BIR Checklist of Audit Requirements How to make a protest letter against BIR deficiency assessments

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CTTO: In the worst case, a taxpayer can be investigated every year without reprieve.

Taxpayers who are subjected to successive tax audits will finally obtain relief from the BIR’s new Audit Program under Revenue Memorandum Order (RMO) 19-2015. Under the RMO, taxpayers who were subjected to tax audit for two successive years will no longer be subject to tax audit on the third year, unless the taxpayer has under-declared sales/income or overstated expenses/deductions by at least 30% (which is considered prima facie evidence of fraud).

The RMO also provides that a full tax audit will no longer include taxes that had been previously examined (e.g., VAT audit under the VAT Audit Program or under a claim for VAT refund).

However, tax examiners are now required to investigate taxpayers who have not been audited but have been in operation for more than three years.

The foregoing new policies appear reasonable as successive tax audits will likely result in lower deficiency taxes among frequently audited taxpayers due to a progressive learning curve. Moreover, rather than concentrating on a limited few, the similarly limited manpower of the BIR would be optimized by targeting other taxpayers, achieving a more inclusive audit.The RMO also provides that the following cases are subject to mandatory audit:

Claims for refund (e.g., VAT, income tax, erroneous payment);
Applications for tax clearance for dissolution or retirement of businesses with gross sales/receipts exceeding P1 million or with more than P3 million in gross assets ;
Cases with unresolved Letter Notices;
Request for tax clearance of taxpayers undergoing merger/consolidation and other types of corporate reorganizations;
Estate tax returns; and
Policy cases identified by the Commissioner of Internal Revenue.
On the other hand, the following are considered priority cases:

Taxpayers reporting gross/net loss or no taxable income or no tax due for two (2) consecutive years;
Taxpayers with income tax due of less than 2% of gross sales/revenues;
Taxpayers with increase in assets of more than 50% from the previous year but with reported net loss;
Professionals;
Sellers of goods and services via e-commerce;
Taxpayers with intelligence information such as specific business knowledge, third party data and publicly available information (e.g., from media press releases vs. actual revenue/tax declaration per return, etc.);
Taxpayers who have failed to comply with the submission of information returns required under existing revenue issuances (e.g., Alphalist, Inventory List, List of Tenants, Summary List of Sales/Summary List of Purchases, eSales);
Issue-oriented audits (e.g., transfer pricing, Base Erosion Profit Shifting, industry issues, etc.);
Taxpayers whose compliance is below the established benchmark rate;
Taxpayers enjoying tax exemptions/incentives;
Taxpayers with shared expenses and other interrelated charges being imputed by a parent company to its affiliates and likewise an affiliate to other affiliate in a conglomerate;
Specific industries: Hospitals, Advertising Agencies, BPOs, Insurance, Amusement Centers, Restaurants, Telecommunication, Real Estate; and
Other priority audits that may be identified by the BIR.
The list is so extensive in scope that it seems to include most individual and corporate taxpayers. Finally, the RMO requires examiners to strictly comply with the prescribed periods in the completion of their audit (reinvestigation) and submission of their reports; failure to do so will result to administrative sanctions. For instance, a report on the results of a tax investigation must be submitted not later than 180 days (for non-Large Taxpayers) or 240 days (for Large Taxpayers) from the issuance of the Letter of Authority.

With these new rules and the BIR’s increasing revenue targets, one could expect a BIR audit sooner than later. Accordingly, it would be wise for businesses to improve tax compliance by being informed of the pertinent tax laws and rules affecting them, and to check accounting records vis-a-vis tax returns, as well as the adequacy and completeness thereof for submission during a tax audit.

The foregoing steps can be undertaken internally or thru the assistance of a trusted and competent tax advisor.

As we all know, taxation is the life blood of the government. Without taxes, the government cannot spend for basic social services, and infrastructure. Let’s do our share in nation-building by paying correctly our taxes so we can then have the right to demand the government to improve its services.