Plot 1: NEJ, the protagonist, heard unknown voices and odd footsteps. Convinced that her family’s house is haunted, she went to find a local priest, but failed. More antagonistic events ensued, and then the plot twist came: Grace and her two children are the ghosts, and the voices and odd footsteps they’ve been hearing are from living people. They only realized that they’ve been dead when they were being cast away by a séance hired by the new owners of the house.
Plot 2: TP, the protagonist, got to his corporate office early. He saw a mail envelope on his desk. It was from the Bureau of Internal Revenue (BIR). He briskly opened it. He read every word on the letter, sighed, then continued to read the numbers in Philippine pesos. There is no plot twist. He almost dropped the letter. He is being assessed for deficiency taxes. After all the clarifications, he paid the assessment accordingly.
Between these two plots, I prefer to watch Plot 1, and will even produce and direct it. It is actually the plot of a 2001 film, entitled The Others, directed by Academy award winner Alejandro Amenábar. The I-didn’t-see-it-coming feeling and the tinge of shock-of-your-life experience at the end are extremely entertaining. Plot 1, however, is not relatable as it is far from reality. Plot 2, on the other hand, is close to, if not completely, a reality.
To showcase the reality of Plot 2, the BIR recently issued Revenue Memorandum Order (RMO) No. 32-2018, prescribing the audit/investigation of individual and non-individual taxpayers with gross sales/receipts of P10 million and below. The audit/investigation shall be conducted by the Revenue Officers (ROs) of the Office Audit Section (OAS) of the Assessment Divisions in the Regional Offices. The thrust of RMO No. 32-20118 is to generate additional revenues by conducting audits for taxable year 2017 without field investigation by ROs who must submit the report of investigation within 90 days from the issuance of the Electronic Letters of Authority (eLA). Nevertheless, the RMO has the following policies: (1) the Electronic Letters of Authority (eLAs) shall be issued; and (2) that all existing policies and procedures for issuing assessment notices shall be strictly observed.
Letters of Authority (LOA), as described by the Supreme Court in MediCard Philippines, Inc. vs. Commissioner of Internal Revenue (G.R. No. 222743) is the authority given to the appropriate revenue officer assigned to assess functions pursuant to Section 6(A) of the National Internal Revenue Code (NIRC) of 1997, as amended. In this case, the Court emphasized the importance of the LOA in all assessments by expressly stating that an LOA cannot be dispensed with simply because none of the financial books or records being physically kept by the taxpayer were examined. The Court also ruled that a Letter Notice (LN) is entirely different and serves a different purpose than an LOA. An LN, which is issued to notify the taxpayer that a discrepancy is found based on the BIR’s RELIEF System as prescribed in Revenue Regulations (RR) No. 12-2002, as amended, cannot stand as an LOA. An LOA must still be secured because, in the absence of which, the assessment or examination is a nullity.
As for the policies and procedures for issuing assessment notices, these are delineated under RR No. 12-1999, as amended by RR No. 18-2013 and RR No. 7-2018 as follows:
The taxpayer shall be informed of the tax deficiency by the revenue officer who audited the taxpayer’s records. A Notice of Informal Conference (NIC) shall be sent to the taxpayer, giving the latter an opportunity to present its side of the case within 30 days from receipt of the NIC;
If the taxpayer failed to present his side, a Preliminary Assessment Notice (PAN) shall be issued to the taxpayer by the Commissioner of Internal Revenue (CIR) or his duly authorized representative. The PAN shows in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based;
If the taxpayer failed to reply or, in cases where no PAN is required, the Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued by the CIR or his duly authorized representative; and
Then a Final Decision on a Disputed Assessment (FDDA) of the CIR or his duly authorized representative shall be issued to the taxpayer.
Pursuant to Section 228 of the Tax Code, as amended, a PAN shall not be required in any of the following cases:
When the finding for any deficiency tax is the result of a mathematical error in computing the tax appearing on the face of the tax return filed by taxpayer;
When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent;
When the taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year;
When the excise tax due on excisable articles has not been paid; or
When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machinery, and spare parts, has been sold, traded, or transferred to non-exempt persons.
The Supreme Court had already settled in the case of CIR vs. Metro Star Superama, Inc. (GR No. 185371) (https://cdasiaonline.com/jurisprudences/54034) the issue on the effect of failure to strictly comply with the notice requirements prescribed under Section 228 of the NIRC (https://cdasiaonline.com/laws/10608)and RR No. 12-99 (https://cdasiaonline.com/taxations/20841), as amended. The Court ruled that sending a PAN to a taxpayer to inform them of the assessment made is but part of the due process requirement in issuing a deficiency tax assessment, the absence of which renders nugatory any assessment made by the tax authorities.
As can be culled from the foregoing reality, the scenes in Plot 2 should be as predictable for any taxpayer being assessed by the BIR. The rules are settled. There is no plot twist. All characters are protagonists and contribute to the lifeblood of the nation — taxes. Hence, if I may ask: Taxpayer, are you surprised? The answer should be a resounding “No!”
Rhino T. Chua is a senior associate of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.