Due process in serving tax assessment notices

The COVID-19 pandemic has affected the way businesses conduct their day-to-day activities. With the continued threat of the virus and community quarantines in force across the country, most companies have been operating with skeleton workforces, to the extent that often only receptionists and security guards are the only warm bodies present. Such situations could lead to Bureau of Internal Revenue (BIR) notices or letters not being properly served to taxpayers.

It is elementary in tax investigation that when the BIR finds that proper taxes should be assessed, the taxpayer should first be informed in writing of the law and the facts on which the assessment will be made, otherwise, the assessment is void. It is a fundamental principle enshrined in our Constitution 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.

VALID MODE OF SERVING ASSESSMENT NOTICE

Revenue Regulations (RR) No. 18-2013 provides for the various modes of serving notice (e.g. Notice of Discrepancy or NoD, Preliminary Assessment Notice or PAN, Final Assessment Notice or FAN, and Final Decision on Disputed Assessment or FDDA) which are personal service, substituted service or by mail.

Personal service is effected by personally delivering a copy thereof to the taxpayer at his registered or known address or wherever he may be found. In case personal service is not practicable, the notice shall be served by substituted service or by mail.

Substituted service can be resorted to when the taxpayer is not present at the registered or known address. The notice may be left at the taxpayer’s registered address, with his clerk or with a person having charge thereof. If the known address is a place where business activity is being conducted, the notice may be left with a clerk or a person having charge thereof. However, if the known address is the place of residence, substituted service can be made by leaving the copy with a person of legal age who is a resident.

If no person is found in the taxpayer’s registered address or known address, the revenue officers concerned are to bring a barangay official and two disinterested witnesses to the address to personally observe and attest to such absence. The notice will be given to the barangay official. Such facts will be contained in the bottom portion of the notice, as well as the names, official position and signatures of the witnesses. The same procedure must be observed when the taxpayer refuses to receive the notice.

Service by mail is done by sending a copy of the notice by registered mail, reputable courier, or ordinary mail, if the registry or reputable courier is not available in the locality of the addressee.

It is also provided that service to the tax agent/practitioner, who is appointed by the taxpayer under circumstances prescribed in the pertinent regulations on accreditation of tax agents, is deemed service to the taxpayer.

PERSONAL SERVICE TO A SECURITY GUARD WHO IS NOT AN EMPLOYEE OF THE TAXPAYER IS INVALID

The personal service of an assessment notice to a security guard who is not an employee of the taxpayer is deemed an invalid service as it was not served upon the taxpayer itself or to its authorized representative. This is what the Court of Tax Appeals (CTA) ruled in one case.

According to the ruling, service by personal delivery strictly requires that the notice must be served only to the taxpayer at his registered or known address or wherever he may be found. On another note, the Court recognized the authority of security guards to receive official notices is confined to situations where the notice is served by registered mail. With regard to the service by registered mail, the postmaster must deliver the notice to the addressee himself or to a person of sufficient discretion to receive the same. In the case, it was considered that a security guard is within the scope of a person of sufficient discretion to receive the registered mail.

The paramount consideration is that the registered mail is delivered to the recipient’s address and received by a person who would be able to appreciate the importance of the papers delivered to him, even if that person is not a subordinate or employee of the recipient or authorized by a special power of attorney.

PERSONAL SERVICE TO AN EMPLOYEE OF A RELATED PARTY IS INVALID

In another case, the assessment notice was served by the BIR to the taxpayer by substituted service because personal service was not practicable. The BIR left the notice with a supposed employee of the taxpayer. However, upon cross-examination of the revenue officer who served the notice, it was determined that the alleged employee of the taxpayer was actually an employee of a related party which is a distinct and separate entity from the taxpayer. As such, the Court invalidated the assessment for failure to properly serve the notice to the taxpayer or his duly authorized representative.

THE NOTICE MUST BE ACTUALLY RECEIVED BY THE TAXPAYER OR HIS AUTHORIZED REPRESENTATIVE

In a recent CTA case, the Court ruled that the BIR’s failure to prove that the PAN was received by the taxpayer renders the assessment void for violation of the taxpayer’s right to due process. The direct denial of the taxpayer on the receipt of the PAN shifts the burden to the BIR to prove that the said letter was actually received.

In this case, the taxpayer argued that the testimonies of the BIR officials were insufficient to prove that he received a copy of the PAN and assuming that he received the letter, he had no personal knowledge that the PAN was actually received by him or his authorized representatives.

The BIR disproves the taxpayer’s allegations by presenting the BIR copy of the PAN, transmittal mailing of the PAN to Manila Central Post office, and the Registry Return Card of Mailing that was duly received by the taxpayer’s alleged authorized representative, a certain person. Relative to the supposed service by registered mail, the BIR also presented the person in charge of mailing, who assumed the position of the staffer who prepared the Transmittal Mailing of the subject PAN.

The Court expressly ruled that while the Registry Return Card proves the fact of mailing, the supposed PAN and the Transmittal Mailing of PAN are insufficient to establish that it was received by the taxpayer. Also, the BIR never presented the staffer, who is the supposed predecessor of the person in charge of mailing and who actually prepared the Transmittal Mailing of the PAN. It was ruled that the person in charge of mailing had no personal knowledge of the preparation of the Transmittal Mailing of the PAN. Thus, it was not sufficiently proven that the PAN was actually received by the taxpayer.

Clearly, the taxpayer’s right to due process was violated because the PAN was not served to him.

In this pandemic, it is a reality that the BIR is facing the challenges of properly serving the assessment notice due to the work-from-home set-up of most companies. However, this does not mean the bureau can disregard the settled rules on proper service of notice. The taxpayer must also be aware of the constitutionally protected right to due process. Tax assessment cases involve lengthy and costly processes, not only for the taxpayer, but also for the government. Thus, these cases can be avoided from reaching our courts when the process of proper service is strictly followed.

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.

Alexander Querido, Jr. is an associate of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 02 February 2021