“With great power comes great responsibility.” This famous line serves as a reminder to Spider-Man to use his power for the greater good. In the realm of taxation, the power to tax is often described as the power to destroy and should therefore be exercised with caution.

To limit such power, taxation must respect the taxpayer’s right to due process. One of the most important safeguards in the tax system is the requirement for a Letter of Authority (LoA) before any audit or investigation can begin. The LoA is not merely a procedural formality — it is a legal prerequisite that ensures the taxpayer’s right to due process is respected.

What Is a Letter of Authority?

A Letter of Authority is an official document issued by the Commissioner of Internal Revenue (CIR) or a duly authorized representative. It empowers specific revenue officers to examine and audit the books of account and other financial records of a taxpayer for a specific period. The LoA must clearly identify the officers assigned to the case, including their names and positions.

The audit team typically consists of the Group Supervisor (GS) and the Revenue Officer (RO).

This is a vital part of the assessment, as only those named in the LoA are authorized to participate. Any involvement by individuals not listed in the LoA constitutes a violation and renders the assessment null and void.

WHY THE LOA MATTERS
The LoA serves as a legal boundary that protects taxpayers from unauthorized or excessive scrutiny. It ensures that the audit is conducted by officers who have been properly designated and that the taxpayer is aware of who is examining their records. This transparency is essential to maintaining trust in the tax system and upholding the principles of fairness and legality.

There are instances where one or both cases of officers assigned to an audit are transferred to other revenue districts. As a result, either a new revenue officer or a new team will be assigned to handle ongoing audits.

In such a scenario, it is mandatory that a replacement LoA be issued bearing the new team’s composition. Failure to do so violates the taxpayer’s right to due process and undermines the legitimacy of the audit.

THE ROLE OF THE GROUP SUPERVISOR
A common point of confusion is whether a group supervisor must be named in the LoA, especially when their role is primarily supervisory rather than directly investigative. This issue was addressed in the recent case of Brilliant Creations Publishing, Inc. v. Commissioner of Internal Revenue, decided by the Court of Tax Appeals (CTA).

In this case, the CTA emphasized that “all ROs must be armed with an LoA issued by the CIR or an authorized representative to conduct an audit or examination of a taxpayer.”

The CTA cited the landmark case Commissioner of Internal Revenue vs McDonald’s Philippines Realty Corp., where it was held that when a revenue officer is reassigned or transferred, the substitute or replacement revenue officer must be issued a separate or amended LoA. Failure to do so violates the taxpayer’s right to due process, usurps the statutory power of the CIR or his duly authorized representative to grant the power to examine the books of account of a taxpayer,  and does not comply with existing BIR rules and regulations.

The CTA further clarified that a group supervisor is considered a revenue officer. Under Revenue Administrative Order (RAO) No. 02-90, 78 a GS is classified as Revenue Officer II, III, or IV and is tasked with supervising and reviewing the work and audit reports of subordinate Revenue Officers.

The CTA also noted the responsibility of a GS, stating that “all group supervisors and section chiefs shall be responsible for the work performance of their subordinates, and it shall be their responsibility to closely supervise and review their work and audit reports.”

As such, the Court ruled that Group Supervisors are Revenue Officers themselves under RAO No. 02-90 and are not exempt from the requirement of a valid LoA when participating in audit activities. Their designation as supervisors does not negate their classification as ROs. The RAO merely defines their additional responsibility to oversee and review the work and audit reports of their subordinate ROs.

LEGAL IMPLICATIONS OF NONCOMPLIANCE
The Court stressed that any audit activity or assessment undertaken by a GS without an LoA is void. In the cited case, since the GS was not granted an LoA, his participation in the audit was unauthorized, rendering the deficiency tax assessment null and void.

WHAT TAXPAYERS SHOULD DO
Given the importance of the LoA, a taxpayer must be vigilant during an audit. He or she must ensure that the person conducting the examination is explicitly authorized in the LoA to safeguard their right to due process.

CONCLUSION
Just as Uncle Ben reminds Peter Parker to use his powers responsibly,  the Court reminds us that the power to tax is not the power to destroy, as long as the courts uphold the rule of law. When the rules are followed, the tax system works not as a tool of destruction, but as a mechanism for justice and accountability.

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.

Eljah Dominic V. David is an associate from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

pagrantthornton@ph.gt.com