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By: Nica Marsha Gasapo on March 12,2020

The proper issuance of a letter of authority (LOA), which is a written official authority issued by the Bureau of Internal Revenue (BIR) to its representatives to conduct a tax audit, is a strict legal requirement for the validity of a BIR tax assessment. The LOA informs the taxpayer that an audit or examination of its books of account will be conducted by the BIR through the authorized representatives specifically named therein. Without a valid LOA, an assessment is void for violating the taxpayer’s right to due process of law. In this article, we will discuss recent rulings of the Court of Tax Appeals (CTA), as well as common issues involving LOAs, memoranda of assignment, “revalidation or reassignment notices” and the like.

In Orient Overseas Container Line Ltd. vs CIR (CTA Case 9179, Aug. 2, 2018), the CTA held that only those BIR officials authorized to issue an LOA can modify or amend a previously issued LOA. The CTA ruled that an “OIC-Chief of BIR Large Taxpayers Service Regular Large Taxpayers Audit Division II” not having been duly authorized by the Commissioner of Internal Revenue (CIR), is bereft of any power to authorize the examination of the taxpayer or to modify or amend a previously issued LOA. Thus, the memorandum of assignment that was signed by the said “OIC-Chief of BIR Large Taxpayers Service Regular Large Taxpayers Audit Division II” did not validly authorize the revenue officers to whom the audit or examination of taxpayer’s accounts was transferred.

In recent cases, the CTA emphasized that a valid LOA is necessary in an assessment case, and that any assessment carried out without a previously issued valid LOA is void.

The CTA has also consistently held that, in case of continuation by another revenue officer of the audit examination of the taxpayer’s books or reassignment of such audit to another revenue officer, a new LOA must be issued. This new LOA must name the new revenue officers who will continue the audit or to whom the audit will be reassigned. Thus, in a recent ruling, the CTA held that the assessment was void due to lack of authority of the revenue officer who conducted the audit or investigation of the books of the taxpayer. In this case, the revenue officer who continued and completed the conduct of audit or investigation of the taxpayer’s books of account only had a revalidation or reassignment notice, and no new LOA was issued to authorize the new revenue officer to conduct the audit or investigation.

Also, the CTA held that the revenue officers identified in a memorandum of assignment, who were not named in a previously issued LOA and not armed with any LOA at all, are not authorized to conduct an audit. The CTA concluded that the revenue officers in the memorandum of assignment had no authority to conduct the audit, and thus, the assessment was void.

The rule is that, unless authorized by the CIR, himself or his duly authorized representative, through an LOA, an examination of the taxpayer cannot be validly undertaken.

Further, the practice of issuing a memorandum allowing a revenue officer to continue the audit commenced by another revenue officer is not equivalent to issuing an LOA. The issuance of the said memorandum does not cure the lack of authority of the revenue officer who conducted the audit or investigation.

This reiterates an earlier ruling where the CTA declared that an ordinary letter to the taxpayer or a memorandum of assignment is not a valid substitute for an LOA to authorize the revenue officer to examine a taxpayer’s books of accounts.

This view was also taken by the CTA en banc in another case wherein the CIR argued that the authority of a subsequently assigned revenue officer to audit and examine a taxpayer’s books of accounts and other accounting records does not originate from the memorandum referral or memorandum of assignment, but rather from the previously issued LOA.

According to the CIR, the memorandum of assignment was issued merely for the continuation of the audit of the taxpayer’s books for that particular taxable year. The CTA en banc emphasized that a revenue officer cannot examine a taxpayer or recommend the assessment of any deficiency tax due in the absence of an LOA. Also, the CTA en banc, citing the BIR’s own policy guidelines, particularly Revenue Memorandum Order 43-90, held that the reassignment or transfer of cases to another revenue office shall require the issuance of a new LOA.

Taxpayers should be aware that a properly issued LOA is an essential requirement of a valid tax assessment.

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