Authorized or not? This question is very relevant to taxpayers who are subject to a tax audit. One should at least know if the Revenue Officer (RO) conducting the audit investigation is duly armed with a valid Letter of Authority (LoA). The Tax Code, as amended, requires the Commissioner of Internal Revenue (CIR) or their duly authorized representative to issue an LoA if it will delegate the examination of a taxpayer.
Section 13 of the code mandates the issuance of an LoA before an assigned RO may examine a taxpayer and recommend the assessment of any deficiency tax due.
The Supreme Court recently ruled that an LoA is a part of the taxpayer’s right to due process. Hence, the issuance of a Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) without a prior LoA served on the taxpayer renders the assessment void on the ground, as it is a due process violation (Medicard Philippines Inc. vs. CIR).
Is an RO required to complete an audit investigation within a specified period? And will this affect the validity of the assessment? This has been the subject of seemingly conflicting decisions of the Court of Tax Appeals (CTA). Relevant to these rulings is the BIR’s General Audit Procedures and Documentation (BIR GAPD), which provides that an RO is allowed only 120 days from the date of receipt of the LoA by the taxpayer to conduct the audit and submit the required report of the investigation. If the RO is unable to submit the final report within the 120-day period, the RO must then submit a progress report to the Head Office and surrender the Letter of Authority for revalidation.
The CTA Division viewed this rule as merely imposing an administrative liability on the part of the RO without affecting the validity of the LoA and the audit report. Citing Revenue Memorandum Circular (RMC) No. 23-2009, the Division categorically declared the LoA valid, even though the investigation and audit lasted more than 120 days without the LoA being revalidated (CTA Case No. 9199 dated Feb. 8, 2019).
Interestingly, this is not the view of the CTA en banc. In an earlier case, when the RO submitted an audit report only after the lapse of the 120-day period without revalidating the LoA, the CTA en banc ruled the RO should have just submitted a Progress Report and surrendered the LoA for revalidation. Since the LoA was not revalidated on or before the expiration of the given period, the LoA ceased to be valid (CTA EB Case No. 1535 dated Jan. 4, 2018). The Court considered the 120-day period mandatory, such that, if no LoA revalidation was made within the said period, the LoA becomes ineffective.
What is the difference between the two cases to merit conflicting CTA rulings? Comparing the two, with regards to the Division ruling, the RO who conducted the audit was duly authorized by an LoA; however, he only completed the audit after the 120-day period and without revalidating the LoA. Thus, the sole issue is whether the LoA, which was not revalidated, has lost its validity. Since RMC No. 23-2009 only imposes administrative liability on the erring RO without affecting the audit and the LoA’s validity, the CTA Division merely harmonized the said rules and declared that the failure to comply with the 120 days does not affect the validity of the LoA.
However, the issue in the en banc case revolves not only on the failure of the RO to complete the audit and revalidate the LoA within the 120-day period, but also on the authority of the RO who conducted the audit. Since the RO named in the LoA was reassigned to another district, the case was transferred to another RO through a mere referral memorandum without revalidating or issuing a new LOA.
In declaring the assessment void, the Court ruled that the RO who conducted the audit has no authority to do so, since the officer was not authorized by an LoA. The Court did not give credence to the CIR’s view that the referral memorandum derives its validity from the original LoA. The Court further explained that RMO No. 43-90 explicitly requires an LoA revalidation in case of reassignment or transfer of cases to another RO. Citing the BIR GAPD, the Court declared that, since the LoA was not revalidated, the RO who conducted the audit has no authority to conduct the investigation, thus, rendering the assessment void.
The CTA en banc has been consistent in ruling that the RO designated in the referral memorandum does not have any authority to examine a taxpayer in the absence of an LoA revalidation. In another case, it debunked BIR’s invocation of RMO No. 44-2010, which has withdrawn the need for LoA revalidations for the failure of ROs to complete the audit within the prescribed period. RMO No. 44-2010 has the same effect as RMC No. 23-2009.
The Court categorically declared RMO No. 44-2010 as invalid, as it runs counter to the provisions of Section 6(A) of the National Internal Revenue Code and the Supreme Court’s pronouncement in Medicard Philippines Inc. vs. CIR, reasoning that a mere administrative issuance cannot amend the law (CTA EB Case No. 1832 dated July 29, 2019). Will this recent development have an adverse effect on the above-cited CTA division ruling?
It is now up to the Supreme Court to settle the seeming conflict. Until then, the aggrieved taxpayer may rely on the CTA en banc’s pronouncement to challenge a deficiency tax assessment and, hopefully, tilt the scale of justice in its favor.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Peter Irish R. De Leon is a tax associate of Tax Advisory & Compliance Division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.