The problem with the presumption of correctness of assessments
By: Atty. Euney Marie Mata-Perez on April 13,2023
TAX assessments by tax examiners are presumed correct and made in good faith (Cagayan Robina Sugar Milling Co. v Court of Appeals, 342 SCRA 663, Oct. 12, 2000). It is the taxpayer and not the Bureau of Internal Revenue (BIR) who has the duty of proving otherwise. Regardless of such presumption, our National Internal Revenue Code (Tax Code) is clear that assessments should be made based on facts and law, and not just based on presumptions or baseless assumptions (Tax Code, Sec. 228).Thus, in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. The failure of the taxpayer to satisfactorily overcome the presumption of regularity and correctness of the assessment will justify a judicial upholding of an assessment notice (Cru Concepts Inc. v CIR, CTA Case 9389, Oct. 19, 2019).The presumption of correctness of tax assessments (the Presumption) stands on the shoulders of two basic doctrines of law. The first is the lifeblood doctrine, which states that the government can neither exist nor endure without taxation, and that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. The second is the doctrine of presumption of regularity in the performance of official duties which is necessary in order to aid the effective and unhampered administration of government functions.
The Presumption is likewise premised on the likelihood that the taxpayer will have access to relevant information and evidence to overturn the presumption, on account of the self-assessing system of internal revenue taxation and on the BIR’s desire to bolster the record-keeping requirements of the Tax Code (CIR v Spouses Magaan, GR 232663, May 3, 2021).Although the Presumption is based on sound doctrines, it has, at many instances, encouraged an overbearing reliance on such Presumption. It has thus resulted in instances where taxing authorities would sacrifice credibility and accuracy for the sake of expediency and collection targets in making assessments, leaving taxpayers with the heavy burden of proving the incorrectness of assessments. And that is not without costs to taxpayers.It should be emphasized, though, that the Presumption is not conclusive and may be disputed and overturned with proof that the assessment is without foundation, arbitrary and capricious. Accordingly, the courts have, on numerous occasions, set aside tax assessments which are not based on actual transactions or facts, but on “estimates based on best possible sources.”In CIRvs. Benipayo (4 SCRA 182, Jan. 31, 1962), the Court of Tax Appeals (CTA) set aside an assessment by the BIR which was made not based on transactions that occurred during the relevant taxable year but were inferred from the previous year’s transactions.The courts have also held that in order for the presumption to apply, the BIR must first prove that it is based on fact and law.
In Marionnaud Philippines Inc. v CIR (CTA Case 9615, May 29, 2020), the taxpayer was assessed based on alleged discrepancies in its income payments on goods per its financial statements vis-à-vis its alphalist. The BIR alleged that, from the discrepancies, it may be presumed that there was an undeclaration of taxable income. The CTA ruled that assessments should not be based on mere presumptions no matter how reasonable or logical the presumption might be. In order to withstand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption.In Keansburg Marketing Corp. v CIR (CTA Case 9076, Jan. 5, 2018), the CTA declared an assessment void for being based on admittedly unverified amounts extracted from the BIR’s own database without so much as supporting certifications or confirmations from the taxpayer’s customers to verify the correctness of the amounts or, at the very least, the summary list of purchases from which the data were lifted.|
In CIR v Island Garment Manufacturing Corp. (GR L-46644, Sept. 11, 1987), the BIR based the corporation’s deficiency income and advance sales taxes on alleged over declaration of its re-exportation of finished goods. The BIR arrived at the discrepancy by examining the boxes used by the corporation to re-export its goods, “mathematical computations,” and an assumption that it was impossible for the corporation to re-export back in said boxes the total number of pieces it claims to have manufactured. In this case, the Supreme Court held that these presumptions and inferences will not bring forth the conclusion that the government was cheated and defrauded of advance sales tax and income tax.While the Presumption may be rebutted, in many instances, taxpayers are constrained to bring the assessment to court to assail them. By that time, the taxpayer, regardless of the outcome of the case, would have already suffered the consequences of a tax assessment and a drawn-out trial. Also, a cancellation of an unsupported or unfounded assessment, even when accompanied by a full refund or credit, is costly, especially with the high court filing fees. In many instances, any such refund or credit will not make up for the time lost and the expenses incurred by the taxpayer.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel).