General audit procedure and documentation

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GENERAL AUDIT PROCEDURES AND

DOCUMENTATION

1. When does the audit process begin?

The audit process commences with the

issuance of a Letter of Authority to a taxpayer

who has been selected for audit.

2. What is a Letter of Authority?

The Letter of Authority is an official document

that empowers a Revenue Officer to examine

and scrutinize a Taxpayers books of accounts

and other accounting records, in order to

determine the Taxpayers correct internal

revenue tax liabilities.

3. Who issues the Letter of Authority?

Letter of Authority, for audit/investigation of

taxpayers under the jurisdiction of National

Office, shall be issued and approved by the

Commissioner of Internal Revenue, while, for

taxpayers under the jurisdiction of Regional

Offices, it shall be issued by the Regional

Director.

4. When must a Letter of Authority be served?

A Letter of Authority must be served to the

concerned Taxpayer within thirty (30) daysfrom its date of issuance, otherwise, it shall

become null and void. The Taxpayer shall then

have the right to refuse the service of this LA,

unless the LA is revalidated.

5. How often can a Letter of Authority be

revalidated?

A Letter of Authority is revalidated through the

issuance of a new LA. However, a Letter of

Authority can be revalidated

Only once, for LAs issued in the Revenue

Regional Offices or the Revenue District

Offices; or

Twice, in the case of LAs issued by the National

Office.

Any suspended LA(s) must be attached to the

new LA issued (RMO 38-88).

6. How much time does a Revenue Officer

have to conduct an audit?

A Revenue Officer is allowed only one hundred

twenty (120) days from the date of receipt of a

Letter of Authority by the Taxpayer to conductthe audit and submit the required report o

investigation. If the Revenue Officer is unable

to submit his final report of investigation within

the 120-day period, he must then submit a

Progress Report to his Head of Office, and

surrender the Letter of Authority fo

revalidation.

7. How is a particular taxpayer selected for

audit?

Officers of the Bureau (Revenue District

Officers, Chief, Large Taxpayer Assessment

Division, Chief, Excise Taxpayer Operations

Division, Chief, Policy Cases and Tax Fraud

Division) responsible for the conduct of

audit/investigation shall prepare a list of al

taxpayer who fall within the selection criteria

prescribed in a Revenue Memorandum Orde

issued by the CIR to establish guidelines for the

audit program of a particular year. The list of

taxpayers shall then be submitted to thei

respective Assistant Commissioner for pre-approval and to the Commissioner of Interna

Revenue for final approval. The list submitted

by RDO shall be pre-approved by the Regiona

Director and finally approved by Assistant

Commissioner, Assessment Service (RMOs 64-

99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be

subjected to examination and inspection for

the same taxable year?

A taxpayers books of accounts shall be

subjected to examination and inspection only

once for a taxable year, except in the

following cases:

When the Commissioner determines that fraud

irregularities, or mistakes were committed by

Taxpayer;

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When the Taxpayer himself requests a re-

investigation or re-examination of his books of

accounts;

When there is a need to verify the Taxpayers

compliance with withholding and other

internal revenue taxes as prescribed in a

Revenue Memorandum Order issued by theCommissioner of Internal Revenue.

When the Taxpayers capital gains tax liabilities

must be verified; and

When the Commissioner chooses to exercise

his power to obtain information relative to the

examination of other Taxpayers (Secs. 5 and

235, NIRC).

9. What are some of the powers of the

Commissioner relative to the audit process?

In addition to the authority of the

Commissioner to examine and inspect the

books of accounts of a Taxpayer who is being

audited, the Commissioner may also:

Obtain data and information from private

parties other than the Taxpayer himself (Sec.5,

NIRC); and

Conduct inventory and surveillance, andprescribe presumptive gross sales and receipts

(Sec. 6, NIRC).

10. What is a Notice for Informal Conference ?

A Notice for Informal Conference is a written

notice informing a Taxpayer that the findings of

the audit conducted on his books of accounts

and accounting records indicate that

additional taxes or deficiency assessments

have to be paid.If, after the culmination of an audit, a Revenue

Officer recommends the imposition of

deficiency assessments, this recommendation

is communicated by the Bureau to the

Taxpayer concerned during an informal

conference called for this purpose. The

Taxpayer shall then have fifteen (15) days from

the date of his receipt of the Notice for

Informal Conference to explain his side.

11. Within what time period must an

assessment be made?

An assessment must be made within three (3)

years from the last day prescribed by law fo

the filing of the tax return for the tax that isbeing subjected to assessment or from the day

the return was filed if filed late. However, in

cases involving tax fraud, the Bureau has ten

(10) years from the date of discovery of such

fraud within which to make the assessment.

Any assessments issued after the applicable

period are deemed to have prescribed, and

can no longer be collected from the Taxpayer

unless the Taxpayer has previously executed a

Waiver of Statute of Limitations.

12. What is "Jeopardy Assessment"?

A Jeopardy Assessment is a tax assessment

made by an authorized Revenue Office

without the benefit of complete or partia

audit, in light of the ROs belief that the

assessment and collection of a deficiency tax

will be jeopardized by delay caused by the

Taxpayers failure to:

Comply with audit and investigation

requirements to present his books of accountsand/or pertinent records, or

Substantiate all or any of the deductions

exemptions or credits claimed in his return.

13. What is a Pre-Assessment Notice (PAN)?

The Pre-Assessment Notice is a communication

issued by the Regional Assessment Division, or

any other concerned BIR Office, informing a

Taxpayer who has been audited of the findingsof the Revenue Officer, following the review of

these findings.

If the Taxpayer disagrees with the findings

stated in the PAN, he shall then have fifteen

(15) days from his receipt of the PAN to file a

written reply contesting the proposed

assessment.

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14. Under what instances is PAN no longer

required?

A Preliminary Assessment Notice shall not be

required in any of the following cases, in which

case, issuance of the formal assessment notice

for the payment of the taxpayers deficiency

tax liability shall be sufficient:

When the finding for any deficiency tax is the

result of mathematical error in the

computation of the tax appearing on the face

of the tax return filed by the taxpayer; or

When a discrepancy has been determined

between the tax withheld and the amount

actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund

or tax credit of excess creditable withholding

tax for a taxable period was determined to

have carried over and automatically applied

the same amount claimed against the

estimated tax liabilities for the taxable quarter

or quarters of the succeeding taxable year; or

When the excise tax due on excisable articles

has not been paid; or

When an article locally purchased or imported

by an exempt person, such as, but not limitedto, vehicles, capital equipment, machineries

and spare parts, has been sold, traded or

transferred to non-exempt persons.

15. What is a Notice of Assessment/Formal

Letter of Demand?

A Notice of Assessment is a declaration of

deficiency taxes issued to a Taxpayer who fails

to respond to a Pre-Assessment Notice within

the prescribed period of time, or whose replyto the PAN was found to be without merit. The

Notice of Assessment shall inform the Taxpayer

of this fact, and that the report of investigation

submitted by the Revenue Officer conducting

the audit shall be given due course.

The formal letter of demand calling for

payment of the taxpayers deficiency tax or

taxes shall state the facts, the law, rules and

regulations, or jurisprudence on which the

assessment is based, otherwise, the forma

letter of demand and the notice of assessment

shall be void.

TAXPAYERS OBLIGATIONS AND PRIVILEGES

16. What is required of a taxpayer who is being

audited?

A Taxpayer who is being audited is obliged to:

Duly acknowledge his receipt of the

appropriate Letter of Authority upon its

presentation by the Revenue Office

authorized to conduct the audit by affixing in

the Letter of Authority the name of the

recipient and the date of receipt.

Present within a reasonable period of time, his

books of accounts and other related

accounting records that may be required by

the Revenue Officer; and

Submit the necessary schedules as may be

requested by the Revenue Officer within a

reasonable amount of time from his

(Taxpayers) receipt of the Letter of Authority.

17. What is the recourse of a Taxpayer whocannot submit the documents being required

of him within the prescribed period of time?

If a Taxpayer, believing that he cannot present

his books of accounts and/or other accounting

records, intends to request for more time to

present these documents in order to avoid the

issuance of a Jeopardy Assessment, the

Taxpayer may execute what is referred to as a

Waiver of the Statute of Limitations.

18. What is a Waiver of the Statute of

Limitations?

The Waiver of the Statute of Limitations is a

signed statement whereby the Taxpaye

conveys his agreement to extend the period

within which the Bureau may validly issue an

assessment for deficiency taxes. If a Taxpayer

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opts to execute a Waiver of the Statute of

Limitations, he shall likewise be, in effect,

waiving his right to invoke the defense of

prescription for assessments issued after the

reglementary period.

No Waiver of the Statute of Limitations shall be

considered valid unless it is accepted by a duly

authorized Bureau official.

19. If a Taxpayer does not agree with the

assessment made following an audit, can he

protest this Assessment?

Yes, he can. A Taxpayer has the right to

contest an assessment, and may do so by filing

a letter of protest stating in detail his reasons

for contesting the assessment.

20. What are the characteristics of a valid

protest?

A protest is considered valid if it satisfies the

following conditions:

It is made in writing, and addressed to the

Commissioner of Internal Revenue;

It contains the information, and complies with

the conditions required by Sec. 6 of Revenue

Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the

immediate past three (3) taxable year.

b.) Nature of request whether reinvestigation or

reconsideration specifying newly discovered

evidence he intends to present if it is a request

for investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or

letter of demand.

f.) Itemized statement of the findings to which

the taxpayer agrees as a basis for computing

the tax due, which amount should be paid

immediately upon the filing of the protest. For

this purpose, the protest shall not be deemed

validly filed unless payment of the agreed

portion of the tax is paid first.

g.) The itemized schedule of the adjustments

with which the taxpayer does not agree.

h.) A statement of facts and/or law in support

of the protest.

The taxpayer shall state the facts, applicable

law, rules and regulations or jurisprudence on

which his protest is based, otherwise, his protest

shall be considered void and without force

and effect on the event the letter of protest

submitted by the taxpayer is accepted, the

taxpayer shall submit the required documents

in support of his protest within sixty (60) days

from date of filing of his letter of protest

otherwise, the assessment shall become final

executory and demandable.

It is filed within thirty (30) days from the

Taxpayers receipt of the Notice of Assessment

and formal Letter of Demand.

21. In the event the Commissioners duly

authorized representative denies a Taxpayers

protest, what alternative course of action is

open to the Taxpayer?

If a protest filed by a Taxpayer be denied by

the Commissioners duly authorized

representative, the Taxpayer may request the

Commissioner for a reconsideration of such

denial and that his tax case be referred to the

Bureaus Appellate Division. The Appellate

Division serves as a "Court", where both parties

i.e. the Revenue Officer on one hand, and the

Taxpayer on the other, can present testimony

and evidence before a Hearing Officer, tosupport their respective claims.

22. What recourse is open to a Taxpayer if his

request for reconsideration is denied or his

protest is not acted?

Should the Taxpayers request fo

reconsideration be denied or his protest is not

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acted upon within 180 days from submission of

documents by the Commissioner, the Taxpayer

has the right to appeal with the Court of Tax

Appeals (CTA).

Any appeal must be done within thirty (30)

days from the date of the Taxpayers receipt of

the Commissioners decision denying the

request for reconsideration or from the lapse ofthe 180 day period counted from the

submission of the documents. (Sec. 228 of the

Tax Code, as amended).

23. If the Taxpayer is not satisfied with the CTAs

decision, can he appeal the decision to a

higher Court?

Yes, he can. Decisions of the Court of Tax

Appeals may be appealed with the Court of

Appeals within fifteen (15) days from the

Taxpayers receipt of the CTAs decision. In the

event that the Taxpayer is likewise unsatisfied

with the decision of the Court of Appeals, he

may appeal this decision with the Supreme

Court.

24. Can a Taxpayer claim a refund or tax credit

for erroneously or illegally collected taxes?

Yes, he can. The Taxpayer may file such a

claim with the Commissioner of Internal

Revenue (Sec.229, NIRC), within two (2) yearsfrom the payment of the tax or penalty sought

to be refunded. Failure of the Taxpayer to file

such a claim within this prescribed period shall

result in the forfeiture of his right to the refund

or tax credit.

25. If a Taxpayer has filed a claim for refund

and the Bureau has yet to render a decision on

this claim, can the Taxpayer elevate his claim

to the CTA?

Yes, he can, if the two (2) year period stated

above is about to end, and the Commissioner

has yet to render a decision on the claim.

(Gibbs v. Collector, L-13453, February 29, 1960).

REMEDIES OF THE BUREAU IN THE AUDIT PROCESS

AND COLLECTION OF DELINQUENT ACCOUNTS

26. What means are available to the Bureau to

compel a Taxpayer to produce his books of

accounts and other records?

A Taxpayer shall be requested, in writing, not

more than two (2) times, to produce his booksof accounts and other pertinent accounting

records, for inspection. If, after the Taxpayers

receipt of the second written request, he stil

fails to comply with the requirements of the

notice, the Bureau shall then issue him a

Subpoena Duces Tecum.

27. What course of action shall the Bureau

take if the Taxpayer fails to comply with the

Subpoena Duces Tecum?

If, after the Taxpayer fails, refuses, or neglects

to comply with the requirements of the

Subpoena Duces Tecum, the Bureau may:

File a criminal case against the Taxpayer for

violation of Section 5 as it relates to Sections 14

and 266, of the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for

contempt, under Section 3(f), Rule 71 of the

Revised Rules of Court.

28. What alternatives are open to Government

for the collection of delinquent accounts?

Once an assessment becomes final and

demandable, the Government may employ

any, or all, of the following remedies for the

collection of delinquent accounts:

Distraint of personal property;

Levy of real property belonging to theTaxpayer;

Civil Action; and

Criminal Action.

29. What is "Distraint of Personal Property"?

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Distraint of personal property involves the

seizure by the Government of personal

property - tangible or intangible - to enforce

the payment of taxes, followed by the public

sale of such property, if the Taxpayer fails to

pay the taxes voluntarily.

30. What is "Levy of Real Property"?

Levy of real property refers to the same act of

seizure, but in this case of real property, and

interest in or rights to such property in order to

enforce the payment of taxes. As in the

distraint of personal property, the real property

under levy shall be sold in a public sale, if the

taxes involved are not voluntarily paid

following such levy.

31. In what time period must collection be

made?

Any internal revenue tax, which has been

assessed within the period prescribed shall be

collected within three (3) years from date of

assessment. However, tax fraud cases may be

collected by distraint or levy or by a court

proceeding within five (5) years from

assessment of the tax or from the last waiver.

http://www.bir.gov.ph/taxpayerrights/taxpayer

rights.htm

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