Strict rules on BIR audits
The receipt by a taxpayer, especially the corporate type, of a Letter of Authority (LoA) from the Bureau of Internal Revenue (BIR) often raises alarm bells.
The LoA is an official document from the BIR that empowers a revenue officer to examine the books of account and other records of a taxpayer to see if it has filed accurate tax returns.
A recent decision of the Supreme Court in “Commissioner of Internal Revenue (CIR) vs. Marilyn Development Corp.” underscored the obligation of the BIR to strictly comply with the formal requirements of that document.
In a nutshell, the case involves the audit and assessment of the company of some P8 million for alleged unpaid taxes in 2006. The company questioned in the Court of Tax Appeals the lack of a LoA prior to the assessment and the validity of the assessment made.
Apparently confident that it had a strong case, the BIR did not present any evidence and witnesses at the trial.
Wrong move.
The tax court cancelled the assessment after it had found out that no evidence was presented to show that the examination of the company’s books was authorized through LoA, and that the assessment breached the three-year prescriptive period on assessment of deficiency taxes.
In its motion for reconsideration, the BIR said there was no need for it to present the LoA in court because it enjoys the presumption of regularity in the performance of official duties and the presumption of correctness of its tax assessments.
The case went through the entire appeal process and eventually found its way to the high court for final resolution.
At the outset, the high court called the BIR’s attention to its inadequate handling of the case. (Ouch!)
It ruled that: “… the power to authorize the examination of a taxpayer is lodged solely with the CIR. This power is not extended to all BIR personnel. Recognizing this statutory limitation on the power of assessment, the Tax Code allows the CIR and the Revenue Regional Director to delegate the authority to assess to Revenue Officers through a LoA.”
With regard to the argument of regularity in the performance of government duties, it court stated, “there is no presumption that a Revenue Officer is authorized to issue assessments. The importance of the LoA cannot be understated.”
Thus, if the BIR conducts an audit without that document or in excess of the authority provided in it, the resulting assessment will be void and ineffectual.
And that’s because “… the issuance of a LoA is part and parcel of the taxpayer’s right to due process … and that a valid LoA is a jurisdictional requirement for an assessment.”
Another issue that the high court passed upon was the prescriptive period on the assessment of deficiency taxes on a taxpayer.
Under the Tax Code, that authority prescribes in three years from the filing date of the tax return or from the date of actual filing, whichever comes later. But in case of a false return, fraudulent return with intent to evade tax or failure to file a return, the assessment may be made within 10 years from the discovery of the falsity, fraud or omission.
The high court said this statute of limitations on assessment and collection of taxes was intended for the benefit and protection of taxpayers against unreasonable and protracted investigations.
At the same time, it is aimed at pushing the BIR to conduct its audit and assessment of delinquent taxpayers as soon as possible to ensure that taxes are promptly and efficiently collected to fund the financial needs of the government.
The high court said that since prescription is a matter of defense, “the taxpayer must positively establish the date when the period started running and when the same was fully accomplished.”
After giving this lecture, the high court returned the case to the tax court for it to verify the actual dates of filing of the company’s tax returns so it can decide on whether or not the deficiency tax assessments had prescribed.
