In one of the episodes of Suits when Mike Ross was being tried for fraud, for impersonating a lawyer, Donna Paulsen was questioned by Anita Gibbs. When asked if she knew whether Mike went to Harvard Law School, this question caught her off guard and prompts her to invoke the Fifth Amendment. While watching this episode, I am amazed that even in US TV shows, they portray characters who know their rights. It’s hard not to compare us, as taxpayers, to them in terms of our understanding of our basic rights. In tax assessment cases, many taxpayers may be unaware of their basic rights. As part of due process, this article will briefly discuss one of the substantive requirements in assessment cases — The Notice of Informal Conference (NIC) or Notice of Discrepancy (NOD).
What is NIC?
As a rule, the BIR has 240 days (for large taxpayers) and 180 days (for taxpayers registered in Revenue District Office) from the date of issuance of the electronic Letter of Authority (LOA) to complete the examination of the taxpayer’s books of accounts and other accounting records.
After the examination is completed, the BIR issues the NIC to the taxpayer. It is a written notice issued to the taxpayer that informs him about the details of the initial tax findings made by the authorized Revenue Officers of the BIR. The taxpayer is given 15 days to submit explanations for the tax findings and supporting documents.
The issuance of the NIC is part of the due process requirement in the issuance of a deficiency tax assessment when Revenue Regulation (RR) No. 12-99 was issued to implement the provisions of the National Internal Revenue Code of 1997 (Tax Code), as amended.
What is NOD?
However, in RR No. 18-13, the NIC was removed from the due process requirement to expedite the assessment process and prevent corruption by limiting interaction between the taxpayer and the revenue case officers. Recognizing that the NIC is an integral part of the due process, the BIR reinstated the NIC at the beginning of 2018 through RR No. 7-2018. Further amendment by, RR No. 22-2020 renamed the NIC to Notice of Discrepancy (NOD).
The discussion of the NOD should not exceed thirty (30) days from the taxpayer’s receipt of the NOD. During the discussion, the taxpayer is given the opportunity to present their side of the case, explain any discrepancies found during the investigation of the Revenue Officers, and submit supporting documents for their explanation or arguments.
Absence of NIC violates right to due process
In Court of Tax Appeals (CTA) En Banc (EB) Case No. 2229, dated March 27, 2023, the CTA En Banc has the opportunity to rule on the importance of the NIC. In the said case, the tax authorities contest the Court’s decision to cancel the deficiency tax assessments for the taxable year 2008, claiming that the taxpayer’s right to due process was violated. The tax authorities argued that the assessment notices and even the Final Decision of Disputed Assessment (FDDA) issued to the taxpayer were properly served to the taxpayer’s registered addressed and authorized persons, contrary to the taxpayer’s claim. The Court agreed with the argument of the tax authorities that the assessment notices and FDDA were properly served to the taxpayer. However, the Court noted that an NIC was not issued prior to the issuances of the assessment notices and FDDA, resulting in a violation of due process in the issuance of assessments.
Considering the importance of the NIC/NOD, the Court emphasized the mandatory and corresponding due process requirement in the issuance of a deficiency tax assessment. In the aforementioned case, the CTA ruled in favor of the taxpayer by reaffirming its decision, prohibiting the collection of assessed deficiency tax by the tax authorities against the taxpayer for violation of the taxpayer’s right to due process. In the case at bar, the tax authorities did not issue an NIC but issued a Post Reporting Notice (PRN).
The tax authorities contend that there is no violation of due process since the PRN and the NIC serve the same purpose of informing the taxpayer of their deficiency taxes and giving them an opportunity to explain their side before the issuance of the Preliminary Assessment Notice. However, the Court denied the tax authorities’ arguments and explained that the issuance of the NIC has been recognized as part of the due process requirement since as early as the 1977 Tax Code. The implementing regulation of the 1977 Tax Code, RR No. 12-1985, states that the BIR shall send the taxpayer a NIC. This requirement was retained in RR No. 12-99 when the Tax Code of 1977 was amended by the Tax Code of 1997as amended. Although the issuance of RR No. 18-2013 removed this requirement, it was later reinstated by RR No. 7-2018. Furthermore, at the time the PRN was issued, the governing regulation was RR No. 12-99, and there was no indication that a NIC was issued by the tax authorities. The Court was not convinced by the tax authorities’ argument that the PRN issued to the taxpayer served as the NIC required under RR No. 12-99 because the PRN did not include an invitation to schedule a conference or discussion between the tax authorities and the taxpayer. In a similar vein, the Supreme Court ruled in G.R. No. 172598, that a taxpayer is deprived of due process when the tax authorities failed to issue a NIC as required by RR No. 12-99.
Based on the above rulings of the court, it is clear that the NIC, now NOD, is an integral part of the due process. An assessment case is considered void if the taxpayer’s due process rights are violated. When it comes to the power of the State to tax versus an individual’s right to due process, the scale favors the taxpayer’s right to due process. As taxpayers, it is crucial that we are aware of our basic rights and equipped with knowledge so that we are not deprived of our rights and placed at a significant disadvantage in tax assessment cases.
Luckily for Donna, she knew her rights. Let us be reminded that we should know ours too.
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 23 May 2023
