Written by Cresencio T. Meneses I, 1 August 2008
In numerous instances, this author has encountered the worries and concerns of clients which have been issued a Letter of Authority that signals the start of a formal tax investigation.
The worries and concerns primarily arise because of the lack of information on the tax investigation process, although even seasoned clients still feel the pressure of complying with the numerous requests for documents and schedules that the investigating revenue examiner may require.
To allay the fears of our clients, we normally provide a general explanation of the tax investigation process.
The time taken to educate a client is worthwhile since it makes them more prepared to face the rigors of the investigation process. With the heightened tax investigations brought about by the revenue collection efforts of the government, this author believes that it is worthwhile to explain again the process to the general public under Section 228 of the National Internal Revenue Code of 1997 (the Tax Code) and Revenue Regulations No. 12-99.
A normal tax investigation usually starts with the issuance of a Letter of Authority (LoA) which is issued by the Revenue District Office that has jurisdiction over the taxpayer.
The LoA expires after 120 days, although the same may be renewed by the tax authorities for one year.
While, technically, a defect in the LoA (i.e. the 120-day period has already expired) may be ground to invalidate it, as a matter of practicality, this issue has seldom been actively pursued because of the ease of having the LoA revalidated.
After the tax investigation process has been finished, the Bureau of Internal Revenue (BIR) should issue a Notice of Informal Conference to allow discussions on the results of the tax investigation within a fifteen-day period from receipt by the taxpayer of the notice. The form and timing of this notice, however, has varied among district offices, adding to the confusion experienced by taxpayers.
Should there be any remaining tax issue/s (which normally is the case), the revenue district office transmits the docket to the Assessment Division of the region for the issuance of a Preliminary Assessment Notice (PAN).
With respect to the PAN, taxpayers are required to submit a written position paper within 15 days from receipt of the PAN. Otherwise, the assessment becomes final and executory.
In this respect, there are no clear-cut rules on the contents of the position paper, but this author recommends that if there are supporting documents, these should form part of the attachments.
Finally, if the issues remain unresolved, the Assessment Division of the region will issue a Formal Assessment Notice (FAN), which is sometimes denoted as Formal Letter of Demand. Under Revenue Regulations No. 12-99, the FAN should state the facts and the law upon which the assessment is based.
Normally, taxpayers have reasonably questioned the validity of the FAN because of one-line general statements of the bases of the assessments, which do not provide actual details which would allow the taxpayer to contest the assessments.
Given the presumption of regularity of functions of government officials, however, the courts have generally struck down this contention and have considered taxpayers as being adequately informed of the nature of the tax assessments, unless even the general one-line statements are missing altogether.
In response, taxpayers are given a period of 30 days within which to file a formal protest letter. In addition, taxpayers are also given a period of 60 days from the filing of the protest letter to submit all relevant documents.
What becomes problematic in this instance is the determination of what constitutes relevant documents since the Tax Code and the regulations do not provide an enumeration.
In several court decisions, the determination of what are relevant documents have been left to the discretion of the taxpayer, although the final decision on the sufficiency of the documents still lies with the BIR.
In a 2008 decision, the Court of Tax Appeals emphasized that relevant supporting documents must be submitted within the 60-day period and the mere filing of supplemental letters without any attached documents is not sufficient.
After the filing of the protest letter or the last day of the filing of the relevant supporting documents, the BIR has 180 days within which to render a decision on the protest letter.
Upon the rendering of the final ruling by the BIR or the lapse of the 180-day period, taxpayers have 30 days within which to file a Petition for Review with the Court of Tax Appeals (CTA), in order to avail of the judicial remedies against the assessments.
In a 2007 Supreme Court decision, the High Court held that the filing of the Petition for Review and the BIR decision are mutually exclusive of each other. Thus, if a taxpayer files a Petition for Review after the lapse of the 180-day period, and a final decision which is not favorable to the taxpayer is later issued by the Commissioner of Internal Revenue, the taxpayer can no longer turnaround and appeal the said final decision to the CTA.
As can be seen from the discussion above, the nuances of the tax investigation process are not simple and straightforward. There are a lot of factors involved, including the amount of discretion on the part of the revenue examiners.
In order to make the process more manageable by taxpayers, however, there is a need to educate the taxpayers, something which the BIR can look at as part of their overall tax campaign strategy.
