The Feast of the Epiphany and the celebration of the Baptism of the Lord ended the Christmas season on Jan. 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 once more dealing with tax assessments.
Even with the hangover of the holidays, it is a good time to be reminded of the BIR’s tax assessment process, what taxpayers should do, and what can still be done to improve it.
The BIR’s tax assessment process starts with the issuance of a Letter of Authority (LoA). Revenue Memorandum Circular (RMC) No. 075-18 requires an LoA for a tax assessment to be valid. No assessments can be issued, and no assessment functions or proceedings can be carried out 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 obtained.
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 is needed to ensure that the correct documents are made available when the examination is conducted in the taxpayer’s business premises.
Once the BIR is done with its examination, the bureau will issue a Notice of Discrepancy (ND) if needed. Under RR No. 22-2020, a Notice of Discrepancy must be issued to the taxpayer upon a finding of liability 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 liable for deficiency taxes, the investigating officer may endorse the case for review and approval for the issuance of a Preliminary Assessment Notice (PAN). Upon receipt of the PAN, the taxpayer has 15 days to reply. Based on the BIR’s evaluation of the reply to the 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 for deficiency taxes. From the receipt of FAN/FLD, the taxpayer has a non-extendible 30-day period to submit a protest letter. Otherwise, the assessment becomes final and executory.
The protest letter must not be a pro-forma protest and should include the taxpayer’s argument and supporting legal arguments. 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 requests 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 the PAN must be carefully evaluated by the BIR. An explanation of how the bureau 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 Nov. 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.
While the current BIR tax assessment process provides due process, there are 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 account, will no longer be requested in case of tax assessment. While we understand the BIR’s manpower limitations, an automated archiving system 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 specifically prohibits the issuance of FANs with findings that are exactly the same as those in the PAN, except when the taxpayer fails to provide a reply to the PAN, or when the PAN fails to properly address the findings, or when the reply to the PAN lacks legal basis. While there are court rulings voiding assessments which merely reiterate the deficiency taxes due as found in the PAN and the FAN/FLD, there are still cases of complete disregard of the reply to the PAN or the issuance of the FAN without clearly explaining the basis for denial of arguments in the reply. 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 is accorded due process in tax assessments.
I also wish for a maximum period for the applicability of the penalty deficiency interest. This will avoid situations where taxpayers are put in a position of having to settle to avoid the interest charge. 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 proposals, will certainly help in improving the tax assessment experience. Taxpayers, on the other hand, must ensure compliance with the required submissions and replies to assessment notices for the speedy disposition of assessment cases. We also hope our tax bureau and legislators 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.
Ma. Lourdes P. Aclan is a director from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.