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BDB Law’s “Tax Law For Business” appears in the opinion section of BusinessMirror every

Thursday. BDB Law is an affiliate of Punongbayan & Araullo (P&A).

Within, beyond scope of Letter of Authority

Due to the number of assessments and tax-audit investigations being cancelled
on account of the taxpayers’ availment of the tax-amnesty program, the Bureau
of Internal Revenue (BIR) began issuing new letters of authority (LA) for the
examination of taxpayers’ books of accounts and accounting records for the
taxable years 2006 and 2007. Thus, it has become necessary for the taxpayers
to review the sufficiency and validity of these LAs to ensure that these are not
issued arbitrarily by the BIR.

An LA is an official document that empowers a revenue officer to examine and

scrutinize a taxpayer’s books of accounts and other accounting records in order
to determine the taxpayer’s correct internal-revenue tax liabilities. It must be
served to the concerned taxpayer within 30 days from the date of its issuance;
otherwise, it shall become null and void. The taxpayer shall then have the right to
refuse being served the LA, unless it is revalidated.

Who may issue LAs? After a return has been filed, the BIR commissioner or his
duly authorized representative may authorize the examination of the books of
any taxpayer and the assessment of the correct amount of tax due from the
taxpayer. A revenue officer is allowed only 120 days from the date of receipt of
the LA 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 within the
120-day period, he must submit a progress report to his head of office and
surrender the LA for revalidation.
LAs are issued to determine the tax liability of a taxpayer. In issuing LAs, the
following rules must be observed: first, the LA must contain the correct
information about the taxpayer’s registered name, complete address and TIN;
second, the data regarding the revenue officer/s authorized to conduct the tax
audit as well as the name of his group supervisor should be properly indicated in
the LA, otherwise, the revenue officers whose names are not indicated in the LA
are considered unauthorized to conduct the tax audit; and third, the date of its
issuance, the BIR official seal and the scope of the audit examination must be
properly shown on the face of the LA. The scope of tax audit refers to the kind of
taxes and the corresponding taxable period/s to be covered by the examination.

In the case of Commissioner of Internal Revenue v. Sony Philippines Inc. (CTA

EB Case No. 90, May 17, 2007), the examiners were authorized to examine the
taxpayer’s books of accounts and other accounting records for the period “1997
and unverified prior years.” The said LA covered the period 1997 and unverified
prior years, but the assessment made on the deficiency value-added tax (VAT)
was for fiscal year ended March 31, 1998. The court ruled that the deficiency
assessment issued without a valid authority is a nullity, and the assessment
issued for 1997, using 1998 data, should be considered without force and effect.

In this case, the BIR in issuing the LA had full knowledge of the period of the
investigation. Had it wanted to include the year 1998 or the fiscal year ending in
March 31, 1998, it should have so indicated. And had there been a mistake in the
issuance thereof, the revenue examiners could have easily asked for the
required authorization from the BIR, instead of conducting an investigation
without proper authority. The fact that the taxpayer was willing to present
documents for the fiscal year that ended March 31, 1998, does not cure the
invalid act. It should emanate from the processes provided for by law. The rule is
that a void act cannot be validated or ratified (Sps. Federico L. Reyes and
Maxima Dela Paz, et al., v. Court of Appeals and The Republic of the Philippines,
G.R. No. 94524, September 10, 1998). An illegal act confers no rights, creates
no duties and, in the eyes of the law, it is as if the same had never existed
(Ismael A. Mathay Jr. v. Victor C. Macalincag, et al., G.R. No. 97618, December

In addition, the issuance of LAs for “one taxable year and all unverified prior
years” or similar statements is prohibited. An LA should cover a taxable period
not exceeding one taxable year. However, if the audit of a taxpayer shall include
more than one taxable period, the other periods or years shall be specifically
indicated in the LA, or another one covering such period is required to be issued.

With these guidelines in mind, taxpayers shall be protected against the conduct
of any unauthorized investigation and the improper use of LAs by the BIR.