A review of 2022 court decisions on due process in tax assessments
By Euney Marie Mata-Perez on January 5, 2023
HAPPY New Year everyone! In our first article of the year, we revisit the basic tenet of due process in tax assessments as upheld by numerous court decisions in the year 2022.
While taxes are the life blood of a nation, and taxpayers have the duty to pay their taxes correctly, the government or the state, in turn, has the obligation to respect the rights of taxpayers, especially their right to due process of law.
The Supreme Court has held that while the government has an inherent interest in the swift collection of taxes, the Bureau of Internal Revenue (BIR) and its officers and agents cannot be overreaching in their efforts. They must perform their duties in accordance with law and with their own rules of procedure, and always with regard to the basic tenets of due process. (Commissioner of Internal Revenue v. Avon Products Manufacturing Inc., GR 201398-99, Oct. 3, 2018)
As mandated by our National Internal Revenue Code (Tax Code), taxpayers must be properly informed of the facts and law of the assessment to enable them to defend against the assessment; otherwise, the assessment is void. (Section 228)
In administrative proceedings, “due process” means an opportunity to explain one’s side or an opportunity to seek a reconsideration of the action or ruling complained of.
It is important to note that as held by the Supreme Court, the right to due process reaches both substantial and procedural rights. (People of the Philippines v. Court of Tax Appeals-Third Division and William Villarica, GR 248802, June 21, 2021, uploaded Feb. 23, 2022) Thus, the right should be respected and protected.
When due process deemed violated, as held by the courts in 2022
In recent decisions, our Court of Tax Appeals (CTA) held that it must be shown that the BIR has properly “considered” the taxpayers’ arguments in their replies to the BIR’s assessments. Thus, the BIR’s mere re-issuance of its assessments almost verbatim and merely reiterating or echoing the same findings, without giving any reason for rejecting the taxpayers’ arguments and explanation, constitutes a violation of due process. (Atlas Precision Environment Corp. v. Commissioner of Internal Revenue [CIR], CTA Case 9043, March 30, 2022; CIR v. Rural Bank of Bacnotan, CTA EB 2436, July 28, 2022). Although the CIR is not obliged to accept a taxpayer’s explanation, he or she must give some reasons for rejecting these explanations and must state particular facts upon which his or her conclusions are based, and those facts must appear on record.
In this regard, the issuance of a final assessment notice (FAN) before the expiration of the 15-day period given to the taxpayers to reply to the preliminary assessment notice (PAN) is premature and violates due process. In other words, the CIR or his duly authorized representative is duty bound to wait for the expiration of the 15-day period from the taxpayer’s receipt of the PAN before it can issue a FAN and the accompanying formal letter of demand. (CIR v. Solutions Using Renewable Energy Inc., CTA EB 2387, June 23, 2022). Consequently, the issuance of the FAN and FLD before the expiration of the 15-day period violates the taxpayer’s right to due process even if the taxpayer was able to submit a “well-prepared protest letter.” (Prime Steel Mill vs. CIR, GR 249153, Sept. 12, 2022)
Therefore, the issuance of both the PAN and the FAN on the same day violates due process. (People of the Philippines v. Errizaro Shoe Corp., CTA Criminal Case 0-704, Sept. 28, 2022)
Proper letters of authority (LOAs) must also be served on taxpayers. LOAs give notice to the taxpayer that it is under investigation for possible deficiency tax assessment. Also, it authorizes or empowers a designated revenue officer to examine, verify and scrutinize a taxpayer’s books and records, in relation to its internal tax liabilities for a particular period.
Thus, the practice of reassigning or transferring revenue officers originally named in a LOA and substituting them with the new officers to continue the audit or investigation without a separate or new LOA violates the taxpayer’s rights to due process. (CIR v. McDonald’s Philippines Realty Corp., GR 242670, May 10, 2021; CIR v. Montalban Methane Power Corp., CTA EB 2170, March 30, 2022; CIR v. Red Ribbon Bakeshop, CTA EB 2491, Sept. 2, 2022; Concepcion Industries Inc., v. CIR, CTA Case 10305, Nov. 24, 2022)
Adherence to due process in assessments is also crucial in the pursuit of the civil aspect of the criminal case for tax evasion under the Tax Code (People of the Philippines v. Court of Tax Appeals-Third Division and William Villarica, supra). Accordingly, the collection of deficiency tax cannot be made in the criminal case, without a formal assessment issued pursuant to a proper service of the LOA. The courts recognized the limited purpose of the criminal action on tax evasion, and for this reason, held that there must be a final determination of the deficiency tax liability through a formal assessment before it can be included in the criminal case. (People of the Philippines v. Tiotangco, CTA EB 086, June 9, 2022; see also People of the Philippines v. Active Travel and Tours Inc., et. al., CTA Crim Case O-737 and O-738, Sept. 22, 2022).
Assessment notices must also be properly served. The Supreme Court has held that for the service of a notice of assessment to be valid, it must not only be proved that the same was sent or served, but that the same was received as well. (CIR v. Fitness by Design Inc., GR 215957, Nov. 9, 2016; CIR v. T Shuttle Services, GR 240729, Aug. 24, 2020). If the BIR fails to prove that the notices were properly received by the taxpayer, the assessment is invalid. (People of the Philippines v. Cosco Petroleum Co. & Michael Cosay, CTA Crim Case O-804, Sept. 21, 2022).
As shown in all the foregoing, the observance of the right to due process is primordial and the lack and disregard of it is fatal in tax assessments. Thus, the BIR must observe, and taxpayers must be cognizant and vigilant of, this right.
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Euney Marie J. Mata-Perez is a CPA-lawyer and managing partner of Mata-Perez, Tamayo and Francisco (MTF Counsel).