As known to the taxpayers, the tax audits conducted by the Bureau of Internal Revenue (BIR) involve a tedious and long process. Taxpayers dedicate plenty of time and effort in retrieving documents and presenting reconciliations to address the alleged BIR’s findings. However, there are instances wherein the taxpayers would later discover that there was actually no point in proceeding with a BIR audit, because the BIR does not anymore have the right to audit the taxpayer due to “prescription”.
In fact, there are several court cases decided by the court where the taxpayers won by reason of prescription. As a refresher, what is the defense of prescription?
The defense of prescription can be raised by a taxpayer when the BIR conducts or issue assessment notices beyond 3 years from the deadline of filing of the tax return as fixed by law or the actual date of filing of the tax return, whichever is later. This is the regular prescription period. When the BIR raises the issue of fraudulent or false return, or non-filing of tax returns, the applicable prescription period is 10 years from discovery.
There are cases in the past wherein the BIR brought up the use of the longer 10-year prescription period, as the BIR’s assessment was issued only after the regular 3-year period. However, it will be noted that the 10-year period could not be readily used by the BIR against the taxpayer.
In one case involving a sale of real property, the BIR alleged the taxpayer committed a falsity in the tax return when it sold at less than its declared fair market value, and hence the 10-year period should apply. However, the taxpayer in this case explained that it was compelled to sell the property at a price less than its market value to minimize its losses. The court ruled that the BIR failed to show that the taxpayer filed fraudulently with intent to evade the payment of the correct amount of tax.
There was also another court case involving a taxpayer engaged in real estate, wherein the sale transactions of the taxpayer were not recorded in the year 1998 financial statement but in the year 2000 financial statements. Here, the BIR claimed that the taxpayer filed a fraudulent tax return in 1998 as the assailed transaction was reported in the wrong year. Here, the BIR also raised the 10-year prescription period; however, the court held that the error committed by the taxpayer just stemmed from the wrong application of the rules related to the installment method of revenue recognition and is not an indication of their intent to evade payment.
In the above case, the Court further explained that if there was really an intent to evade payment, the taxpayer in this case would not have reported and subsequently paid the income tax, albeit in the wrong year.
In another case, the BIR alleged the taxpayer filed a false or fraudulent return when the BIR had findings based on computerized matching on the information and data provided by third-party sources against the taxpayer’s declaration in the VAT returns. However, the court, considering the circumstances in the said case, explained that it did not find enough evidence to prove fraud or intentional falsity by the taxpayer.
There was also a recent case, when an interesting argument was raised by the BIR, when the BIR posited that it did not lose its right to assess the taxpayer for deficiency value-added tax (VAT) and expanded withholding tax (EWT), which had already prescribed using the 3-year period, by reason of the taxpayer’s non-filing of its other tax return, that is, the documentary stamp tax return, which tax type is different from VAT and EWT. In this case, the court is unconvinced of the BIR’s assertion that the taxpayer’s non-filing of its DST returns should trigger the 10-year assessment period for all its deficiency tax liabilities. According to the court, a plain reading of the relevant Tax Code provisions would show that the prescriptive periods are reckoned from the last day of each return for each type of tax.
The above court cases are just few examples of situations wherein the court decided in favor of the taxpayers for not using the longer 10-year prescription period. It will be noted, in summary, that fraud is a question of fact that should be alleged and duly proven. The fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot just be presumed.
The defense of prescription available to the taxpayers must be recognized and respected. It is anchored on the rationale that tax assessments should avoid the conduct of the tax audit or investigation for an unreasonable length of time. The taxpayers should have a feeling of security against unwarranted audits that will result in unnecessary time and effort on the part of the taxpayers .
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 12 September 2023
