Briefer on Tax and Customs Audit Processes
By Mark Anthony Tamayo on December 23, 202
First of a series
Recently, the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) respectively issued Letters of Authority (LOAs) and Audit Notification Letters (ANLs) to selected taxpayers and importers. It may thus be the most propitious time to revisit the BIR and BOC audit processes and procedures in light of the revenue-generating agencies’ aggressiveness.
LOAs and ANLs essentially empower revenue officers to conduct investigations and to examine and scrutinize particulars reflected in the taxpayers’ and importers’ previous returns and/or customs entry declarations. The end goal is to uncover any short payments or deficiencies that could result in more government revenue collections.
Based on jurisprudence, BIR and BOC assessments are generally accorded the presumption of correctness and of being made in good faith (Marcos II vs. Court of Appeals, GR. No. 120880). The presumption proceeds from the principle of presumption of administrative regularity in the performance of public functions. Every reasonable intendment will be made in support of the presumption and considerable deference will be afforded, subject to de novo review by the tax court, to determine if the deficiency findings are indeed supported by substantial evidence.
In the conduct of an audit, the due process requirements must strictly be complied with.
Period to assess and audit coverage
The period for the BIR and BOC to assess is generally three years. In cases involving fraud, the period to assess is 10 years from discovery thereof.
The three-year period for the BIR to assess a taxpayer is reckoned from the date the tax return was filed or the last day prescribed by law for the filing of such return, whichever is later. For the BOC audit, this is counted from the date of final payment of duties and taxes or customs clearance, as the case may be.
The coverage of a BIR audit per LOA is only one taxable year (Revenue Memorandum Order 57-2016). The practice of issuing LOAs covering audit of “unverified prior years” is prohibited. (CIR v. Sony Philippines, Inc. G.R. No. 178697)
In contrast, the default coverage of a BOC audit is three years counted backward from the date of the ANL. The audit is undertaken by the agency’s Post-Clearance Audit Group (PCAG).
Audit process
In a BIR tax audit, the process commences with the issuance of an LOA. The LOA must be served (i.e., personal service, registered mail, or through substituted service) within 30 days from the date of issuance (subject to revalidation) and must also be received by the taxpayer. Non-compliance with these requirements will make assessments issued thereafter a complete nullity.
The next step is the issuance of a Notice of Discrepancy (NOD) required under Revenue Regulations (RR) 22-2020. The purpose of the NOD is to inform the taxpayer of initial findings noted by the BIR during their investigation. Taxpayers are allowed to present and explain the alleged discrepancies with relevant supporting schedules and documents within 30 days from the receipt of the NOD.
If the BIR maintains its position despite the documents and arguments submitted by the taxpayer, the investigating office will endorse the case to the reviewing office in the National Office (or Revenue Regional Office) for the issuance of the Preliminary Assessment Notice (PAN). Subject to certain exceptions, the issuance of a PAN is a substantive requirement in order to inform the taxpayer, as part of due process, of the facts and the law upon which the assessment is made (Commissioner of Internal Revenue v. Metro Star Superama, GR No. 185371).
A Formal Assessment Notice (FAN) and a Demand Letter will then be issued if the BIR finds no basis to cancel the findings or the taxpayer fails to respond to the PAN.
In comparison, a BOC post-clearance audit is triggered by the issuance of an ANL served within the same 30-day period to the importer by personal service, registered mail, or through electronic notice. Together with the ANL, an attached list of requested documents and a customs questionnaire (which must be accomplished) are sent to the importer-auditee for compliance.
The PCAG (after preparing an audit plan) will then schedule a date of the field audit where PCAG officers will verify and validate accounting, financial, and other import data. Under the rules, the audit should be scheduled no later than 60 calendar days from when the ANL was served. This period may, however, be extended for another 30 days if the importer-auditee manifests an intention to avail of the Prior Disclosure Program (PDP), files the PDP application, and tenders payment (of the disclosed exposure) within 90 days (see also TMT article “Highlights of the new BOC audit rules” dated Jan. 25, 2019).
The filing of a PDP will not necessarily prevent the PCAG from continuing the audit investigation. Under Customs Administrative Order 1-2019, the audit must be completed within 120 calendar days (subject to a maximum extension of 30 days) per year of the audit period from the date the importer receives the ANL.
Should there be additional findings of deficiency duties and taxes during the field audit, the BOC will serve, by registered mail or personal service, a Final Audit Report (FAR) with a Demand Letter (signed by the BOC Commissioner). The FAR and Demand Letter will inform the importer-auditee to pay the deficiencies within 15 calendar days from receipt thereof. It is also within this period where audit findings can be protested by filing a Request for Reconsideration or Request for Reinvestigation.
In next week’s article, the author will discuss the timeframe within which to conduct an audit, the penalties imposable, as well as remedies on the part of the taxpayers and importers. On behalf of MTF, we wish everyone a season of great joy and countless blessings.
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Mark Anthony P. Tamayo is a CPA-lawyer and a partner of Mata-Perez, Tamayo & Francisco (MTF) Counsel.