Handling tax assessments

So, you received that dreaded letter from the Bureau of Internal Revenue (BIR) notifying you of a tax audit. If you are like some people, you will probably start having heart palpitations and cold sweats. For some, going through a BIR tax audit is worse than visiting the gynecologist or proctologist for an annual check-up. At least with the latter, you know that the episode will definitely end after a few minutes or within an hour, at most.

When you have finally managed to calm down and breathe normally, you should reread the letter of authority and start planning your reply and compliance. Hopefully, your record keeping and your tax practices have been meticulous and correct. Now is not the time to panic. Despite your initial reaction, undergoing a BIR tax audit does not have to be a harrowing experience, if you follow some of these tips.

Be prepared. Treat the BIR assessment like you would a board exam. You do not waltz into a board exam without sufficient preparation.

Assess the amount of work needed. This will depend on the amount of man hours that will be needed to collate the documents and prepare the reconciliations for the BIR. Can you devote the time by yourself, or do you need to gather a team that will handle the BIR assessment as a special project? It is also important to designate a lead person who will coordinate with the BIR to ensure the proper flow of communication.

Ensure that the officers of the company are aware of the progress of the assessment. You will need their support through the assessment process. Do not keep this to yourself, as it is important to enrol the help of key individuals in the organization.

Expect the BIR to visit your office to inspect your documents. If possible, designate a room or area where the BIR examiners can examine your papers without being bothered by the comings and goings in the office.

Ensure that your documents and accounting records are intact. You will notice that the BIR letter contains a list of documents that are required to be submitted. The list is long and may require you to sweep through cobwebs to locate documents that have not seen the light of day in a long time. Start collecting them as soon as possible and prepare them for submission within the time stated in the letter.

If you need more time to submit all the required documents, try submitting what you have collated before asking for a time extension to submit. In certain cases, the BIR may grant your request for an extension of time to submit the documents.

A reliable filing system is important. It is not enough to follow the BIR rules on how long you are supposed to keep documents. It is equally important to have a system that allows you to locate a document when needed. A warehouse full of documents is useless if you cannot find the documents the BIR requires.

In many of the assessment cases that I have handled as a tax lawyer, most of the BIR findings can be cancelled by presenting factual and legal explanations. The initial assessments can start at a huge amount, at hundreds of millions even. When the reconciliations are presented, however, more than 90% of the findings can be explained. This is because the BIR assessment process picks up natural differences in the documents they examine. For example, the BIR may pick up the difference between the gross sales in the income tax return and the gross sale declared in the value-added tax (VAT) return. They can slap you with either an income tax assessment or a VAT assessment on the difference, classifying the difference is undeclared sales. The difference, however, is most likely due to a timing difference in recognizing gross sales for these two type of taxes. If your company is engaged in the sale of services, for instance, income tax is computed on accrual basis, while your VAT sales are on a cash basis.

Hopefully, the remaining 10% have a good legal explanations that will allow you to fully cancel the assessment.

Never ignore notices and letters from the BIR. Never ignore a request to submit documents from the BIR. It is essential to show your willingness to cooperate during the assessment process. But more importantly, ignoring BIR letters can lead to dire consequences. Ignore the request for documents three times, and you may find yourself faced with a criminal case, which can be a bigger problem than the BIR assessment you were originally handling.

BIR notices are not like spam e-mail that can be deleted as soon as you see them in your mailbox. Some notices must be replied to, or they will make the assessment final, executory, and demandable.

Know the procedural and technical rules. We hate being technical, but that is essentially what an assessment process is. There are procedural and technical rules that must be followed. The assessment process has three main stages: the informal conference, the preliminary assessment, and the final assessment.

After examining your documents and records, the BIR examiner will issue a Notice for Informal Conference, giving you a chance to present documents and reconciliations explaining why the initials findings of the BIR should be cancelled. If, despite your presentation of explanation and documents, the examiner is not convinced, the Informal Conference shall be concluded.

The examiner shall proceed with the issuance of the Preliminary Assessment Notice (PAN). Upon receipt of the PAN, you should submit your reply within 15 days. Again, the reply shall contain reconciliations and explanations why the assessment must be cancelled partially or fully. If the BIR disagrees with your explanations, the BIR shall issue the Formal Letter of Demand and Final Assessment Notice (FLD/FAN), calling for the payment of the deficiency tax liability, inclusive of the applicable penalties.

If you do not agree with the findings in the FLD/FAN, submit a protest within 30 days from receipt thereof by filing either a request for reconsideration or a request for reinvestigation. It is important to remember that the 30-day period is not extendible. Failure to file a protest will make the assessment final, executory, and demandable.

If the protest is denied, in whole or in part, by the Commissioner’s duly authorized representative, you may either: (i) appeal to the Court of Tax Appeals (CTA) within 30 days from the date of receipt of the said decision; or (ii) elevate your protest through a request for reconsideration to the Commissioner within 30 days from the date of receipt of the said decision. Again, failure to act after receiving the decision within the 30-day period will make the assessment final, executory, and demandable.

You also need to check the date when the FAN was issued. It could have been issued past the three-year prescription date. Hence, any FAN issued is already prescribed, and you can cite such prescription as a defense against the assessment. Take note that prescription dates for the different types of taxes being examined may differ. Again, technical rules are important to determine when the prescription will set in.

In the tax assessment process, knowing the rules and possible defenses is half the battle. If you want to find out more about how to handle a BIR tax assessment, you may be interested in attending our seminar, Know your rights: Rules on BIR Tax Assessment and Recent Trends. The seminar will be held on Oct. 26 from 8 a.m. to 5 p.m. at the Holiday Inn & Suites in Makati. For more details, call +632 988 22 88 (ext. 521).

Eleanor Lucas Roque is the head of the Tax Advisory and Compliance Division of P&A Grant Thornton. 

As Published in BusinessWorld dated 15 October 2018