A tax audit is an examination of the taxpayer’s compliance with the tax system. It is defined as the verification and accuracy of income and deductions declared by the taxpayer. During the tax audit, examinations and investigations of the books and documents of the taxpayer are carried out to find and correct, if necessary, errors, frauds and deficiencies.
Tax audit aims to: (a) Ensure that income and deduction claims are correctly and accurately entered by taxpayers; (b) Limits the risk of fraudulent tax practices; c) Any increase in tax revenue increases the efficiency of tax administration; and (d) Taxpayers’ compliance with the Philippine tax system contributes to the efficiency of the government system.
On May 30, BIR issued Circular Revenue Memorandum (RMC) 76-2022 to suspend audit and other field operations in accordance with and under the authority of all working groups established through Special Revenue Orders (RSO), Memoranda of Operations (MO), and other similar orders/directives. The RMC emphasized that no field audits, field operations or any form of company visits in execution of Letters of Authorization/Audit Notice (LOA) or Mission Orders (MO) will be carried out and that no written orders for the audit and/or investigation of taxpayers’ domestic tax debts are issued and/or served by the said working groups relating to the examinations and verifications of taxpayers’ books, records and other transactions. Said suspension will take effect immediately until further notice.
A case-by-case review and assessment of the need and progress of each working group should be carried out by the Office of the Commissioner before they are allowed to resume their audit functions and field operations.
On the same day, the BIR issued RMC 77-2022, to suspend all pending LOAs effective May 30, 2022 / MO effective May 30, 2022 and inventory submission thereafter. The RMC reiterated that no field audits, field operations or any form of company visits in connection with the execution of LOAs or MOs will be carried out, and that no new LOAs/MOs will be issued. In addition, no written orders to audit and/or investigate taxpayers’ internal tax obligations will be issued and/or served, except in the following cases:
• Investigation of limitation cases no later than October 31, 2022.
• Processing and verification of inheritance tax declarations, donor declarations, capital gains declarations and withholding tax declarations on the sale of real estate or shares of shares as well as stamp declarations related documentary.
• Review and/or audit of the internal tax obligations of outgoing taxpayers.
• Audit of National Government Agencies (NGAs), Local Government Units (LGUs) and Government Owned and Controlled Companies (GOCCs), including subsidiaries and affiliates.
• And other issues/concerns for which time limits have been imposed or as directed by the Commissioner of Internal Revenue.
However, the RMC clarified that service of notices of assessment, warrants and notices of seizure should still be in effect. Without obtaining permission from the relevant tax authorities, taxpayers may voluntarily pay their known tax losses.
The BIR provides procedures, as defined by Section 228 of the National Revenue Code 1997, for the conduct of the audit of the BIR: (a) the notice of discrepancy will be issued to the taxpayer for the purpose of discussing the divergence; (b) A Notice of Preliminary Assessment (PAN) will be issued within 10 days of the conclusion of the discussion, in which case the taxpayer has a non-extendable period of 15 days from receipt of the PAN to submit a take position against the PAN; (c) The Formal Assessment Notice (FAN) will be issued after the end of the 15-day period or within 15 days of BIR’s receipt of the taxpayer’s response to the PAN; (d) Protest against FAN may be submitted, either by Request for Reconsideration or Request for Reconsideration, within 30 days of receipt of FAN; (e) The Taxpayer shall submit all relevant supporting documentation within 60 days from the date of the effective filing of the protest against FAN; (f) BIR’s decision on the complaint to FAN within 180 days of the submission of the last supporting document (reconsideration) or filing of the complaint (reconsideration); (g) If the protest to FAN is denied, the taxpayer has the mutually exclusive opportunity to appeal (petition for review) the denial of the BIR to the Court of Tax Appeal (CTA) within 30 days of receipt of the refusal. by the taxpayer; or appeal (request for reconsideration) the refusal of the BIR to the Commissioner of Internal Revenue (CIR).
On the other hand, if the protest is not acted upon (no decision) by the BIR at the end of the 180 days, the taxpayer has the mutually exclusive option to appeal (petition for review) the inaction by the BIR with the CTA within 30 days of the expiry of the 180-day period; either wait for the decision of the BIR (authorized even beyond the 180-day period); (h) If the Request for Final Disputed Assessment Ruling (FDDA) is denied by the CIR within 180 days from the date the request was filed, the taxpayer must appeal the denial issued by the CIR to the CTA within 30 days from the date of submission of the application. receipt of the refusal. On the other hand, if the request is not processed (no decision) by the CIR after 180 days, the taxpayer has the mutually exclusive option of either appealing (request for review) the inaction of the CIR with the CTA within 30 days of the expiry of the 180-day period; either wait for the decision of the CIR (authorized even beyond the 180-day period); (i) If the request is refused (definitively) by the CIR even beyond the 180-day period, the taxpayer has 30 days from the receipt of the refusal by the CIR to appeal (Request for review) the final decision of the CIR with the CTA.
As mentioned in the BIR broadcasts above, audit suspension also gives benefits to taxpayers. This will give them more time to gather documents and ease the burden of having to go face-to-face with BIR reviewers given the social distancing brought on by the pandemic. BIR examiners will also not be burdened with too much paperwork to meet the audit deadline of the cases they handle, which will help them save more time for auditing and paperwork. However, it could also derail the tax system as it will lead to more backlogs and possibly delayed resolutions of BIR audits submitted to the tax year and audit cases mentioned in the BIR issues above. It will also pile up audits and extend BIR receipts, which will also disrupt state revenues.
The advantages and disadvantages that will flow from the publication of the aforementioned circulars will undeniably be significant. The suspension of the audit can be seen as an inconvenience, as some phases of BIR reviews and audits cannot be performed virtually as it is necessary to physically review the documents. As stated, there will be more upsides than can be expected from said shows, despite the downsides.
Adjusting to the new normal brought by the pandemic is really difficult. Taxpayers are still recovering and adjusting to this new normal. Nevertheless, we must trust our tax system to ensure that the government does its best for the country. After all, the BIR is meant to ease taxpayers, not add to that burden.
Shirley Marie D. Cada is the Tax Group Supervisor of KPMG RG Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm was recognized in 2021 as Tier 1 in transfer pricing practice and in general corporate tax practice by the International Tax Review.
This article is for general informational purposes only and should not be considered professional advice on any specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG RGM&Co.
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