In the Philippines, the taxpayer is deemed responsible for tax compliance and is expected to know which taxes should be paid, how and when to pay them, and by what means he can comply with the required reports. The Bureau of Internal Revenue (BIR) acts as the tax authority with the right to conduct tax assessments and examinations to determine compliance of taxpayers.
Facing a BIR tax audit can be quite daunting, especially if you’re an entrepreneur and to survive it, the first thing you need to do is familiarize yourself with the procedures.
Below is an overview of the steps included in the due process of BIR tax assessments.
Letter of Authority (LOA)
The LOA authorizes a specific Revenue Officer (RO) of a Tax Assessment Group to conduct the tax examination. It tells you which tax types, as well as the specific taxable year, that would be examined.
This is normally served within thirty (30) days from date of issuance and usually accompanied by a request for documentation.
Documentation and Sub Poena Duces Tecum
You’ll be required to present the documents listed on the request sent together with the LOA and will serve as the basis for the RO’s tax examination. Failure to show necessary papers, a Second Request will be forwarded. If you still fail to submit after this, a Sub Poena Duces Tecum will be issued, which will mandatorily require you to provide the documents within a particular time and place.
Failure to obey the subpoena is a ground for criminal prosecution. The Prosecutors Office will determine probable cause and may file an action in the Criminal Court for your prosecution.
Preliminary Assessment Notice
Under the old rules in RR-12-99, the next step would be the issuance of the Notice for Informal Conference. However, under the new regulations, this step has been deleted. Instead, the process goes directly to the issuance of the Preliminary Assessment Notice (PAN), which will state the findings of the tax assessment conducted.
At this stage, you may choose to pay your deficiency taxes or file a protest within fifteen (15) days. The protest must state your disagreements regarding the findings, along with its basis in terms of facts and law.
Formal Letter of Demand and Final Assessment Notice (FLD/FAN)
The Final Assessment Notice – Formal Letter of Demand (FAN-FLD) will be issued by the BIR within fifteen (15) days upon issuance of the PAN. You’ll then have a choice between paying the deficiency taxes in the FAN-FLD and filing a protest.
Your protest must be filed within thirty (30) days from receipt of the FAN-FLD and must contain factual and legal basis for your protest. Complete supporting documents must be submitted within sixty (60) days from filing your protest.
In your protest, you must dispute all alleged finding/s on deficiencies. Any item that has not been discussed will become final and executory, and would require paying the amount upon filing your protest.
BIR Final Resolution
The BIR may grant or deny your protest through formal communication such as a Final Decision on Disputed Assessment (FDDA) or a Preliminary Collection Letter (PCL). Both cases mean you have lost your case at the administrative level.
Court of Tax Appeals (CTA)
You may file an appeal through a Petition for Review with the Court of Tax Appeals Division within thirty (30) days from receipt of the final resolution. If you lose at this stage, you can file a Motion for Reconsideration (MR) within fifteen (15) days with the Court of Appeals – En Banc. If you still lose the case, proceed to the next step.
Supreme Court (SC)
File an appeal through a Petition for Review with the Supreme Court Division within thirty (30) days from receipt of the final resolution. If you lose, file an MR with the Supreme Court – En Banc within fifteen (15) days from receipt of the decision.
Finality and Settlement
After the SC – En Banc has made its final decision, or when the tax assessment is final and executory, you have to pay the assessment in full including the interest and penalties. If you’re incapable of doing so, you can apply for a compromise settlement based on your financial incapacity.
Going through a BIR tax audit need not be a scary ordeal. You just need to understand the processes and at the same time have an expert, such as a tax lawyer to help you out.
If you’re not yet in this predicament though, you can avoid tax assessments by ensuring that your filings, such as your business registration requirements and tax payments are properly filed at the get go.
About the author: Danella Yaptinchay is the managing director of Full Suite, a service company providing back end support to small businesses. She is the cofounder of Co.lab, a coworking space, and of the media company Homegrown. In constant pursuit of balance and self-development, she tries to apply the practices of yoga to her daily life.