By: Felson Dalaguete on September 27, 2018

The Commissioner of Internal Revenue (CIR) is empowered by law to audit the books of taxpayers. Such audits must be conducted by the CIR or his duly authorized officer.

The authority given to revenue officers should be set out in a duly-issued and valid Letter of Authority (LOA).

A valid LOA is a prerequisite to a valid audit and assessment. In Medicard Philippines vs. CIR (G.R. No. 222743, April 5, 2017), the Supreme Court declared there can be no assessment issued or any assessment function or proceeding performed without the prior approval and authorization of the CIR or his duly authorized representative through an LOA.

An LOA is important because it informs taxpayers of the authority and the limits of the authority granted to the revenue officers assigned to examine their books. An LOA also protects taxpayers from unauthorized audits. An LOA is an essential part of due process of law.

Recognizing the importance of LOAs, the CIR, in Revenue Memorandum Circular (RMC) No. 75-2018 last September 5, 2018, restated the requirements of issuing LOAs in the conduct of tax audits by revenue officers of the Bureau of Internal Revenue (BIR).

A valid LOA must be issued by the proper official. Revenue Memorandum Order (RMO) No. 43-90 states that the CIR, Deputy Commissioners and the Regional Directors are the BIR officials authorized to issue and sign LOAs.
Other officials may be authorized to issue and sign LOAs but only upon prior authorization of the CIR himself.

A valid LOA must specify the names of the revenue officers are authorized to conduct the examination. If the revenue officers who will actually examine the books of the taxpayer are not mentioned in the LOA that was issued, then the LOA must be modified or amended or a new LOA issued. In Orient Overseas Container Line Ltd. v. CIR (CTA Case No. 9179, August 2, 2018), the Court of Tax Appeals (CTA) held that only those authorized to issue an LOA can modify or amend a previously issued LOA, otherwise the modification or amendment is void.

A valid LOA must also specify the taxable year covered by the audit. In the case of CIR vs. Sony Philippines, Inc. (GR No. 178697, November 17, 2010), the Supreme Court held that an LOA should cover only a taxable period not exceeding one taxable year. Thus, the issuance of LOAs covering an audit of unverified prior years is prohibited.

In CIR vs. China State Philippines Construction Corporation (CTA EB No. 1558, Feb. 8, 2018), the CTA clarified that if a taxpayer is audited for more than one taxable year, the BIR must specify each taxable year or taxable period in separate LOAs.

Equally important is the period of validity of a valid LOA. An LOA must be served or presented to the taxpayer within 30 days from its issue date. Otherwise, it becomes null and void unless revalidated (RAMO No. 1-00).

Also, the authorized revenue officer is allowed only 120 days from the date of the taxpayer’s receipt of the LOA to conduct the audit and submit the required report of investigation (RMC No. 36-99).

If the authorized revenue officer is unable to submit the final report within the 120-day period, he or she is required to submit a progress report and surrender the LOA for revalidation.

In GS MTE Grains Corporation vs. CIR (CTA Case No. 8837, March 19, 2018), the CTA confirmed that the revalidation requirement is essential, otherwise the LOA will cease to be valid and the resulting assessment or examination will be considered a nullity.

The proper issuance of an LOA with respect to a tax audit or examination by the BIR is a recognized safeguard of a taxpayer’s right to due process against the immense power of the government to tax.

While taxation is the lifeblood of the government, the government cannot disregard the equally important right of taxpayers to due process of law.

Thus, taxpayers should take the time to familiarize themselves with the requisites of a validly issued LOA

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Felson M. Dalaguete is a CPA-lawyer and a Junior Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). He is an active member of MTF Counsel’s corporate and tax practice. The contents of the above article are intended for general information purposes only and do not constitute legal advice. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF Counsel’s website at www.mtfcounsel.com.