Stress-free BIR audits

A lot has been going on with respect to tax reform. Some tax rates are proposed for adjustment, while some tax exemptions face removal, among other expected changes. One thing that taxpayers can assume to remain constant -- the right of the Bureau of Internal Revenue (BIR) to audit them. And the very idea of a “BIR audit” can be the source of much stress.

In the medical context, stress is a physical, mental, or emotional factor that causes bodily or mental tension. Medical studies show that unnecessary worries result in self-inflicted stress. This means that there are instances where we, ourselves, primarily contribute to our own anxieties. Now, how about when we face a BIR audit? How are we supposed to react to specific situations to avoid this self-inflicted stress? You may want to consider the following:

1. When receiving a notice of audit from the BIR, don’t fret.
Worrying upon the receipt of a notice of audit from the BIR will result in unnecessary nervous tension. As we know, the notice of audit or a letter of authority (LOA) only means that the taxpayer’s case will be reviewed by BIR examiners. While it is true that a notice of audit means future work on the part of taxpayers, there are no tax findings yet at such time. So, worrying too much at the LOA stage is premature. 

For all we know, the BIR’s audit may turn up only minimal findings. Unless you are a tax evader, there should be no reason to fear BIR examiners.

2. Don’t think that a Subpoena Duces Tecum (SDT), itself, is a “warrant of arrest” that will get you imprisoned.
I have seen some reactions in which a taxpayer imagines being halfway to prison upon receipt of an SDT. The mere thought of jail time surely inspires in many of us a hormonal rush, rapid breathing, and increased heart rates. 

Although “subpoena duces tecum” may sound threatening, SDT just means that you need to comply with what is directed by the BIR, particularly with respect to the presentation of documents or records being sought by the bureau. If you receive an SDT, don’t think of “imprisonment,” right away, think of compliance.

It would be best for matters not to reach the SDT stage at all. So, you have to pay attention to the list of documents being required by the BIR examiners during the audit, and submit these documents to the extent possible. Anyway, two prior notices are required before the BIR can issue an SDT. 

There could be items on the BIR list of documents that may not be applicable to you. Be sure to closely coordinate with the BIR examiners and formalize your correspondence to inform them.

3. Don’t be startled by significant tax findings at the Preliminary Assessment Notice (PAN) stage.
This scenario, I think, is the one that could cause heart attacks.

Receiving, for example, a tax finding amounting to P1 billion from the BIR is certainly a cruel joke! And if the PAN finds you at a bad time, you would certainly struggle to sleep for several nights. But, how should you react if you believe the tax finding is unreasonable, ridiculous, absurd, nonsensical? 

You should know that receiving a finding amounting to huge sums is not uncommon. If you’ve spent any time attending tax forums, you will quickly realize that you are not alone.

The tax finding amount could easily be reduced significantly after the PAN stage. As the term suggests, PAN is just “preliminary,” and normally, the huge amounts reflected in the PAN are not accurate. It is disappointing that many, but not all, BIR examiners start at an exorbitant amount of initial findings, when it is obvious that their audits and analysis are not yet complete. 

Thus, in terms of handling stress, don’t panic when the tax finding is outrageous. Confidence in your accounting and tax records is your ultimate defense. 

4. Be ready to present again your arguments at the Final Assessment Notice (FAN) stage, despite your submission of a reply to the PAN.
Why should taxpayers be ready to do so? Typically, BIR examiners review the taxpayer’s reply to the PAN so that the findings in the FAN are reduced, if not totally wiped out. But consider the possibility that many examiners are pressed for time, and they are being directed internally to endorse the case for the issuance of FAN. What some of them do is just copy the findings in the PAN and replicate the same in the FAN. 

For taxpayers, that’s not acceptable, after all that work preparing the requirements within the 15-day deadline to respond to the PAN. To find out that the work was for naught. What’s to be done?

If this happens to you, there is an administrative protest available to protect your rights as a taxpayer, in which you can raise legal and factual points. Anyway, once you find out you may need to repeat your arguments at the FAN stage, it takes away the stress of an unwarranted surprise.

The above are just a few of the many pointers I would give to those facing an audit. A totally “stress-free” BIR audit may be an unattainable dream, but at best, we can lessen the impact of the stress triggers if we have a prepared mind ready to react accordingly. Nonetheless, if you want to share your apprehensions on BIR audit with someone, you can call your tax consultant!

Olivier D. Aznar is a partner with the Tax Advisory and Compliance division of Punongbayan & Araullo.

As published in BusinessWorld, dated on 09 May 2017