Weathering the storm of BIR assessments

“Rain, Rain, Go Away” is a nursery rhyme that children sing when they wish the rain to stop so they can go outside and play.

In 2018, the Philippine Atmospheric, Geophysical, and Astronomical Services Administration (PAGASA) recorded 20 typhoons entering the Philippine Area of Responsibility (PAR) that took a toll on the country’s economy, infrastructure, agriculture, and livelihood and that ruined many lives. As much as Filipinos want to prevent typhoons from entering the country, unfortunately, this is beyond anyone’s control.

Many taxpayers find themselves in a similar situation when receiving a Letter of Authority (LoA) issued by the Bureau of Internal (BIR) to conduct a tax audit or investigation. Even worse is receiving a second or third LoA covering different taxable years while the audit of one taxable year is ongoing. Hence, taxpayers often ask: “Why am I receiving another audit notice while another tax audit is still ongoing?,” “Is it common or legal to receive LoAs for three or more consecutive years?,” or “Is there a limit to the number of LoAs that the BIR can issue?” One typhoon can cause so much damage. Hence, seeing two or more brewing, even while the first has not completely left the country, can cause much apprehension.

Unfortunately, the answer is yes: a taxpayer can validly receive a LoA for more than three consecutive years. Taxpayers can actually receive more than one LoA in one taxable year.

A closer examination of the BIR’s authority to assess taxpayers could explain why taxpayers receive multiple LoAs.

In the Philippines, the self-assessment system is the method used to determine one’s amount of internal revenue tax owed to the government. As taxes are the lifeblood of any nation, there should be a way to check the correctness of the taxes remitted to the government; hence, the need for a tax audit. The BIR is authorized to assess taxpayers by Section 6 (A) of the National Internal Revenue Code of 1997, as amended.

To improve taxpayers’ voluntary compliance by encouraging the correct payment of internal revenue taxes through the exercise of the enforcement function of the Bureau, the BIR issued Revenue Memorandum Order (RMO) No. 19-2015, as amended by RMO No. 64-2016, to prescribe the policies, guidelines, and procedures to be observed in the audit or investigation of tax returns.

Generally, all taxpayers are possible candidates for audit. The RMO, nevertheless, provides guidance on who should be selected for audit or investigation, among them:

(1) Mandatory cases [i.e., claim for tax refund or issuance of tax credit certificate, requests for tax clearance in case of retirement or cessation and business combination, and unresolved Letter Notices (LNs);

(2) Priority cases (i.e., based on industry classification, noncompliant taxpayers, taxpayers enjoying incentives, etc.); and

(3) Other priority audits, as identified by the Regional Director (RD) and Assistant Commissioner, Large Taxpayers Service (ACIR-LTS).

In addition, the same RMO provides that it is permissible for a taxpayer who has been audited for the last two years to be selected again for audit on the current or third year, as long as the Regional Director or Assistant Commissioner who heads the investigating office approves it.

There are also instances when the company may receive two LoAs covering the same taxable year: (1) LoA under the Value-Added Tax (VAT) Audit Program and (2) LoA for regular audit. If the taxpayer received another LoA for a regular audit subsequent to a LoA for VAT audit, the former shall not include the VAT liability, even if the LoA issued under the VAT Audit Program is for a particular taxable quarter only.

If taxpayers are to digest the memorandum order above, it is as if there is no escaping from receiving an audit notice from the BIR. Taxpayers can hope and pray that they may be spared from new LoAs, but taxpayers also have the option to eliminate or at least minimize their tax exposure upon receiving one.

In the same manner that you prepare for the approaching storm, taxpayers should anticipate a BIR audit and plan out strategy, as follows:

1. Check for any holes and damage to your house for repair. As a taxpayer, on the other hand, you should regularly review your company’s overall compliance with the current rules and regulations and to amend tax returns, if necessary, prior to receiving a BIR audit notice;

2. Equip yourself to survive a storm, like knowing the nearest evacuation center and learning first aid. In the same vein, taxpayers should also educate themselves on the rights and options available to them when dealing with a BIR tax assessment; and

3. Extract the lessons from storm damage suffered despite all the precautions. As taxpayers, you should also note the issues raised during the assessment and plan for the improvement of current practices.

Taxpayers should always find a takeaway from a tax audit experience; it pays to be equipped with and updated on the all current rules and regulations and to be compliant with all the requirements. At the end the day, the taxes you pay are subject to a BIR audit. It is better that you currently report and pay your taxes correctly rather than wait for your company to be assessed, which can be more costly.

Another BIR audit storm could be brewing, but you are not as worried, because you know you have prepared.

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.

Christian Derick D. Villafranca is a senior of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 18 June 2019