In every relationship, the parties involved need to agree to achieve a harmonious relationship. The Bureau of Internal Revenue (BIR) and the taxpayer are no exception.
An assessment has to be formally issued within three years from the due date or date filing of the tax return, whichever is later. In case the three-year period is not sufficient, the taxpayer and the BIR may agree in writing to extend the three-year period for assessment pursuant to Section 222 of the Tax Code. The taxpayer executes a Waiver of the Statute of Limitation which is accepted by the BIR.
Can a waive make or break a tax audit?
Under the rules, the Waiver has to be executed in strict compliance with the provisions of Revenue Memorandum Order (RMO) No. 20-90, as amended. In many cases where the BIR failed to comply with the formalities of a valid waiver, the Supreme Court and Court of Tax Appeals, instead of deciding on the arguments in the appeal, have declared the waiver, and consequently the assessment as invalid which cause the BIR to lose multimillion-peso tax-deficiency assessment cases.
The BIR observed that the issue on defective waiver is initiated by the taxpayer as a means to cancel his alleged tax liabilities. In many cases, the Court nullifies the waiver because the same was not accepted by the BIR within the prescribed period or the taxpayer was not furnished a copy of the waiver signed by BIR. Thus, there was no binding of the parties.
To address this trend in court decisions, the BIR issued RMO No. 14-2016 to provide guidelines and relax the rules on the execution of the waiver.
The new rule still requires that the waiver is accepted by the designated officer. However, the responsibility to have the waiver signed and accepted is shifted to the taxpayer. Thus, the taxpayer, if it would like to extend the period of collection, should ensure that the waiver is accepted before the expiration of the prescription period.
The new rules also ensured that the taxpayer can no longer scrutinize the technicalities of his own waiver to challenge the assessment. The BIR, perhaps mindful of these technicalities which are normally disputed by the taxpayer in his appeal, prescribed new rules as follows:
1. The waiver may be, but not necessarily, in the form prescribed by RMO No. 20-90 or Revenue Delegation Authority Order No. 05-01 as long as (a) the date of execution is indicated (b) signed by the taxpayer or his authorized representative and (c) expiry date of the period agreed upon to assess/collect the tax is indicated.
2. The waiver is no longer required to be notarized to be deemed valid and binding on the taxpayer.
3. The waiver need not specify the particular taxes to be assessed nor the amount thereof. It may simply state “all internal revenue taxes” considering the BIR is still in the process of examining and determining the tax liability of the taxpayer.
4. The taxpayer is charged with the burden of ensuring that the waiver of the statute of limitations is validly executed by its authorized representative. The authorized representative can no longer be contested to invalidate the waiver.
5. Considering that the waiver is a voluntary act of the taxpayer, the waiver shall take legal effect and be binding on the taxpayer upon its execution.
In sum, the said RMO posits that the waiver is the sole responsibility of the taxpayer. We are reminded by the BIR that the taxpayer executes the waiver for him to have ample time to submit the required documents. However, in actual cases, the waiver is initiated not just for the taxpayer’s cause. There are cases where the waiver is requested by the BIR examiner to give him the time to evaluate the documents and information, discuss the findings to his superiors, and prepare his reports in support of the assessment.
In some cases, the BIR serves the Letter of Authority to the taxpayer at the time where the 3-year prescriptive period is about to end. As such, the Waiver is executed for the examiner to come up with an assessment based on an examination of the taxpayer’s records. A waiver, therefore, is not really a unilateral act by the taxpayer but a bilateral agreement between two parties to extend the period to a date certain.
While acknowledging that the waiver is necessary to extend the time for each party to evaluate the findings and justifications, it shall not only be the taxpayer’s responsibility to execute a valid waiver. A waiver of the statute of limitations, being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.
Regardless of the reasons behind the RMO, the takeaway is quite clear. Taxpayers should take priority over the tax audit and coordinate closely with the BIR officer to complete the tax audit. This way, there is a lower cost to the taxpayer and possibility that the BIR asks for the waiver. Moreover, taxpayers should bank on documents and factual defenses against tax audit since the new rules leave no elbow room to challenge the waiver in the court.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Punongbayan & Araullo. The firm will not accept any liability arising from the article.
Marie Fe F. Dangiwan is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.