A tax audit is an examination of the taxpayer’s compliance with the tax system. It is defined as the verification and accuracy of income and deductions declared by the taxpayer. During tax audit, examinations and investigations on books and documents of the taxpayer are being conducted to find and correct, if any, errors, fraud, and deficiencies.
Tax audit aims to do the following: (a) ensures that the income and claims for deduction are correctly and accurately entered by taxpayers; (b) restricts the chance of fraudulent tax practices; (c) any increase in tax revenues increases the efficiency of tax administration; and (d) proper compliance of taxpayers with the tax system in Philippines contributes to an efficient government system.
On 30 May 2022, the BIR issued Revenue Memorandum Circular (RMC) No. 76-2022 to suspend the audit and other field operations pursuant to, and under authority of, all Task Forces created through Revenue Special Orders (RSOs), Operations Memoranda (OM), and Other Similar Orders/Directives. The RMC emphasized that no field audit, field operations, or any form of business visitation in execution of Letters of Authority/Audit Notices (LOAs) or Mission Orders (MOs) shall be conducted and that no written orders to audit and/or investigate taxpayers' internal revenue tax liabilities shall be issued and/or served by the said Task Forces relative to examinations and verifications of taxpayers' books of account, records, and other transactions. The said suspension shall take effect immediately until further notice.
A case-to-case review and evaluation of the necessity and progress of each Task Force shall be conducted by the Office of the Commissioner before they are allowed to resume their audit functions and field operations.
On the same day, BIR issued RMC No. 77-2022, to suspend all pending LOAs effective 30 May 2022 / MOs as of 30 May 2022 and submission of inventory thereafter. The RMC reiterated that no field audit, field operations, or any form of business visitation in execution of LOAs or MOs shall be conducted, nor any new LOA/MO shall be further issued. Moreover, no written orders to audit and/or investigate taxpayers' internal revenue tax liabilities shall be issued and/or served, except in the following cases:
- Investigation of cases prescribing on or before 31 October 2022;
- Processing and verification of estate tax returns, donor's tax returns, capital gains tax returns and withholding tax returns on the sale of real properties or shares of stocks together with the documentary stamp tax returns related thereto;
- Examination and/or verification of internal revenue tax liabilities of taxpayers retiring from business;
- Audit of National Government Agencies (NGAs), Local Government Units (LGUs) and Government Owned and Controlled Corporations (GOCCs) including subsidiaries and affiliates; and
- Other matters/concerns where deadlines have been imposed or under the orders of the Commissioner of lnternal Revenue.
However, the RMC clarified that service of Assessment Notices, Warrants, and Seizure Notices should still be in effect. Without securing authority from concerned revenue officials, taxpayers may voluntarily pay their known deficiency taxes.
The BIR provides procedures, as laid down by Section 228 of the National Internal Revenue Code of 1997, the conduct of BIR Audit: (a) the Notice of Discrepancy will be issued to the taxpayer for purposes of the Discussion of Discrepancy; (b) a Preliminary Assessment Notice (PAN) will be issued within ten (10) days from the conclusion of the Discussion, to which the taxpayer has a non-extendable period of 15 days from receipt of the PAN to submit a position paper against PAN; (c) Formal Assessment Notice (FAN) will be issued after the end of the 15 day period or within 15 days after the receipt by the BIR of the taxpayer’s reply to the PAN; (d) protest against the FAN may be submitted, either through a request for reconsideration or a request for reinvestigation, within 30 days from receipt of the FAN; (e) taxpayer will have to submit all the relevant supporting documents within 60 days from the date of actual filing of the protest against the FAN; (f) decision by the BIR on the protest to the FAN within 180 days from submission of the last supporting document (reinvestigation) or from the filing of the protest (reconsideration); (g) if the protest to the FAN is denied, the taxpayer has the mutually exclusive option to either Appeal (Petition for Review) the denial by the BIR to the Court of Tax Appeals (CTA) within 30 days from the receipt of the denial by the taxpayer; or Appeal (request for reconsideration) the denial by the BIR to the Commissioner of Internal Revenue (CIR).
On the other hand, if the protest is not acted upon (no decision) by the BIR by the end of 180 days, the taxpayer has the mutually exclusive option to either Appeal (Petition for Review) the inaction of the BIR to the CTA within 30 days from the expiry of the 180 day period; or wait for the decision of the BIR (allowed even beyond the 180 day period); (h) if the request for the Final Decision on Disputed Assessment (FDDA) is denied by the CIR within 180 days from the date of filing of the request, the taxpayer should appeal the denial issued by the CIR to the CTA within 30 days from the receipt of the denial. On the other hand, if the request is not acted on (no decision) by the CIR by the end of 180 days, the taxpayer has the mutually exclusive option to either Appeal (Petition for Review) the inaction of the CIR to the CTA within 30 days from the expiry of the 180 day period; or wait for the decision of the CIR (allowed even beyond the 180 day period); (i) if the request is denied (final) by the CIR even beyond the 180 day period, the taxpayer has 30 days from the receipt of the denial by the CIR to appeal (Petition for Review) the final decision of the CIR to the CTA.
As mentioned in the BIR Issuances above, the suspension of audit also gives advantages to taxpayers. This will give them more time to collate the documents and ease the burden of having to go on a face-to-face meeting with the BIR examiners in view of the social distancing brought by the pandemic. The BIR examiners will also not be loaded with too much paperwork to meet the deadline for the audit of the cases they are handling, which will help them gather more time for the audit and paperwork. However, this might also derail the tax system as it will result to more backlogs and eventually delayed resolutions of BIR Audits subject to the taxable year and audit cases mentioned in the BIR Issuances above. It will also pile up audits and will prolong the collections of the BIR, which will also disrupt the revenues of the government.
The pros and cons that will result by virtue of the issuance of the abovementioned Circulars will undeniably be prominent. The suspension of audit may be viewed as a disadvantage, as there are phases of the BIR examinations and audits that cannot be performed virtually as there is a need to physically examine the documents. As discussed, there will be more advantages that can be expected out of the said issuances, despite the disadvantages.
Adjusting to the new normal brought by the pandemic is really challenging. Taxpayers are still recovering and adjusting to this new normal. Nevertheless, we need to put our faith in our Tax System that the government is doing its best for the country. After all, the BIR aims to ease off on taxpayers and not add to this burden.
Shirley Marie D. Cada is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG RGM&Co.
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