Deficiency Taxes – Until When Can the Commissioner of Internal Revenue Collect?
By: Atty. Cara Angela N. Flores on April 25,2024
Section 203 of the National Internal Revenue Code, as amended (the “Tax Code”), entitled “Period of Limitation Upon Assessment and Collection”, provides that taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return or the date of actual filing of the return, whichever is later. It is silent as to when collection may be made.
On the other hand, as an exception to the three-year period of assessment, Section 222 of the Tax Code which provides that in the case of filing a false or fraudulent return or failure to file a return, an assessment may be made within ten (10) years after discovery of the falsity, fraud, or omission. Unlike Section 203, Section 222 explicitly provides for the period of collection with respect to false or fraudulent returns or the failure of the taxpayer to file a return, i.e., collection may be made within five (5) years following the assessment of the tax.
Thus, while Sections 203 and 222 of the Tax Code expressly provide for a regular prescriptive period of three years and an extraordinary prescriptive period of ten years for assessments, and Section 222 sets out the extraordinary prescriptive period of five years for collection, the Tax Code is silent on the regular prescriptive period for collection.
It should be noted that the power of the Commissioner of Internal Revenue (CIR) to enforce collection is distinct from the power of the CIR to make an assessment.
Collection generally is initiated by the CIR’s issuance of warrant of distraint and levy, or the initiation a court proceeding, after an assessment has become final or delinquent. (CIR vs. Court of Tax Appeals Second Division and QL Development, Inc., G.R. No. 258947, March 29, 2022.)
As early as July 2, 2014, the Supreme Court in CIR vs. United Salvage and Towage (Phils.), Inc. (G.R. No. 197515) has addressed the issue of what is the regular prescriptive period for collection of deficiency taxes. In this case, the Supreme Court categorically pronounced that when the CIR validly issues an assessment within the three-year period, it has another three years within which to collect the tax due by distraint, levy, or court proceeding. The three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed, or sent to the taxpayer.
A more recent case, the case of CIR vs. Court of Tax Appeals Second Division and QL Development, Inc. (G.R. No. 258947, March 29, 2022) (the “QL Development Case”) the Supreme Court pronounced that the five-year period for collection of taxes only applies to assessments issued within the extraordinary period of 10 years in case of false or fraudulent return or failure to file a return, citing Section 222 of the Tax Code as basis. In this case, since the Final Assessment Notice and Final Letter of Demand were mailed on December 12, 2014, the CIR had another three years reckoned from such date or until December 12, 2017 to enforce collection of the assessed deficiency taxes. Thus, when the CIR made collection efforts only on 2020, the Supreme Court ruled that the collection efforts were barred by prescription.
The QL Development Case was cited in a recent Court of Tax Appeals (CTA) Division case titled Canlubang Waterworks Corporation vs. CIR (CTA Case No. 10682, January 10, 2024). The CTA Division cited such case and reiterated that, as a rule, the CIR has three years to collect assessed taxes based on Section 203 of the Tax Code, as amended.
It is important to note that the prescriptive period for collecting taxes can be interrupted by the happening of certain events, such us when the when the taxpayer requests for reinvestigation, which is granted by the CIR, the taxpayer cannot be located at the address given by him in the return filed upon which a tax is being assessed or collected, or when the taxpayer is out of the Philippines. (Tax Code, sec. 223)
To summarize, in assessments involving false or fraudulent returns which call for the ten-year extraordinary prescriptive period, there is also an extraordinary prescriptive period of five years for the CIR to collect the taxes assessed. On the other hand, in regular assessments subject of the three-year prescriptive period, the CIR has a period of three years to collect the taxes assessed.