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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.