively protested or disputed within
from date of receipt thereof. The taxpayer protesting an assessment 30 days, and not the PAN (Allied Banking
may file either a written request for reconsideration or reinvestigation. Corp. v. CIR, G.R. No. 175097, February 5,
2010)
RR 12-99 (September 6, 1999), as amended by RR 18-2013
(November 28, 2013).

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TAX AUDIT AND INVESTIGATIONS:
ASSESSMENT PROCESS AND TAXPAYERS REMEDIES

Atty. Pierre Martin D. Reyes



FORMS OF PROTEST

A Request for Reconsideration refers to a plea of re- A Request for Reinvestigation refers to a plea of re-
evaluation of an assessment on the basis of existing records evaluation of an assessment on the basis of newly discovered
without need of additional evidence. It may involve both a or additional evidence that a taxpayer intends to present in the
question of fact or of law or both. (RR 12-85) 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).

General Rule: SUBMISSION OF RELEVANT SUPPORTING


DOCUMENTS
No prior payment of assessed internal revenue tax is required
when protested or disputed. For requests for reinvestigation, the taxpayer shall
submit all relevant supporting documents in support
Exceptions: of his protest within sixty (60) days from date of filing
of his letter of protest, otherwise, the assessment
1. If there are several issues involved in the FLD/FAN but
shall become final. The term relevant supporting
the taxpayer only disputes or protests against the validity
of some of the issues raised
documents refer to those documents necessary to
2. If there are several issues involved in the disputed support the legal and factual bases in disputing a tax
assessment and the taxpayer fails to state the facts, the assessment as determined by the taxpayer. The sixty
applicable law, rules and regulations, or jurisprudence in (60)-day period for the submission of all relevant
support of his protest against some of the several issues supporting documents shall not apply to requests for
on which the assessment is based 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 taxpayers 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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TAX AUDIT AND INVESTIGATIONS:
ASSESSMENT PROCESS AND TAXPAYERS REMEDIES

Atty. Pierre Martin D. Reyes


GRANT THE PROTEST DENY THE PROTEST NO ACTION


This means that the request This means that the request for The CIR may opt not to take
for reconsideration or reconsideration or any action at all. In such
reinvestigation, as the case reinvestigation, as the case may case, the FLD/FAN stands.
may be is granted. be is denied. 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 CIRS DULY AUTHORIZED REPRESENTATIVE

DENIAL OF PROTEST INACTION

1. Appeal to the Court of Tax Appeals (CTA) within 1. Appeal to the CTA within thirty (30) days after the
thirty (30) days from date of receipt of the said expiration of the one hundred eighty (180)-day
decision period; or
2. Elevate his protest through request for 2. Await the final decision of the Commissioners duly
reconsideration to the Commissioner within thirty authorized representative on the disputed
(30) days from date of receipt of the said decision. assessment.
No request for reinvestigation shall be allowed in
administrative appeal and only issues raised in the
decision of the Commissioners duly authorized
representative shall be entertained by the
Commissioner.

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) 1. Appeal to the CTA within thirty (30) days from after
days from date of receipt of the said decision. the expiration of the one hundred eighty (180)-day
Otherwise, the assessment shall become final, period; or
executory and demandable. 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
A motion for reconsideration of the Commissioners receipt of a copy of such decision.
denial of the protest or administrative appeal, as the
case may be, shall not toll the thirty (30)-day period to The option here is mutually exclusive and resort to one
appeal to the CTA. See also Fishwealth Canning bars the application of the other. See also Lascona
Corp. v. CIR, G.R. No. 179343, January 21, 2010 Land v. CIR, G.R. No. 171251, March 5, 2012

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TAX AUDIT AND INVESTIGATIONS:
ASSESSMENT PROCESS AND TAXPAYERS REMEDIES

Atty. Pierre Martin D. Reyes



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)