A revisit on the BIR’s audit process and taxpayers’ defenses

One of the most commonly used phrases in Philippine taxation is that it is the lifeblood of the nation. It is the beating heart wherein the nation funds its projects whose benefits ultimately redound to its constituents. Hence, it is the duty of Filipino citizens to properly pay the taxes due. To ensure that taxes are properly filed and paid, one of the functions of the Bureau of Internal Revenue (BIR) is to examine the books and records of taxpayers. However, a BIR audit is not an easy pill to swallow.

The dreaded love letter of every taxpayer 

The BIR’s tax assessment starts with the service of a Letter of Authority (LOA). The LOA serves as a grant of authority by the Commissioner of Internal Revenue (CIR), or his authorised representatives, to examine the taxpayers’ books. Without the LOA, the BIR’s audit, no matter how proper and precise the legal and factual findings are, will be invalidated on the grounds of technicality. This is consistent with rulings held by the courts (Supreme Court and Court of Tax Appeals (CTA) in several tax cases.

Attached to the LOA is the checklist of requirements, which are essential for the information gathering of the BIR in the conduct of its audits. Taxpayers must comply with the request of the BIR examiners as indicated in the checklist of requirements to avoid being issued a subpoena duces tecum (SDT) and to maintain a healthy professional relationship with the BIR examiners. Most of the documents are submitted as softcopies. In case there are challenges in submitting the requested information to the BIR, such as due to the volume of documents, the taxpayers can coordinate to request the BIR examiners to conduct fieldwork on the taxpayers’ business premises.

The first set of findings 

After the examination, the BIR will issue a Notice of Discrepancy (NOD). Revenue Regulations (RR) No. 22-2020 provides that an NOD must be issued to taxpayers found to be liable for deficiency taxes during a tax audit. The NOD shall give the taxpayers and the BIR examiners the opportunity to discuss the initial results of the investigation and for the former to provide defenses and submit explanations. Based on the NODs issued by the BIR, the taxpayers must present explanations for the discrepancies within five days from the receipt of the NOD. However, the taxpayers may still submit additional documents and explanations after the discussion, but within 30 days from the receipt of the NOD.  The assessment may be closed if the taxpayers and the BIR reach a settlement at this stage. Otherwise, the BIR examiner will elevate the case for review and issuance of the Preliminary Assessment Notice (PAN).

The assessment notices 

The PAN should be issued first before the FAN, as provided under Section 228 of the Tax Code, as amended, which states that when the CIR or his duly authorised representative finds that proper taxes should be assessed, he shall first notify the taxpayers of the findings. 

Upon receipt of the PAN, the taxpayers have 15 days to reply in pursuance of RR No. 18-2013. Similar to the NOD, taxpayers have an opportunity to submit explanations, reconciliations, and supporting documents to the BIR examiners. If the BIR disagrees with the explanations and documents provided, a Final Assessment Notice (FAN)/ Formal Letter of Demand (FLD) will be issued, and wherein the taxpayers have 30 days to submit the protest letter. The taxpayers will either pay the deficiency taxes or proceed to protest the FAN/FLD. Failure to do either renders the assessment final and executory.

The exercise of the right to protest 

The protest letter should contain in detail the factual and legal defenses. The protest letter may be a request for reconsideration or a request for reinvestigation, involving a question of fact, law, or both. A request for reconsideration is a plea for re-evaluation of an assessment on the basis of existing records without the need for additional pieces of evidence. On the other hand, a request for reinvestigation is a plea for re-evaluation of an assessment on the basis of newly discovered or additional evidence.  Taxpayers must present additional evidence to the BIR within 60 days from the date of filing the protest. Failure to submit additional evidence on the 60th day after filing the protest will render the assessment final and executory.

The BIR issues a Final Decision on Disputed Assessment (FDDA) once it has reached a decision on the factual and legal defenses raised by the taxpayers. If the taxpayers disagree with the FDDA, an appeal can be filed with the CTA, or a motion for reconsideration can be filed with the CIR 30 days after the receipt of the FDDA. If the taxpayers choose the latter and the CIR’s decision denies the motion for reconsideration, the appeal may be brought to the CTA 30 days after the receipt of the decision.

The key takeaways 

In every stage of the BIR assessment process, it pays to create and maintain open communication with the BIR examiners, maximising the taxpayers’ right to due process. It therefore pays to know the taxpayers’ rights and the remedies available in cases of tax audits.

Being equipped with adequate knowledge of taxation goes a long way towards avoiding paying hefty deficiency taxes. More importantly, appropriate preparations prior to any tax audits prove to be advantageous. Regular internal tax compliance checks, for instance, help in rectifying errors before any tax audits.

The BIR and the taxpayers do share common ground. For the taxpayers, it is to ensure that they are filing and paying the proper amount of taxes on time. For the BIR, it is to ensure that the taxpayers remit the proper amount of taxes on time. At the end of the day, proper tax compliance will contribute to the nation-building of the Philippines with the BIR and the taxpayers working hand in hand.

As published in Mindanao Times, dated 10 December 2023