Tax audit by the Bureau of Internal Revenue (BIR) is a challenge to every taxpayer but should be treated as an important matter when conducting business in the Philippines. These audits follow the guidelines and policies originating from the Tax Code of the Philippines; which states that all corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep and use the relevant and appropriate set of bookkeeping records.
Internal revenue taxes can be assessed within three (3) years after the last day prescribed by law for the filing of the return or in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. The tax audit’s purpose is to show whether an individual or business is compliant with the BIR’s tax requirements.
We would like to share this short guide to help smaller businesses with their initial tax audit requirements and understand the most essential elements to consider during a BIR Tax Audit.
Corporations, companies, partnerships, or persons whose gross annual sales, earnings, receipts or output exceed Three Million pesos (P3,000,000), shall have their books of accounts audited and examined yearly by independent Certified Public Accountants (CPAs) and their income tax returns accompanied with a duly accomplished Account Information Form (AIF).
Process of a BIR Tax Audit
The following events detail how a BIR Tax Audit operates in the Philippines:
1.) The BIR sends a Letter of Authority (LOA)
- The BIR hands out an LOA to the taxpayer and requests documents needed to conduct its investigation. This document allows the Revenue Officer (RO) within a Tax Assessment Group led by a Group Supervisor (GS) to conduct a tax examination.
An LOA also states what kind of tax is to be examined, this includes income tax, value-added tax, withholding tax, etc. It usually covers one taxable year and specifies the year covered.
2.) The BIR will request documentation
- The LOA will request several documents in an attachment when received. These include tax reports, tax returns, and accounting records. The RO will use these documents as the basis for their examination. If you fail to submit these documents, you will be given a second request. If you are still not able to submit it, a final notice will be given. If again you don’t present the required documents the BIR may issue a “Subpoena Duces Tecum”, which legally mandates you to submit these documents at a specified time.
3.) Issuance of a Notice of Discrepancy
- When the RO has completed checking the required documents, they will then submit their findings to the Revenue District Officer (RDO) for approval. Taxpayers that are liable for tax deficiencies will be issued with a Notice of Discrepancy (NOD) by the RO. The report showcases the taxpayer’s records and explains the discrepancies found during the initial report.
A Discussion of Discrepancy (DOD) will be held between taxpayers and the RO to have a chance to explain the former’s side of the case and present legitimate documentation. However, DODs shall only be held within thirty (30) days from receiving the NOD, during this time, they must have been able to gather the proper documents to support their claim and arguments.
If the taxpayer is still deemed liable for tax deficiencies and is not able to address the discrepancy through payment of the deficiency taxes or the taxpayer does not agree with the findings, the investigating office will then endorse the case to the reviewing office and approve official in the National Office or the Revenue Regional Office, for issuance of a Deficiency Tax Assessment in the form of a Preliminary Assessment Notice within ten (10) days from the conclusion of the DOD.
4.) Issuance of Preliminary Assessment Notice (PAN)
-If after review and evaluation by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer a PAN for the proposed assessment. Taxpayers will have to respond to the PAN within fifteen (15) days upon receipt thereof.
5.) Issuance of Formal Letter of Demand and Final Assessment Notice (FLD/FAN)
- The Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued by the Commissioner or his duly authorized representative. The FLD/FAN calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based; otherwise, the assessment shall be void.
The taxpayer or its authorized representative or tax agent may protest administratively against the aforesaid FLD/FAN within thirty (30) days from the date of receipt thereof. The taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation. For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents in support of his protest within sixty (60) days from the date of filing his letter of protest, otherwise, the assessment shall become final.
If the protest or administrative appeal, as the case may be, is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals (CTA) within thirty (30) days from the date of receipt of the said decision.
If the protest or administrative appeal is not acted upon by the Commissioner within one hundred eighty (180) days counted from the date of filing of the protest, the taxpayer may either: (i) appeal to the CTA within thirty (30) days from after the expiration of the one hundred eighty (180)-day period; or (ii) await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within thirty (30) days after the receipt of a copy of the such decision.
6.) Issuance of Final Decision on a Disputed Assessment (FDDA)
-The decision of the Commissioner or his duly authorized representative shall state the (i) facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void.
Being as prepared as possible for a tax assessment is key towards avoiding tax discrepancies. Make sure that all the necessary records and requirements are always updated and readily available. You can also hire knowledgeable tax practitioners or experienced tax bookkeepers to help you maintain your books if you wish to make yourself as secure as possible.
BIR Tax Audits can be challenging to every business owner, and while the consequences for failing to comply can be severe, completing it can be bearable if you have smart business practices such as the following:
- Attentive report checking
- Regularly checking your company’s policies, records, and processes can make it easier for you to comply and submit to the BIR their requested documents.
- Researching your requirements
- Applying enough research regarding the regulations or policies applicable to your business can help you avoid misconceptions, incomplete requirements, and other negative events during the audit.
- Preplan for possible events
- While your main goal in a BIR Tax Audit is to clear all discrepancies found by the BIR, you should always have a plan in case you do have a deficiency and make sure to establish a process or system so that it will not be the case in the future, and you will be in complete compliance.