At a time where every peso in public funds is scrutinized, one piece of paper has recently received the ire of the public eye: the Bureau of Internal Revenue’s (BIR) Letter of Authority (LoA). While the LoA is viewed as a mere piece of paper, it must be remembered that this document emanates from the Bill of Rights enshrined in the 1987 Constitution, particularly the right of all persons to due process of law.

The LoA is the first document issued to commence the audit of a taxpayer. The LoA is the BIR’s primary legal document that authorizes revenue officers to examine a taxpayer’s books and records, and to issue an assessment of the correct amount of tax due.

To be valid, the LoA must contain a specific period. It must also contain the tax types subject to review, and the names of the revenue officers authorized to conduct the audit. Section 6 of the National Internal Revenue Code (Tax Code) provides that the LoA must be issued by the Commissioner of Internal Revenue or his duly authorized representative. Previously, a revenue officer had 120 days to examine the taxpayer’s books. Today, Revenue Memorandum Order No. 82-2022 imposes a 180-day period from the issuance of the LoA for regular taxpayers, and 240 days for large taxpayers.

Section 6 should be read in conjunction with Section 228 of the Tax Code. Section 228 contains the procedure for protesting an assessment and lists the due process requirements to be afforded by the Commissioner or his duly authorized representative to each taxpayer.

Section 228 strictly requires that the taxpayer must first be notified of the findings through a preliminary assessment notice (PAN). Within 15 days from the receipt of the PAN, the taxpayer may file a response. If the taxpayer fails to respond, the Commissioner may proceed to issue an assessment, which is the formal letter of demand/final assessment notice (FLD/FAN). The FLD/FAN may be protested administratively by filing a request for reconsideration or reinvestigation within 30 days of its receipt. In case of a reinvestigation, the taxpayer shall have 60 days from the filing of the protest, to submit all relevant supporting documents, otherwise, the assessment shall become final.

Before Section 228 of the Tax Code, Philippine tax audits operated without a clear framework. The 1939 Tax Code, and later PD 1158, did not require the BIR to issue a PAN, to state the facts and law of an assessment, or to decide protests within a fixed period. Assessment procedures were largely administrative and discretionary. This all changed with the enactment of the 1997 Tax Reform Act. Aligned with the 1987 Constitution, Section 228 requires the BIR to provide written notice to the taxpayer stating the factual and legal basis of which an assessment is made. Section 228 clearly provides that a PAN that fails to state the law and the facts shall be void. These requirements were implemented through Revenue Regulations No. 12-99, which formalized the PAN to FAN process and detailed the protest mechanism. Later amendments, such as Revenue Regulations No. 18-2013, strengthened the duty to clearly state facts and law in assessments.

The Secretary of Finance issued regulations requiring that a notice of informal conference be held even prior to the issuance of the PAN. Beginning in 2020, this informal conference process was renamed a notice of discrepancy (NoD). The NoD is issued prior to the PAN, and gives the taxpayer 30 days from the receipt of the NoD to address the revenue officers’ discrepancy findings.

Effectively, from the issuance of the LoA, a taxpayer is afforded three stages to react: the NoD stage, the PAN stage, and the FLD/FAN stage. In Avon v. Commissioner (G.R. No. 201398-99, Oct. 3, 2018), the Supreme Court held that all stages of the audit are part of due process. Each stage should give both the taxpayer and the BIR the opportunity to settle the case at the earliest possible time without needing a final assessment notice. However, this purpose is not served if the BIR should fail to act or consider the taxpayer’s explanations. Throughout the audit process, due process must be observed. Ultimately, the Commissioner’s Final Decision on Disputed Assessment must clearly state the facts, law, rules, or jurisprudence on which it is based.

While the Tax Code, regulations and jurisprudence have clarified the stages of tax audits, it may however be observed that further legislation is necessary to protect the due process rights of taxpayers.

For instance, there is no law listing the requisites and standards for a taxpayer to be subjected to a LoA. As a result, there is news of taxpayers receiving successive LoAs, for several taxable years, without proper justification. A 2003 Revenue Memorandum Order disclosed that the BIR uses data taken from third-party matching information to determine discrepancies on sales and purchases. Another matter to be clarified is the audit process by which an assessment is prepared. Discrepancy findings based on a mere comparison of the taxpayer’s financial statements and returns are speculative.

As discussed above, Section 6 of the Tax Code defines who can issue the LoA. Section 228 provides for the manner for protesting the assessment arising from the LoA. As the LoA is now being scrutinized, this may also present an opportunity to revisit the need for legislation on who are proper subjects of the LoA, and the procedure and standards in exercising the power to audit a taxpayer.

The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and is not offered as, and does not constitute legal advice or legal opinion.

Jennifer Rose O. Tapia is an associate of the Tax department of the Angara Abello Concepcion Regala Cruz Law Offices.