The pitfalls of inadequate personal delivery in tax assessments

AMONG the priority programs and projects of the Bureau of Internal Revenue (BIR) in 2023 was to generate revenue via a range of audit and enforcement activities to ensure that taxpayers meet their obligations.

While the BIR is yet to release its 2024 priority programs, I am willing to bet that tax audits will still be one of the priorities, considering that the first order of the newly sworn-in Finance Secretary Ralph G. Recto is to collect P4.3 trillion worth of taxes.

In the grand scheme of things, higher taxes would mean more money for the government to promote the general welfare of and provide services to the public. As noble as this sounds, unfortunately, the pursuit of higher revenue has led to more assertive audits by the BIR. This heightened scrutiny has brought apprehension and at times, unexpected courage, among taxpayers, especially in cases of seemingly disproportionate findings.

But how can one mount a proper defense if the findings were not duly received? If one is not informed of the findings, one is deprived of the opportunity to be heard and consequently, one’s constitutional right to due process is violated.

In a recent case, the Supreme Court delved upon the importance of proper service of the findings and due process.

Personal delivery must be acknowledged by the taxpayer or his duly authorized representative

Section 228 of the Tax Code provides that when the BIR finds that proper taxes should be assessed, the taxpayer must be properly notified of the findings. In case of deficiency tax findings, current regulations require that the same be sent to the taxpayer by personal delivery, substituted service, or service by mail.

In practice, assessment notices are usually sent via personal delivery. Personal delivery shall be made by sending a copy personally to the taxpayer at his registered or known address or wherever he may be found. Under Section 3.1.4 of Revenue Regulation (RR) No. 12-99, if findings are sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if  received by a person other than the taxpayer himself; and (d) date of receipt thereof.

The above provision was the basis of the Supreme Court (SC) when it issued a decision in GR No. 244202 dated July 10, 2023. The SC emphasized that while Sections 3.1.1 and 3.1.2 of the RR govern Notice of Informal Conference (NIC, which was replaced by Notice of Discrepancy) and Preliminary Assessment Notice (PAN) bear no similar qualifications for personal delivery as those found in Section 3.1.4, the same requirements shall still apply on the grounds that the sending and actual receipt of PAN are part and parcel of the due process requirement in the issuance of a deficiency tax findings that the BIR must strictly comply with.

LACK OF DUE PROCESS INVALIDATES THE ASSESSMENT
In the case, the NIC and PAN were served upon a person whose indicated position was “Client Service Assistant.” The FAN, on the other hand, was personally served upon the taxpayer’s reliever security guard at the time, and who was not an employee of the taxpayer. Having failed to properly serve the NIC and PAN, the SC ruled that it necessarily follows that the succeeding FAN was void and without effect.

The Court also held that even if the NIC and PAN were properly served by strictly implementing Sections 3.1.1 and 3.1.2 and agree that there was proper receipt by the taxpayer’s receptionist, the serving of the FAN remains problematic.

It is a well-settled rule that an assessment that fails to strictly comply with the due process requirements set forth in Section 228 of the Tax Code and the above-mentioned RR, as amended, is void and produces no effect.

Personally, I believe that strict adherence to due process is hitting two birds with one stone. It would not invalidate the tax findings, thereby increasing the probability of the bureau’s collection of taxes, while also increasing taxpayers’ confidence in the tax system as their constitutional rights are upheld.

In the above case, the High Court emphasized the wisdom of the requirement to ensure that assessments are received by the taxpayer or his authorized representative — that it requires a certain degree of authority or discretion to grasp the gravity of the service of an assessment notice and its potential financial impact on the taxpayer, That being said, I sincerely hope taxpayers take comfort in knowing that the courts impose strict adherence to the due process accorded to them by the law.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Frenz Angelie B. Hechanova is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

frenz.angelie.hechanova@pwc.com