Tax Assessments: What to do and what can still be done

The Feast of Epiphany and the celebration of the Baptism of the Lord ended the Christmas season last January 8. This day also marked the end of the Bureau of Internal Revenue’s suspension of audit and field operations. Taxpayers must now face the sad reality of handling again their tax assessments.  

While most still have the hangover of the holidays, it is high time that we be reminded of the BIR’s tax assessment process, what taxpayers should do, and what can still be done to improve the tax assessment process.

The BIR’s tax assessment process starts with the issuance of a Letter of Authority (LOA). The BIR highlighted in Revenue Memorandum Circular (RMC) No. 075-18 the mandatory statutory requirement of an LOA for a tax assessment to be valid. No assessments can be issued, and no assessment functions or proceedings can be done without the prior approval and authorization of the Commissioner of Internal Revenue (CIR) or his duly authorized representative, through an LOA. Any tax assessment issued without an LOA is a violation of the taxpayer’s right to due process, and is therefore, “inescapably void”. Thus, taxpayers must always ensure that a valid LOA has been duly issued and received before the BIR can proceed with its tax assessment. If only a Letter Notice (LN) was received, the revenue officer cannot proceed with further examination and assessment of taxpayer unless an LOA is also secured.

Included in the LOA is a Checklist of Required Documents. To avoid issuance of subpoena duces tecum (SDT), taxpayers should ensure that they comply with the notices on the submission of required documents. Close coordination with the BIR examiner must be done for voluminous documents which may be requested to be examined in the business premises of the taxpayer.

Once the BIR is done with its examination, the BIR shall issue a Notice of Discrepancy (ND). Under RR No. 22-2020, a Notice of Discrepancy (ND) must be issued to the taxpayer if he is found liable for deficiency taxes during an investigation conducted by a revenue office. Based on the prescribed template for the ND, the taxpayer must be able to present and explain his side on the discrepancies noted by the BIR within five days from receipt of the ND. In case the taxpayer needs more time to present documents, he may submit such documents and explanations after the discussion but within 30 days from receipt of the ND.

If the taxpayer is still found to be liable for deficiency taxes, the investigating officer shall endorse the case for review and approval for issuance of a Preliminary Assessment Notice (PAN). Upon receipt of the PAN, the taxpayer has 15 days to provide its reply to PAN. Based on the BIR’s evaluation of the reply to PAN, it may proceed to issue a Final Assessment Notice (FAN)/Formal Letter of Demand (FLD) if the taxpayer is still found to be liable to deficiency taxes. From receipt of FAN/FLD, the taxpayer has a non-extendible 30-day period to submit its protest letter. Otherwise, the assessment shall become final and executory.

The protest letter must not be a pro-forma protest and should include the taxpayer’s argument and supporting legal basis. The protest letter may be in the form of request for reinvestigation or request for reconsideration. A request for reinvestigation is recommended if there are still supporting documents which cannot be submitted within the 30-day period for the protest letter. For request for reinvestigation, additional supporting documents may be submitted within 60 days from submission of protest letter.

Note that the PAN stage is specifically provided under the Tax Code. Under Section 228 of the Tax Code, when the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he must first notify the taxpayer of his findings.

Arguments and evidence submitted in the reply to PAN must be carefully evaluated by the BIR. Explanation on how they considered or appreciated the taxpayer's arguments and evidence must be included in the FAN/FLD. Thus, in several court cases, it has been ruled that the Issuance of the FAN, without consideration and evaluation of the defenses contained in the reply to the PAN, violates the taxpayer’s right to due process. Also, in the recent CTA Case No. 10063, dated November 29, 2022, the court ruled that an assessment which merely reiterated in the preliminary collection letter notices the deficiency taxes due as found in the PAN and the FAN/FLD is considered void assessment.

While the current BIR’s tax assessment process provides due process, there are still areas which I think can still be improved to make the assessment more efficient and effective for both the taxpayer and the BIR.

First, at the LOA stage, it is every taxpayer’s wish that copies of the documents which were previously submitted to the BIR such as copies of tax returns, books of accounts, and other reports which are being submitted to the BIR will no longer be requested in case of tax assessment. While we understand the BIR’s limitation in manpower, an automated archiving system for the BIR may certainly help in retrieving such documents. This will save time both for the taxpayer and the BIR.

Second, I wish that our Tax Code will specifically prohibit issuance of FAN with findings exactly the same as those in the PAN, except when the taxpayer failed to provide reply to the PAN, or with reply to PAN but failed to properly address the findings or the reply to PAN lacks legal basis. While there are court cases which already ruled that an assessment which merely reiterated the deficiency taxes due as found in the PAN and the FAN/FLD is void, there are still cases of complete disregard of reply to PAN or issuance of FAN without clearly explaining the basis for denial of arguments in the reply to PAN. The FAN must explain clearly why the BIR is rejecting the documents/explanations in the PAN and not just by giving very general statements of denial. This will ensure that every taxpayer will be accorded due process in case of tax assessment.

Lastly, I also wish that there shall be a maximum period when the penalty deficiency interest shall be applied. With this, taxpayers shall no longer be in a position wherein they will just settle their supposed deficiency tax based on a BIR evaluation just to avoid the running of interest. Also, having a maximum period for penalty interest may encourage the BIR to expedite the evaluation of cases.

The BIR’s current tax assessment process, together with the above improvements, will certainly help in improving the taxpayer’s experience in tax assessments. On the part of the taxpayers, they must ensure compliance with the required submissions and replies to assessment notices for speedy disposition of assessment cases. On the other hand, we hope our tax bureau and our lawmakers will also heed the call for an efficient and effective tax assessment process.

With all these in mind, here’s to a blessed and a prosperous 2023!

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

As published in BusinessWorld, dated 10 January 2023