Using the net worth method to check corruption and tax evasion
By: Atty. Euney Marie J. Mata-Perez on January 22, 2026
WITH recent corruption incidents being unraveled, including alleged purchases of very high-end properties by government officials, it has become apparent that many government officials and contractors have been living extravagantly. We have yet to see a conviction of any of the alleged culprits, whether under the Anti-Graft and Corrupt Practices Act, or for tax evasion under our National Internal Revenue Code (Tax Code).
When we hear of the mind-boggling excesses being enjoyed or paraded by these corrupt government officials, it is amazing why the government has not yet employed some very effective methods of catching these offenders and charging them with tax evasion. One of these is the “net worth” method.
While the method very often used in tax assessment is the “direct approach method,” or by direct evidence, also called Specific Item Cases, there are acceptable indirect methods in building tax evasion cases.
Under the direct approach, proof of fraudulent acts is adduced by specific fraudulent transactions. The existence of the principal or ultimate fact is proven without any inference or presumption, such as the failure to file income tax return, items of income and expenses, or assets or liabilities omitted or falsely claimed in accounting records or tax returns.
Under the indirect approaches, meanwhile, a taxpayer’s income is arrived at using other means.
The most popular is the net worth or inventory or net worth and expenditure method. This reconstructs income based on the theory that, if the taxpayer’s net worth has increased in a given year in an amount larger than reported income, income for that year had been understated. The unexplained increase in net worth is presumed to have been derived from taxable sources.
The net worth method is actually an extension of a basic accounting principle: assets minus liabilities equals net worth. The taxpayer’s net worth is determined both at the beginning and at the end of the same taxable year. The increase or decrease is adjusted by adding all non-deductible items and subtracting non-taxable receipts. The general theory underlying this is that money and other assets in excess of liabilities after accurate and proper adjustment of non-deductible and non-taxable items not accounted for in the taxpayer’s tax return are deemed to be unreported income.
The application of the net worth method is not without limitations. Under existing regulations, conditions for the proper use of such method are– that the taxpayer’s books do not clearly reflect the taxpayer’s income or the taxpayer has no books, or if the taxpayer has books, the taxpayer refuses to produce them;
– that there is evidence of a possible source or sources of income to account for the increases in net worth or expenditures;
– that there is a fixed starting point or opening net worth, i.e., a date beginning with a taxable year or prior to it, at which time the taxpayer’s financial condition can be affirmatively established with some definiteness; and
– that the circumstances are such that the method does reflect the taxpayer’s income with reasonable accuracy and certainty.
The use of the net worth method has basis in law. Under Section 6 of the Tax Code, the Commissioner of Internal Revenue has the power to assess the proper tax on the “best evidence” obtainable when a report required by law as a basis for the assessment of any national internal revenue tax will not be forthcoming within the time fixed by law or rules and regulations, or when there is reason to believe that any such report is false, incomplete or erroneous.
Also, under Section 43 of the Tax Code, if the taxpayer does not adopt proper accounting methods in determining taxable income or if the method employed does not clearly reflect the income, the computation will be made in accordance with such method as, in the opinion of the commissioner, clearly reflects the income.
Lastly, the use of the net worth method has been upheld by the Supreme Court. In the landmark case of Perez vs. Court of Tax Appeals and Commissioner of Internal Revenue, GR L-10507, May 30, 1958, the high court held that considering that normally, acquisitions of property are made from accumulations of taxable income and where not so made, it lies with the taxpayer to explain how such acquisitions were done with non-taxable resources. If no such explanations were made, the court saw no error in the conclusion that appellant’s increase in net worth was due to undeclared taxable income.
Therefore, if the government is serious about charging corrupt officials with tax evasion, it could do so under various sanctioned methods, including the net worth method discussed above.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Chair of the Tax Committee of the Management Association of the Philippines. She acknowledges the contribution of Atty. Keisha Daniell L. Valencia in this article. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on January 22, 2026. Please see this link.