Automated Initiation, Single-Instance and Standardized BIR audit framework
The National Internal Revenue Code, as amended, empowers the Commissioner of Internal Revenue (CIR) to make assessments and prescribe additional requirements for tax administration and enforcement. The CIR, or his duly authorized representative, may authorize the examination of any taxpayer and the assessment of the correct amount of tax. Pursuant to this power, the CIR issued Revenue Memorandum Order No. 001-2026 (RMO) on Jan. 27 this year.
Automated Initiation. To ensure objectivity and integrity in the initiation of audits, the RMO provides that the issuance of Electronic Letters of Authority (eLOA) shall be governed by system-assisted taxpayer selection. While all taxpayers are generally considered potential subjects of an audit and assessment, the CIR has ordered that the initiation of audits shall be limited to taxpayers selected through the prescribed automated system-assisted process.
The selection criteria include, among others, taxpayers: with under declaration of sales/income or overstatement of expenses, or deductions by at least 30%; with intelligence information such as specific business knowledge, third party data and publicly available information; covered by Mission Orders with preliminary indicator that the taxpayer had an understatement of sales by 30% or more, those who underwent One-Time Transactions which resulted in deficiency taxes; and those enjoying tax exemptions/incentives. The RMO however provides that a more comprehensive procedure for taxpayer selection, case assignment, and eLOA issuance shall be implemented on or before April 16.
The RMO requires that the system-generated audit list should be submitted to the CIR and provides that only taxpayers included in the approved audit list may be issued new eLOAs. The RMO adds that recommendations may be made by the relevant Revenue Offices, provided that there is written justification. All endorsed recommendations shall be incorporated into the system-assisted process, subject to validation against the approved audit selection criteria and subject to approval by the CIR. Pending full automation, the Bureau of Internal Revenue (BIR) shall implement an Anonymized Selection and Assignment Process. This process ensures that taxpayer identity remains concealed during initial assignment, thereby separating taxpayer selection from Revenue Officer designation.
Single-Instance Audit Framework. Prior to the RMO, a separate Value-Added Tax (VAT) Audit could be initiated covering a taxable year that is subject to a regular audit. The Single-Instance Audit Framework introduced in the RMO is the CIR’s new policy which instructs that only one eLOA for a given taxable year, covering all applicable internal revenue tax types, including VAT, can be issued. The framework is intended to prevent overlapping or fragmented audits. The issuance of multiple or overlapping eLOAs covering the same taxpayer and taxable year is prohibited. However, the RMO provides that in fraud cases, one eLOA may cover several years.
Beginning on March 4, all pending eLOAs covering the same taxpayer and taxable year shall be automatically consolidated into one eLOA, without any action required from the taxpayer, except where a request for non-consolidation is allowed. To ensure alignment with the Single-Instance Audit Framework and to facilitate an orderly transition to the Audit Program for 2026, the VAT Audit Sections shall wind up operations by May 15.
The RMO allows a taxpayer with multiple pending eLOAs covering the same taxable year to file a written Request for Non-Consolidation allowing such audits to proceed separately. The option not to consolidate shall be upheld and respected by the BIR. Where the request for non-consolidation is received, the affected eLOAs shall be allowed to proceed independently, and the Revenue Officers shall continue their respective audit actions until April 30. After that date, however, or beginning May 4, all pending eLOAs, regardless of stage, shall be automatically consolidated. But even prior to the automatic consolidation, the RMO states that a taxpayer should not be precluded from voluntarily settling assessed or admitted tax deficiencies.
Standardized Checklist and Audit Process. Taxpayers have raised concerns on unreasonable assessments due to the violation of their right to due process. The RMO thus reminds that “[t]he conduct of audits and the issuance of assessments shall strictly observe due process, audit safeguards, and proper documentation.” All audit activities shall be undertaken in a manner that is fair, transparent, and supported by complete and verifiable records.
In order to promote this process, the CIR has imposed a mandatory standardized checklist of documents which shall serve as the uniform reference for identifying, requesting, receiving, and evaluating documents necessary for audit, verification, or other authorized compliance activities. The checklist shall be applied consistently across all offices and audit cases. The RMO, however, recognizes that the supporting documents may vary depending on the industry of the taxpayer. As such, industry-specific checklists shall also be issued by the BIR.
The RMO provides that Revenue Officers shall not issue unreasonable assessments. A Notice of Discrepancy (NOD), should clearly and specifically set out the details of the discrepancies in order to ensure that the taxpayer is sufficiently informed and is given a reasonable opportunity to explain, submit supporting documents, and contest the findings during the Discussion of Discrepancy. The NOD shall clearly state that it is not yet an assessment, but merely reflects discrepancies initially determined by the Revenue Officers. Minutes of meetings or discussions shall be prepared for the Discussion on Discrepancy. Such minutes shall be duly signed by the taxpayer or authorized representative and the Revenue Officers, with any refusal to sign clearly noted. All other meetings or discussions with the taxpayer shall be coursed through official communication channels of the Revenue Officers, such as their official e-mail address or official office contact numbers.
Examination and inspection of books of accounts and other accounting records shall be conducted in the taxpayer’s office or registered place of business, or in the appropriate BIR office. However, where the records required for audit are voluminous in nature, such that transporting, handling, or reviewing them at the BIR office would be impractical, burdensome, or disruptive to normal business operations, the taxpayer shall be given reasonable options on the manner and venue of examination, without causing undue disruption to business operations. Where records are physically submitted to the BIR, the taxpayer may submit photocopies, provided that such copies are certified by the taxpayer or its authorized representative as true and faithful reproductions of the original documents. The BIR may require the presentation of original documents for verification purposes.
Finally, the RMO reminds that due process must be observed, the factual and legal bases should be clearly stated, and the subsequent assessment notices should only reflect issues which remain unresolved. However, this requirement is nothing novel. In fact, this is consistent with the minimum audit procedures provided in existing revenue audit issuances of the BIR.
This automated, simplified, centralized, and standardized process for audits provided in the RMO provides a clear and transparent framework which will guide the BIR in tax administration and enforcement. The RMO mandates the observance of due process, and promotes responsibility and accountability in tax administration. This also provides guidance and safeguards to taxpayers to encourage and promote tax compliance.
The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.
Fatima Faye E. Cordova-De Lima is a senior associate of the Tax department of the Angara Abello Concepcion Regala Cruz Law Offices.
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