Briefer on Tax and Customs Audit Processes
By Mark Anthony Tamayo on December 30, 2021
Last of a series
In last week’s article, we briefly compared Bureau of Internal Revenue (BIR) and Bureau of Customs (BoC) audits. Further differences are highlighted here.
Audit timeframe
The BIR and the BOC are mandated to complete their audits within 120 days, respectively reckoned from the date of receipt of a letter of authority (LOA) by the taxpayer or the audit notification letter (ANL) by the importer-auditee. The BIR audit is generally deemed completed upon submission of BIR report of investigation, whereas the BOC audit is deemed completed once the final audit report (FAR) is available.
In the case of AFP General Insurance Corp. v. CIR, GR No. 222133 (2020), the Supreme Court ruled that the failure to comply with the 120-day rule does not ipso facto void an LOA ab initio. The expiration merely renders an LOA unenforceable since the revenue officer must first seek ratification of his expired authority before he can resume his audit beyond the 120 days.
In other words, any extended audit must be preceded by a proper LOA revalidation. Otherwise, the taxpayer can validly resist further investigation. Failure to raise this supposed violation can be considered acquiescence to an extended audit.
Assessment validity
Procedures for the issuance of assessments are defined under pertinent rules and regulations issued by the BIR (Revenue Regulations 12-1999, as amended by RRs 18-2013, 7-2018, and 22-2020) and the BOC (CAO 1-2019). In line with the constitutional mandate of the right to due process, substantial and procedural requirements are spelled out in the performance of audit investigations.
Among others, a valid assessment must be in writing and signed by the BIR or BOC authorized signatory. It should also contain the law and facts on which the assessment is based.
The law mandates that the bases must be reflected not only in the formal assessment notice (FAN), but also in the preliminary assessment notice (PAN), final letter of demand (FLD), and the final decision on the disputed assessment. Where fraud is invoked, the factual basis must also be stated and communicated to the taxpayer. (CIR v. Spouses Magaan, G.R. No. 232663 (2021).
The above requirement is mandatory and cannot be presumed. It enables the taxpayer to make an effective protest or appeal of the assessment or decision. (Bac-Man Geothermal Inc., v. CIR, CTA Case No. 9728, (2021). Non-compliance will render the assessment void.
A valid assessment must also contain a demand for payment within the prescribed period. A clear and definite statement of the amount payable and the due date of payment in the FLD accompanying a FAN is essential. The due date signals the time “when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies.” (CIR v. Fitness by Design Inc., G.R. 215957, (2016); CIR v. Pascor Realty, G.R. No. 128315 (1999). An FLD that requires the adjustment of the interest if paid beyond the date specified therein is insufficient and indefinite (URC v. CIR, CTA Case 9530, (2020).
Lastly, a valid assessment should be served upon and received by the taxpayer. If the taxpayer denies receipt of an assessment from the BIR, the latter has to prove that such was indeed received by the former. (10K South Concrete Mix Specialist, Inc., v. CIR, CTA Case No. 9730 (2021)
Compliance or noncompliance with the above requirements ultimately determines the validity of the assessments issued either by the BIR or BOC.
Period to contest
Assessments are formalized through the issuance of an FAN by the BIR or through an FAR issued by the BOC. Accompanying the FAN and the FAR are their respective FLDs.
The FAN and FAR may be contested administratively by filing either a protest requesting for a reconsideration (a plea for re-evaluation based on existing records) or requesting for a reinvestigation (based on newly discovered or additional evidence). Otherwise, the protest may be considered invalid and thus without force and effect. (HR Mall, Inc. v. CIR, CTA Case No. 9981 (2021))
The protest should be filed within 30 days (for a BIR FAN) or 15 days (for a BOC FAR) from receipt thereof. Otherwise, the final assessment issued becomes final and executory and the BIR or the BOC can then enforce collection.
For requests for reinvestigation, the protesting taxpayer can have another 60 days (30 days for the BOC) from the filing of the original protest letter to submit all relevant supporting documents in support of its position (supplemental protest letter). This additional period, however, is not available in a request for reconsideration.
The BIR then has 180 days (60 days for the BOC) within which to decide on the protest, reckoned either from the filing of the protest letter (in case of a reconsideration) or from the filing of the supplemental protest letter (in case of a reinvestigation).
Penalties
BIR civil penalties include a 25-percent surcharge (50 percent for fraud cases), 12-percent interest per annum, and a compromise penalty. For willful attempts to evade income taxes, the fine imposable is between P500,000 and P10 million. Imprisonment will range from six to 10 years upon conviction thereof. (RR 13-2021)
In comparison, BOC penalties, after post clearance audit (PCA), include a 125-percent administrative fine based on the revenue loss in cases of negligence. For fraud cases, the penalty is 600 percent and possible imprisonment of two to eight years shall be imposed.
The imposition of a 20-percent interest in a PCA is a highly contested issue. Interpreting Sections 104 and 429 of the Customs Modernization and Tariff Act, interest should only be imposable if the assessment has already been due and demandable as a result of the failure by the importer-auditee to file a protest or settle the deficiency within the 15-day period.
On behalf of MTF, we wish everyone a great and prosperous new year.
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Mark Anthony P. Tamayo is a CPA-lawyer and a partner of Mata-Perez, Tamayo & Francisco (MTF) Counsel. He is a recipient of the 2016 Asia Tax Practice Leader award by the International Tax Review, and the Tax Expert of the Year in the Philippines award conferred during the Leaders in Law – 2021 Global Awards. The contents of this article are not a substitute for professional advice where specific circumstances warrant. If you have any questions or comments, email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.