The power to tax involves the power to destroy, but NOT when the Court sits: Upholding due process in BIR tax assessments

Taxation is one of the inherent powers of the State. The famous dictum of the US Supreme Court Chief Justice John Marshall in McCulloch v. Maryland that “the power to tax involves the power to destroy” has long illustrated the breadth of the taxing power of the State. Taxes are the lifeblood of the government and, therefore, should be collected without unnecessary hindrance. However, if exercised arbitrarily, the power to tax can become oppressive. 

Recognizing the potential dangers, Justice Oliver Wendell Holmes, Jr. articulated that “the power to tax is not the power to destroy while this Court sits.” The same principle applies in the Philippines. Thus, while taxation is an inherent attribute of sovereignty, its exercise is not absolute. It remains subject to constitutional limitations and judicial review.   

In light of recent developments, including the broader tax-relief package proposed by President Ferdinand R. Marcos, Jr. during his State of the Nation Address (SONA) last July, tax authorities may place greater emphasis on revenue collection efforts in the coming months. Therefore, taxpayers should remain audit-ready by familiarizing themselves with the proper tax assessment process and keeping apprised of applicable tax laws, rules, regulations, and relevant jurisprudence.

An overview of the BIR tax assessment process

An assessment is a written notice and demand made by the Bureau of Internal Revenue (BIR) on the taxpayer for the settlement of a due tax liability that is definitely set and fixed.

The assessment process commences with the issuance and service of a valid Letter of Authority (LOA), which authorizes the revenue officers to conduct an audit or investigation of the taxpayer’s books of accounts and other accounting records. 

After the completion of the audit, the taxpayer will be informed of the initial findings of the revenue officers through the Notice of Discrepancy (NOD), after which a discussion of discrepancy will ensue. The taxpayer shall submit all the necessary supporting documents explaining the discrepancies within 30 days after the receipt of the NOD. 

If the revenue officers determine that the taxpayer failed to sufficiently address the alleged tax discrepancy or is still liable for deficiency tax after the NOD stage, a Preliminary Assessment Notice (PAN) shall be issued and served to the taxpayer. Thereafter, the taxpayer may file a reply within 15 days from receipt thereof. 

In case the taxpayer fails to file a reply or the reply is found to be unmeritorious, the Final Assessment Notice (FAN) and Formal Letter of Demand (FLD) shall be issued. The taxpayer must file a protest within 30 days from the receipt thereof, otherwise, the assessment becomes final, executory, and demandable. The protest may be in the form of a request for reconsideration or a request for reinvestigation, the latter of which requires the submission of additional supporting documents within 60 days from the filing of the Protest.

Within 180 days from the filing of the protest in the case of request for reconsideration, or from the submission of complete additional documents within the 60-day period in the case of request for reinvestigation, the Final Decision on Disputed Assessment (FDDA) will be issued to the taxpayer. This contains the ruling on the form and merits of the protest. 

The taxpayer adversely affected by the decision or inaction may appeal by filing a petition for review with the Court of Tax Appeals within 30 days from the receipt of the decision or from the lapse of the 180-day period. Otherwise, the decision shall become final, executory, and demandable.

The application of the due process requirement in tax assessment

As a general rule, the power to tax is plenary and unlimited in its range. Nonetheless, it is bounded by constitutional limitations. The constitutional safeguard of due process is enshrined in Article III, Section 1, of the 1987 Constitution which provides that “no person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.”

In a long line of cases, the Supreme Court (SC) has consistently emphasized that tax assessments issued in violation of the due process rights of a taxpayer are null and void. 

In the recent case of Ortiz Memorial Chapel Inc. v. Commissioner of Internal Revenue (CIR), G.R. No. 278483, 03 December 2025, the SC categorically ruled that the BIR’s assessment is void for lack of factual and legal bases, as the BIR failed to provide comprehensive explanations for the Details of Discrepancies in the PAN. This is consistent with Section 228 of the Tax Code and its implementing rules under Revenue Regulations (RR) No. 12-99, as amended, which mandate that the taxpayer be informed in writing of the specific facts and law on which the assessment is based, otherwise, the assessment is void. The SC stressed that due process demands that the taxpayer be apprised, with reasonable clarity, of specific facts and legal provisions forming the basis of the government’s claim, so that an intelligent and meaningful response or protest be made. The requirement is not a mere procedural formality, but a substantive safeguard to protect the taxpayer’s right to due process, which is guaranteed by no less than the Constitution. 

Moreover, the SC discussed the requirement of the issuance of a new LOA in the event of re-assignment or transfer of cases to another Revenue Officers in CIR v. Standard Insurance Co. Inc., G.R. No. 259729, 17 November 2025. In this case, no new LOA was issued to cover the authority of the newly assigned Revenue Officers to conduct the audit of a reopened case. To justify the new examiners’ actions, the CIR argued that it issued Letter Notice (LN). However, the SC stressed that LN merely informs a taxpayer of a discrepancy and urges voluntary compliance. It does not empower a revenue officer to conduct an audit, unlike LOA. It was further emphasized that the LOA requirement is not a mere technicality but a basic procedural requirement, the non-observance of which invalidates the assessment. 

Likewise, in CIR v. Stradcom Corporation, G.R. No. 255520, 21 April 2025, the SC held that the due process requirements for the issuance of a valid tax assessment were not observed when the CIR failed to issue LOA, NIC/NOD, PAN, and FAN prior to Stradcom’s receipt of the Warrant of Distraint and Levy (WDL) and Warrant of Garnishment (WOG). It follows that Stradcom had not been informed of the basis of its income tax liability.  Without a proper assessment, there exists no enforceable tax liability, making any attempt to collect through summary remedies entirely void. Thus, a void assessment bears no valid fruit. 

Proper service of assessment notice must also be observed as enunciated in the case of Mannasoft Technology Corporation v. CIR, G.R. No. 244202, 10 July 2023. Here, although the notices were personally served, the recipients were not the authorized representative of the petitioner. As per RR No. 12-99, personal delivery must be acknowledged by the taxpayer or his duly authorized representative. It further requires that the signee-recipient must indicate their designation and authority to act for and on behalf of the taxpayer.

Premature issuance of a FAN constitutes a fatal violation of the taxpayer’s right to due process, as held in Prime Steel Mill, Inc. v. CIR, G.R. No. 249153, 12 September 2022. Here, the FAN was issued before the lapse of the 15-day period to reply to the PAN. The SC ruled that only after receiving the taxpayer's response or in case of the taxpayer's default can the respondent issue the FAN/FLD.

Finally, in CIR v. Avon Products Manufacturing, Inc., G.R. No. 201398-99, 03 October 2018, where the CIR issued identical PAN, FAN, and Collection Letters without considering the taxpayer’s submissions or partial payment, the SC held that the right to be heard, which includes the right to present evidence, is meaningless if the CIR can simply ignore the evidence without reason. Although the BIR is not obliged to accept the taxpayer’s explanations, it must still provide the reasons for rejecting them. Otherwise, there is denial of due process. 

The bottom line

When due process is observed, it fosters compliance not through fear, but through trust that the tax system is fair. The effectiveness of the tax system does not depend on the aggressiveness of enforcement, but on the integrity of the procedures. After all, it is a well-settled rule that between the power of the State to tax and an individual's right to due process, the scale favors the right of the taxpayer to due process.

While due process protects taxpayers from arbitrary assessments, taxpayers’ preparedness ensures that legitimate claims are properly recognized and defended.  Awareness remains one of the taxpayer’s greatest defenses during a tax audit. By understanding the assessment process, complying with documentary requirements, observing procedural deadlines, and keeping abreast of relevant jurisprudence, taxpayers are better positioned to protect their rights. 

Ultimately, although the State’s power to tax may be broad, it is not without limits. The Constitution demands that taxation be exercised with fairness and due process.  Thus, when the Court sits, the rule of law must always prevail. 

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 11 August 2026