Unverified third-party data in BIR assessments

A month after President Duterte line-vetoed the general tax amnesty provision of the Tax Amnesty Act of 2019, taxpayers who have long anticipated a clean slate with the Bureau of Internal Revenue (BIR) are once again confronted with the question of whether to expect rigorous tax audits by the BIR.

With the BIR’s collection goal of P2.33 trillion this year, tax audits can be expected.

I cannot blame taxpayers who had hoped for a general tax amnesty as a saving grace from burdensome tax audits and unreasonable assessments. Most tax assessments in the past were based on mere presumptions. As a result, the initially assessed amounts were often exorbitant and incredible, while the taxpayers suspected that many BIR examiners were exploiting the presumption of regularity in performing their functions.

In the recent case of Ayala Property Management Corp. vs. Commissioner of Internal Revenue, Court of Tax Appeals (CTA) Case No. 9298 dated Jan. 21, this year, the CTA again invalidated the income tax assessment over the failure of the BIR to verify the third-party information it used with externally-sourced data. The alleged unaccounted income, based on the differences that resulted from the BIR’s matching of the taxpayer’s Summary List of Sales (SLS) and the third parties’ Summary List of Purchases (SLP), were not actually verified by the BIR with the each of the third parties. Considering that the team that conducted the tax audit did not verify, validate, or confirm the third-party information, the CTA cancelled the related tax assessment alleged by the BIR.

The decision on this recent CTA case could be linked to previous Supreme Court (SC) rulings relevant to the issue. The SC had ruled that “the presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption; hence, assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be” (Collector of Internal Revenue vs. Benipayo, G.R. No. L-1365 ending Jan. 31, 1962). In another case, the SC again emphasized that “prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without factual basis, meaning it is arbitrary and capricious. Where the BIR has come out with a ‘naked assessment’ i.e., without any foundation character, the determination of the tax due is without a rational basis” (Commissioner of Internal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975 dated March 3, 2005).

Despite the pronouncements of the Courts, many taxpayers still find revenue examiners issuing assessments that are based on third-party information-matching without the BIR’s supporting proof of further verification. On the part of taxpayers, when faced with alleged differences presented to them by the BIR that arose from the unverified third-party information matching, they exert herculean efforts and use extensive time and resources to reconcile such “unverified” alleged differences to avoid dispute with and hostility from BIR examiners. Taxpayers believe the BIR’s approach of using unverified third-party information is unfair and biased, as the BIR appears to presume that such third-party information is correct, as against the data of taxpayers being audited by the BIR. Consequently, an unwarranted burden is being passed on to taxpayers.

The BIR could have taken a different approach to avoid unnecessary disruption on the part of taxpayers. In particular, the BIR examiners could be reminded that it is still incumbent on them to review and verify further the third-party information they use in BIR assessments before they can allege that any deviation from such data is wrong and should be treated as a tax deficiency. In doing so, the unnecessary and unfair burden on the taxpayers will be avoided.

Certainly, on the part of the BIR, there are laudable objectives and benefits to the third-party information matching. With the innate limitations of the process, however, taxpayers hope that the BIR is the first to recognize that greater diligence and utmost prudence are required whenever it assesses using third-party information matching as a basis.

The presumption of correctness of a tax assessment is a long-standing principle of taxation. Indeed, there are merits to upholding the presumption of correctness of the tax assessment of the BIR. However, when the taxpayer’s paramount right to property is at risk, significant reliance on such a presumption must take a back seat. After all, we could take the word of the Supreme Court on the matter: “The power of taxation should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.”

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. Even though careful effort has been exercised to ensure the accuracy of the contents of this article, it should not be used as the basis for formulating business decisions. Government pronouncements and laws, especially on taxation, as well official interpretations, are all subject to change. Matters relating to taxation, law, and business regulations require professional counsel. The view and opinions expressed herein are those of the author and do not necessarily represent the views of and opinions of P&A Grant Thornton or Grant Thornton International.

Farrah Andres-Neagoe is a senior manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please email

As published in BusinessWorld, dated on 12 March 2019