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GENERAL

AUDIT
DOCUMENTATION

PROCEDURES

AND

1. When does the audit process begin?The audit


process commences with the issuance of a
Letter of Authority to a taxpayer who has been
selected for audit.
2. What is a Letter of Authority? The Letter of
Authority is an official document that empowers
a Revenue Officer to examine and scrutinize a
Taxpayers books of accounts and other
accounting records, in order to determine the
Taxpayers correct internal revenue tax
liabilities.
3. Who issues the Letter of Authority? Letter of
Authority, for audit/investigation of taxpayers
under the jurisdiction of National Office, shall be
issued and approved by the Commissioner of
Internal Revenue, while, for taxpayers under the
jurisdiction of Regional Offices, it shall be issued
by the Regional Director.
4. When must a Letter of Authority be served? A
Letter of Authority must be served to the
concerned Taxpayer within thirty (30) days from
its date of issuance, otherwise, it shall become
null and void. The Taxpayer shall then have the
right to refuse the service of this LA, unless the
LA is revalidated.
5. How often can a Letter of Authority be
revalidated? A Letter of Authority is revalidated
through the issuance of a new LA. However, a
Letter of Authority can be revalidated
Only once, for LAs issued in the Revenue
Regional Offices or the Revenue District Offices;
or
Twice, in the case of LAs issued by the National
Office.
Any suspended LA(s) must be attached to the
new LA issued (RMO 38-88).
6. How much time does a Revenue Officer have
to conduct an audit?A Revenue Officer is
allowed only one hundred twenty (120) days
from the date of receipt of a Letter of Authority
by the Taxpayer to conduct the audit and submit
the required report of investigation. If the
Revenue Officer is unable to submit his final

report of investigation within the 120-day period,


he must then submit a Progress Report to his
Head of Office, and surrender the Letter of
Authority for revalidation.
7. How is a particular taxpayer selected for
audit?Officers of the Bureau (Revenue District
Officers, Chief, Large Taxpayer Assessment
Division, Chief, Excise Taxpayer Operations
Division, Chief, Policy Cases and Tax Fraud
Division) responsible for the conduct of
audit/investigation shall prepare a list of all
taxpayer who fall within the selection criteria
prescribed in a Revenue Memorandum Order
issued by the CIR to establish guidelines for the
audit program of a particular year. The list of
taxpayers shall then be submitted to their
respective Assistant Commissioner for preapproval and to the Commissioner of Internal
Revenue for final approval. The list submitted by
RDO shall be pre-approved by the Regional
Director and finally approved by Assistant
Commissioner, Assessment Service (RMOs 6499, 67-99, 18-2000 and 19-2000).
8. How many times can a taxpayer be subjected
to examination and inspection for the same
taxable year? A taxpayers books of accounts
shall be subjected to examination and inspection
only once for a taxable year, except in the
following cases:
When the Commissioner determines that fraud,
irregularities, or mistakes were committed by
Taxpayer;
When the Taxpayer himself requests a reinvestigation or re-examination of his books of
accounts;
When there is a need to verify the Taxpayers
compliance with withholding and other internal
revenue taxes as prescribed in a Revenue
Memorandum
Order
issued
by
the
Commissioner of Internal Revenue.
When the Taxpayers capital gains tax liabilities
must be verified; and
When the Commissioner chooses to exercise
his power to obtain information relative to the
examination of other Taxpayers (Secs. 5 and
235, NIRC).

9. What are some of the powers of the


Commissioner relative to the audit process?In
addition to the authority of the Commissioner to
examine and inspect the books of accounts of a
Taxpayer
who
is
being
audited,
the
Commissioner may also:

Comply
with
audit
and
investigation
requirements to present his books of accounts
and/or pertinent records, or

Obtain data and information from private parties


other than the Taxpayer himself (Sec.5, NIRC);
and

13. What is a Pre-Assessment Notice (PAN)?


The Pre-Assessment Notice is a communication
issued by the Regional Assessment Division, or
any other concerned BIR Office, informing a
Taxpayer who has been audited of the findings
of the Revenue Officer, following the review of
these findings.

Conduct inventory and surveillance, and


prescribe presumptive gross sales and receipts
(Sec. 6, NIRC).
10. What is a Notice for Informal Conference ?A
Notice for Informal Conference is a written
notice informing a Taxpayer that the findings of
the audit conducted on his books of accounts
and accounting records indicate that additional
taxes or deficiency assessments have to be
paid.
If, after the culmination of an audit, a Revenue
Officer recommends the imposition of deficiency
assessments,
this
recommendation
is
communicated by the Bureau to the Taxpayer
concerned during an informal conference called
for this purpose. The Taxpayer shall then have
fifteen (15) days from the date of his receipt of
the Notice for Informal Conference to explain his
side.
11. Within what time period must an assessment
be made?An assessment must be made within
three (3) years from the last day prescribed by
law for the filing of the tax return for the tax that
is being subjected to assessment or from the
day the return was filed if filed late. However, in
cases involving tax fraud, the Bureau has ten
(10) years from the date of discovery of such
fraud within which to make the assessment.
Any assessments issued after the applicable
period are deemed to have prescribed, and can
no longer be collected from the Taxpayer,
unless the Taxpayer has previously executed a
Waiver of Statute of Limitations.
12. What is "Jeopardy Assessment"? A
Jeopardy Assessment is a tax assessment
made by an authorized Revenue Officer without
the benefit of complete or partial audit, in light of
the ROs belief that the assessment and
collection of a deficiency tax will be jeopardized
by delay caused by the Taxpayers failure to:

Substantiate all or any of the deductions,


exemptions or credits claimed in his return.

If the Taxpayer disagrees with the findings


stated in the PAN, he shall then have fifteen (15)
days from his receipt of the PAN to file a written
reply contesting the proposed assessment.
14. Under what instances is PAN no longer
required? A Preliminary Assessment Notice
shall not be required in any of the following
cases, in which case, issuance of the formal
assessment notice for the payment of the
taxpayers deficiency tax liability shall be
sufficient:
When the finding for any deficiency tax is the
result of mathematical error in the computation
of the tax appearing on the face of the tax return
filed by the taxpayer; or
When a discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding agent; or
When a 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; or
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, machineries and
spare parts, has been sold, traded or transferred
to non-exempt persons.

15. What is a Notice of Assessment/Formal


Letter of Demand?
A Notice of Assessment is a declaration of
deficiency taxes issued to a Taxpayer who fails
to respond to a Pre-Assessment Notice within
the prescribed period of time, or whose reply to
the PAN was found to be without merit. The
Notice of Assessment shall inform the Taxpayer
of this fact, and that the report of investigation
submitted by the Revenue Officer conducting
the audit shall be given due course.
The formal letter of demand calling for payment
of the taxpayers deficiency tax or taxes shall
state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is
based, otherwise, the formal letter of demand
and the notice of assessment shall be void.

TAXPAYERS
PRIVILEGES

OBLIGATIONS

AND

16. What is required of a taxpayer who is being


audited?A Taxpayer who is being audited is
obliged to:
Duly acknowledge his receipt of the appropriate
Letter of Authority upon its presentation by the
Revenue Officer authorized to conduct the audit
by affixing in the Letter of Authority the name of
the recipient and the date of receipt.
Present within a reasonable period of time, his
books of accounts and other related accounting
records that may be required by the Revenue
Officer; and
Submit the necessary schedules as may be
requested by the Revenue Officer within a
reasonable amount of time from his (Taxpayers)
receipt of the Letter of Authority.

18. What is a Waiver of the Statute of


Limitations? The Waiver of the Statute of
Limitations is a signed statement whereby the
Taxpayer conveys his agreement to extend the
period within which the Bureau may validly issue
an assessment for deficiency taxes. If a
Taxpayer opts to execute a Waiver of the
Statute of Limitations, he shall likewise be, in
effect, waiving his right to invoke the defense of
prescription for assessments issued after the
reglementary period.
No Waiver of the Statute of Limitations shall be
considered valid unless it is accepted by a duly
authorized Bureau official.
19. If a Taxpayer does not agree with the
assessment made following an audit, can he
protest this Assessment?Yes, he can. A
Taxpayer has the right to contest an
assessment, and may do so by filing a letter of
protest stating in detail his reasons for
contesting the assessment.
20. What are the characteristics of a valid
protest? A protest is considered valid if it
satisfies the following conditions:
It is made in writing, and addressed to the
Commissioner of Internal Revenue;
It contains the information, and complies with
the conditions required by Sec. 6 of Revenue
Regulations No. 12-85; to wit:
a.) Name of the taxpayer and address for the
immediate past three (3) taxable year.
b.) Nature of request whether reinvestigation or
reconsideration specifying newly discovered
evidence he intends to present if it is a request
for investigation.
c.) The taxable periods covered.

17. What is the recourse of a Taxpayer who


cannot submit the documents being required of
him within the prescribed period of time? If a
Taxpayer, believing that he cannot present his
books of accounts and/or other accounting
records, intends to request for more time to
present these documents in order to avoid the
issuance of a Jeopardy Assessment, the
Taxpayer may execute what is referred to as a
Waiver of the Statute of Limitations.

d.) Assessment number.


e.) Date of receipt of assessment notice or letter
of demand.
f.) Itemized statement of the findings to which
the taxpayer agrees as a basis for computing
the tax due, which amount should be paid

immediately upon the filing of the protest. For


this purpose, the protest shall not be deemed
validly filed unless payment of the agreed
portion of the tax is paid first.
g.) The itemized schedule of the adjustments
with which the taxpayer does not agree.
h.) A statement of facts and/or law in support of
the protest.
The taxpayer shall state the facts, applicable
law, rules and regulations or jurisprudence on
which his protest is based, otherwise, his protest
shall be considered void and without force and
effect on the event the letter of protest submitted
by the taxpayer is accepted, the taxpayer shall
submit the required documents in support of his
protest within sixty (60) days from date of filing
of his letter of protest, otherwise, the
assessment shall become final, executory and
demandable.
It is filed within thirty (30) days from the
Taxpayers receipt of the Notice of Assessment
and formal Letter of Demand.
21. In the event the Commissioners duly
authorized representative denies a Taxpayers
protest, what alternative course of action is open
to the Taxpayer? If a protest filed by a Taxpayer
be denied by the Commissioners duly
authorized representative, the Taxpayer may
request the Commissioner for a reconsideration
of such denial and that his tax case be referred
to the Bureaus Appellate Division. The
Appellate Division serves as a "Court", where
both parties, i.e. the Revenue Officer on one
hand, and the Taxpayer on the other, can
present testimony and evidence before a
Hearing Officer, to support their respective
claims.
22. What recourse is open to a Taxpayer if his
request for reconsideration is denied or his
protest is not acted?
Should
the
Taxpayers
request
for
reconsideration be denied or his protest is not
acted upon within 180 days from submission of
documents by the Commissioner, the Taxpayer
has the right to appeal with the Court of Tax
Appeals (CTA).

Any appeal must be done within thirty (30) days


from the date of the Taxpayers receipt of the
Commissioners decision denying the request for
reconsideration or from the lapse of the 180 day
period counted from the submission of the
documents. (Sec. 228 of the Tax Code, as
amended).
23. If the Taxpayer is not satisfied with the
CTAs decision, can he appeal the decision to a
higher Court? Yes, he can. Decisions of the
Court of Tax Appeals may be appealed with the
Court of Appeals within fifteen (15) days from
the Taxpayers receipt of the CTAs decision. In
the event that the Taxpayer is likewise
unsatisfied with the decision of the Court of
Appeals, he may appeal this decision with the
Supreme Court.
24. Can a Taxpayer claim a refund or tax credit
for erroneously or illegally collected taxes? Yes,
he can. The Taxpayer may file such a claim with
the Commissioner of Internal Revenue
(Sec.229, NIRC), within two (2) years from the
payment of the tax or penalty sought to be
refunded. Failure of the Taxpayer to file such a
claim within this prescribed period shall result in
the forfeiture of his right to the refund or tax
credit.
25. If a Taxpayer has filed a claim for refund and
the Bureau has yet to render a decision on this
claim, can the Taxpayer elevate his claim to the
CTA?
Yes, he can, if the two (2) year period stated
above is about to end, and the Commissioner
has yet to render a decision on the claim. (Gibbs
v. Collector, L-13453, February 29, 1960).

REMEDIES OF THE BUREAU IN THE AUDIT


PROCESS
AND
COLLECTION
OF
DELINQUENT ACCOUNTS
26. What means are available to the Bureau to
compel a Taxpayer to produce his books of
accounts and other records? A Taxpayer shall
be requested, in writing, not more than two (2)
times, to produce his books of accounts and
other pertinent accounting records, for
inspection. If, after the Taxpayers receipt of the
second written request, he still fails to comply

with the requirements of the notice, the Bureau


shall then issue him a Subpoena Duces Tecum.
27. What course of action shall the Bureau take
if the Taxpayer fails to comply with the
Subpoena Duces Tecum?
If, after the Taxpayer fails, refuses, or neglects
to comply with the requirements of the
Subpoena Duces Tecum, the Bureau may:
File a criminal case against the Taxpayer for
violation of Section 5 as it relates to Sections 14
and 266, of the NIRC, as amended; and/or
Initiate proceedings to cite the Taxpayer for
contempt, under Section 3(f), Rule 71 of the
Revised Rules of Court.
28. What alternatives are open to Government
for the collection of delinquent accounts?
Once an assessment becomes final and
demandable, the Government may employ any,
or all, of the following remedies for the collection
of delinquent accounts:
Distraint of personal property;
Levy of real property belonging to the Taxpayer;
Civil Action; and
Criminal Action.
29. What is "Distraint of Personal Property"?
Distraint of personal property involves the
seizure by the Government of personal property
- tangible or intangible - to enforce the payment
of taxes, followed by the public sale of such
property, if the Taxpayer fails to pay the taxes
voluntarily.
30. What is "Levy of Real Property"? Levy of
real property refers to the same act of seizure,
but in this case of real property, and interest in
or rights to such property in order to enforce the
payment of taxes. As in the distraint of personal
property, the real property under levy shall be
sold in a public sale, if the taxes involved are not
voluntarily paid following such levy.

31. In what time period must collection be


made? Any internal revenue tax, which has
been assessed within the period prescribed shall
be collected within three (3) years from date of
assessment. However, tax fraud cases may be
collected by distraint or levy or by a court
proceeding within five (5) years from
assessment of the tax or from the last waiver.