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GENERAL AUDIT PROCEDURES AND DOCUMENTATION
1. When does the audit process begin?The audit process
commences with the issuance of a Letter of Authority to a
taxpayer who has been selected for audit.
2. What is a Letter of Authority? The Letter of Authority 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
nternal revenue tax liabilities.
3. Who issues the Letter of Authority? 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.
4. 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 torefuse the service of this LA, unless the LA is revalidated.
5. How often can a Letter of Authority be revalidated? A Letter of
Authority is revalidated through the issuance of a new LA.
However, 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).
6. How much time does a Revenue Officer have to conduct an
audit?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
nvestigation. 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.
7. How is a particular taxpayer selected for audit?Officers of theBureau (Revenue District Officers, Chief, Large Taxpayer
Assessment Division, Chief, Excise Taxpayer Operations Division,
Chief, Policy Cases and Tax Fraud Division) responsible for the
conduct of audit/investigation shall prepare a list of all taxpayer
who fall within the selection criteria prescribed in a Revenue
Memorandum Order issued by the CIR to establish guidelines for
the audit program of a particular year. The list of taxpayers shall
then be submitted to their respective Assistant Commissioner for
pre-approval and to the Commissioner of Internal Revenue for
final approval. The list submitted by RDO shall be pre-approved
by the Regional Director and finally approved by Assistant
Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2
and 19-2000).
8. How many times can a taxpayer be subjected to examina
and inspection for the same taxable year? A taxpayer’s book
accounts shall be subjected to examination and inspection
once for a taxable year, except in the following cases:
When the Commissioner determines that fraud, irregularities
mistakes were committed by Taxpayer;
When the Taxpayer himself requests a re-investigation or
examination of his books of accounts;
When there is a need to verify the Taxpayer’s compliance w
withholding and other internal revenue taxes as prescribed
Revenue Memorandum Order issued by the Commissione
Internal Revenue.
When the Taxpayer’s capital gains tax liabilities must be verif
and
When the Commissioner chooses to exercise his power to obinformation relative to the examination of other Taxpayers (S
5 and 235, NIRC).
9. What are some of the powers of the Commissioner relativ
the audit process?In addition to the authority of
Commissioner to examine and inspect the books of accounts
Taxpayer who is being audited, the Commissioner may also:
Obtain data and information from private parties other than
Taxpayer himself (Sec.5, NIRC); and
Conduct inventory and surveillance, and prescribe presumpgross sales and receipts (Sec. 6, NIRC).
10. What is a Notice for Informal Conference ?A Notice
Informal Conference is a written notice informing a Taxpayer
the findings of the audit conducted on his books of accounts
accounting records indicate that additional taxes or deficie
assessments have to be p
If, after the culmination of an audit, a Revenue Off
recommends the imposition of deficiency assessments,
recommendation is communicated by the Bureau to
Taxpayer concerned during an informal conference called for
purpose. The Taxpayer shall then have fifteen (15) days fromdate of his receipt of the Notice for Informal Conference
explain his side.
11. Within what time period must an assessment be made
assessment must be made within three (3) years from the
day prescribed by law for the filing of the tax return for the
that is being subjected to assessment or from the day the ret
was filed if filed late. However, in cases involving tax fraud,
Bureau has ten (10) years from the date of discovery of s
fraud within which to make the assessm
Any assessments issued after the applicable period are deem
to have prescribed, and can no longer be collected from
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Taxpayer, unless the Taxpayer has previously executed a Waiver
of Statute of Limitations.
12. What is "Jeopardy Assessment"? A Jeopardy Assessment 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:
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.
13. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment
Notice is a communication issued by the Regional Assessment
Division, or any other concerned BIR Office, informing a Taxpayer
who has been audited of the findings of the Revenue Officer,
following the review of these findings.
f the Taxpayer disagrees with the findings stated in the PAN, he
shall then have fifteen (15) days from his receipt of the PAN tofile a written reply contesting the proposed assessment.
14. Under what instances is PAN no longer required? A
Preliminary Assessment Notice shall not be required in any of the
following cases, in which case, issuance of the formal assessment
notice for the payment of the taxpayer’s deficiency tax liability
shall be sufficient:
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.
15. What is a Notice of Assessment/Formal Letter of Demand?
A Notice of Assessment is a declaration of deficiency taxes issued
to a Taxpayer who fails to respond to a Pre-Assessment Notice
within the prescribed period of time, or whose reply to the PAN
was found to be without merit. The Notice of Assessment shall
inform the Taxpayer of this fact, and that the report
investigation submitted by the Revenue Officer conducting
audit shall be given due course.
The formal letter of demand calling for payment of
taxpayer’s deficiency tax or taxes shall state the facts, the
rules and regulations, or jurisprudence on which the assessm
is based, otherwise, the formal letter of demand and the no
of assessment shall be void.
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The Bureau of Internal Revenue (BIR)’s Reconciliation for
Listing and Enforcement (RELIEF) System and Integrated Tax
System (ITS) have worked wonders for the bureau. The BIR is
able to generate data that could, at the very least, indicate possible
sales under-declarations made by taxpayers on a third -- party
matching basis.
The BIR’s matching system is fairly simple: the bureau compares
the declarations of the supplier and the customer, looking at their
respective income, value-added tax, withholding tax and other tax
returns. For example, if a supplier’s reported sales to a purchaser
is less than that purchaser’s reported purchases from that supplier,
the purchaser will be asked to explain the seemingly over-
declared purchases. If the purchaser manages to prove the
correctness of the amount of his purchases, then the BIR now has
significant evidence to go after the supplier. Of course, this could
go the other way if the supplier involuntarily shares information
with the BIR that can be used to pursue the purchaser. This
becomes a matter of inadvertently pointing a finger at the erring
party.
The BIR issues a Letter Notice (LN) based on under-declarations
discovered through the RELIEF and ITS. This LN is the basis of
authority for the BIR to assess a taxpayer. The LN is equivalent to
the Letter of Authority (LoA), and its issuance prevents a taxpayer from amending his returns covered by the said LN.
What sets the LN apart from the LoA is that the former is an
issue-based assessment. This means that the investigation will
cover only specific discrepancies discovered under the third-party
information matching system.
This is the reason why, even after the settlement of any valid
assessment for deficiency taxes listed in the LN, the BIR is not
precluded from issuing an LoA covering all internal taxes to the
same taxpayer for the same year as that of the LN.
Neither is the BIR limited to nor by the information obtained from
its own system. The BIR acquires information from other
government agencies to verify relevant information such as a
taxpayer’s costs and volume of production, receipts or sales and
gross incomes of a taxpayer, as well as the names, addresses and
financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of
multinational companies, joint accounts, associations, joint
ventures or consortia and registered partnerships, and their
members.
The power of the BIR to access this information is provided for
under Section 5 of the Tax Code, wherein the BIR Commissioner
may regularly obtain from any office or officer of the national
government or local government units, government agencies and
its instrumentalities, including the Bangko Sentral ng Pilipinas
and government-owned and -controlled corporations, any
information relevant to ascertaining the correctness of any return;
or even if no return is made, in determining the liability of any
person for any internal revenue tax, in the collection of any such
liability or in evaluating tax compliance.
Of late, the BIR has been increasing its information-sharing
activities with various agencies, such as the Bureau of Customs,
Land Registration Authority, Insurance Commission and the Land
Transportation Office. This means that any information that may
have been provided to these or other government agencies,
intentionally or inadvertently, will be accessible to the BIR and
may result in the issuance of an LN (or LoA, as the case may b
when certain discrepancies are identified in the said informatio
accessed and the declarations made in tax returns filed.
LN verification is a form of no-contract audit but taxpayers mu
not take it lightly. Under existing BIR rules, if the discrepancy
stated in the LN is at least 30% and the taxpayer fails to contes
the same, the BIR may institute closure proceedings according
the policies and procedures prescribed under Revenue
Memorandum Order 31-2002.
Furthermore, the BIR recently obtained P400 million under the
"e-Government Fund" to establish the Assets Information
Management Program (AIM-P), which will be utilized initially
a system to check the information being shared among the said
government agencies against the information already obtained
the BIR under the one-time amnesty program conducted in 200
The AIM-P will then be used to provide a system for the BIR t
easily evaluate (and compare) a taxpayer’s income payments,
based on the number and value of the taxpayer’s assets current
registered with other government agencies.
With the new administration’s emphasis on increased
transparency and accountability, there is greater focus in
government to raise tax revenue collection without having to
impose new taxes. And the key to this goal is information.
As responsible taxpayers, we must take steps to be consistent a
truthful in our income reporting and -- for our own protection
check if the people we deal with are doing the same.
