Tax Remedies under the NIRC

a. General Concepts
(RAMO 1-00)

Term Definition
Letter of Authority It is an official document that empowers a Revenue Officer to examine
(LOA) and scrutinize a taxpayer’s books of accounts and other accounting
records, in order to determine the Taxpayer’s correct internal revenue tax
liabilities. (General Audit Procedures and Documentation)
Letter Notice (LN) This pertains to an automatic assessment issued by the BIR pursuant to a
computerized matching of 3rd party information without taxpayer’s contact.

 LOA should cover a taxable period not exceeding one (1) year. The practice of issuing LOA covering
audit of “unverified prior years” is prohibited.
 The revenue examiner went beyond the authority conferred LOA. LOA authorizes or empowers a
designated revenue officer to examine, verify and scrutinize a taxpayer’s books and records in
relation to his internal revenue tax liability for a particular period. In the LOA, the examiners were
authorize to examine Sony’s book of accounts and other accounting records for the period “1997
and unverified prior years.” However, CIR’s basis for deficiency VAT for 1997 was 1998. They
acted without authority in arriving at the deficiency VAT assessment. It should be considered without
force and effect – a nullity (CIR vs. Sony Philippines, Inc., G.R. No. 178697, May 17, 2007)

a.1. Assessment
a.1.1 Definition and requisites of a valid assessment

An assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a
due tax liability that is definitely set and fixed. It is a written communication containing a computation by
a revenue officer of tax liability, giving the taxpayer an opportunity to contest or disprove the BIR
examiner’s findings (Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence, First Edition, p. 282).

 An assessment contains not only a computation of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the time when penalties and interests begin to accrue
against the taxpayer. To enable the taxpayer to determine the remedies thereon, due process
requires that it must be served and received by the taxpayer. Accordingly, an affidavit which was
executed by the revenue officer stating the tax liabilities of a taxpayer and attached to a criminal
complaint for tax evasion cannot be deemed an assessment that can be questioned before the CTA.
The fact that the complaint itself was specifically directed and sent to DOJ and not to Pascor shows
that the intent of the CIR was to file a criminal complaint for tax evasion and not to issue an
assessment (CIR vs. Pascor Realty and Development Corporation, June 29, 1999, G.R. No. 128315).

Requisites for valid assessment

The taxpayer shall be informed (1) in writing of (2) the law and the facts on which the assessment is
made; otherwise the assessment shall be void. (Sec. 228 of the NIRC)

 To be simply informed in writing of the investigation being conducted and of the recommendation for
the assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of
correctly assessing a taxpayer.  The act cannot be taken to mean that Reyes already knew the law
and the facts on which the assessment was based.  It does not at all conform to the compulsory
requirement under Section 228. (CIR vs. Reyes; GR No. 159694)

 The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary
five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual
 bases of the assessment. These steps were mere perfunctory discharges of the CIR’s duties in
correctly assessing a taxpayer.The requirement for issuing a preliminary or final notice, as the case
may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different
from the requirement of what such notice must contain. Just because the CIR issued an advice, a
preliminary letter during the pre-assessment stage and a final notice, in the order required by law,
does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax
assessment was made. The law requires that the legal and factual bases of the assessment be stated
in the formal letter of demand and assessment notice. Thus, such cannot be presumed. (CIR vs. Enron
Subic Power Corporation; GR No. 166387; Jan. 19, 2009)

Substantive Due Process

The concept of due process in assessment can be summarized as follows:

1. Taxpayer should be notified that there is an assessment

2. In such notice he must be informed of the legal and factual basis of assessment, for both PAN and
FAN (CIR vs. Metro Star Superama, Inc, G.R. No. 185371, December 8, 2010).

 Assessment must not be based on mere conjectures or presumptions (CIR vs. Benipayo, 4 SCRA 182).

 The alleged “factual basis” in the advice, preliminary letter and “audit working papers” did not suffice.
There was no going around the mandate of the law that the legal and factual bases of the
assessment be stated in writing in the formal letter of demand accompanying the assessment notice
(CIR vs. Enron Subic, G.R. No. 166387, January 19, 2009).

 The formality of a control number in the assessment notice is not a requirement for its validity but
rather the contents thereof should inform the taxpayer of the declaration of deficiency tax against the
taxpayer (CIR vs. Gonzales, G.R. No. 177279, October 13, 2010).

 The old requirement of merely notifying the taxpayer of the CIR’s findings was changed in 1998 of
informing the taxpayer of not only the law, but also of the facts on which an assessment would be
made, otherwise, the assessment itself would be invalid (CIR vs. Azucena Reyes, G.R. No. 159694, January 27,
2006).

 Sending of PAN and assessment notice to the wrong address may only be seen as an attempt to
mislead or confuse ABC. In the observance of procedural due process, the SC is always mindful that a
taxpayer being made liable with his property be given an opportunity to be heard which is one of its
essential elements. With the failure of CIR to strictly comply with the procedure prescribed by law,
and failure of ABC to receive a copy of the alleged assessment, the latter was not afforded its right to
be heard for it was denied the opportunity to protest or dispute the alleged assessment (A Brown Co.,
Inc. vs. CIR, CTA 6357, June 07, 2004).

 While the lack of PAN and deviation from the requirements under Sec. 1 and 2 of RR 12-85, the same
cannot detract from the fact that the FAN were issued to and actually received by Menguito in
accordance with Sec. 228 of NIRC. The stringent requirement that an assessment notice be
satisfactorily proven to have been issued and released or, if receipt thereof is denied that the said
assessment notice have been served on taxpayer, applies only to FAN but not PAN. The issuance of
valid FAN is a substantive pre-requisite to tax collection, for it contains not only a computation of tax
liabilities but also a demand for payment within a prescribed period, thereby signaling the time when
penalties and interest begin to accrue against the taxpayer and enabling the latter to determine his
remedies thereof. Due process requires that it must be served on and received by taxpayer. A PAN
do not bear the gravity of a FAN. The PAN merely hint at the initial findings of the BIR against a
taxpayer. Hence, the lack of such notices inflicts no prejudice on taxpayer for as long as the latter is
property served with the FAN (CIR vs. Dominador Menguito, G.R. No. 167560, September 17, 2008).
Modes of Service of Assessments

Three ways to serve PAN/FAN/FDDA are as follows:

1. Personal, or
2. Registered mail
3. Substituted delivery (RR 18- 2013)

If the notice to the taxpayer is served by registered mail, and no r esponse is received from the taxpayer
within the prescribed period from date of the posting thereof in the mail, the same shall be considered
actually or constructively received by the taxpayer. If the same is personally served on the taxpayer or
his duly authorized representative who, however, refused to acknowledge receipt thereof, the same shall
be constructively served on the taxpayer (Sec. 3.1.7, RR 12-99).

 The presumption that a letter duly directed and mailed was received in the regular course of mail
cannot apply where none of the required facts to raise this presumption, i.e., that the letter was
properly addressed with postage prepaid and that it was mailed, has been shown. Mere notations on
the records of the tax collector of the mailing of a notice of a deficiency tax assessment to a
taxpayer, made without the supporting evidence, cannot suffice to prove that such notice was sent
and received; otherwise, the taxpayer would be at the mercy of the revenue officers, without
adequate protection or defense (Nava vs. CIR (G.R. No. L-19470, January 30, 1965).

Procedural Due Process (Sec. 3 of RR No. 12-99 as amended by RR No. 18-13) – please see Assessment Process

(b) Constructive Methods of Income Determination

The following are some of the methods that may be used by the BIR in order to determine whether a
taxpayer has not reported all of his income during a particular taxable year:

1. Net worth method

2. Cash expenditure method
3. Percentage method
4. Bank deposit method
5. Unit and value method
6. Third party information or access to records method
7. Surveillance and assessments method
8. Such methods as in the opinion of the BIR Commissioner clearly reflect the income

 If the revenue officers were not given the opportunity to examine the taxpayer’s documents, they are
authorized under Section 5 of the Tax Code to gather information from third parties (CIR V. Hon. Raul M.
Gonzales, October 15, 2010).

a.1.2 Tax Delinquency and Tax Deficiency

DEFICIENCY DELIQUENCY
Exists when: Exists when:
Amount imposed by law exceeds amount shown as tax The self-assessed tax is not paid at all or was only
upon return partially paid, or

An amount is determined by the BIR as a tax liability, When the deficiency tax assessed by the BIR has
where there is no amount stated in the return become final and executory
To be collected, has to go through the assessment Can be immediately collected
 process.
Filing of a civil action during pendency of protest is a Filing of a civil action for the collection of taxes is the
ground for a motion to dismiss proper remedy
Generally not subject to 25% surcharge Is subject to surcharges and administrative penalties.

a.1.3 Jeopardy Assessment

A jeopardy assessment is a tax assessment made by an authorized Revenue Officer without the benefit of
a complete or partial audit, in light of the RO’s belief that the assessment and collection of the deficiency
tax will be jeopardized by delay caused by the taxpayer’s failure to:
i. Comply with audit and investigation requirements to present his books of accounts and/or pertinent
records
ii. Substantiate all or any of the deductions, exemptions or credits claimed in his return (Sec. 3[1][a], RR
No. 30-02).

It is usually issued when statutory prescriptive periods for the assessment or collection of taxes are about
to lapse due principally to the taxpayer’s fault.

Under Sec. 204(A) of the NIRC as implemented by Sec. 3 of RR 30- 2002, the Commissioner may
compromise the payment of any internal revenue tax when there is “doubtful validity of the assessment”
where a reasonable doubt as to the validity of the claim against the taxpayer exists, when it is shown
that the delinquent account or disputed assessment is one resulting from a jeopardy assessment.

Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for
Tax Administration and Enforcement (Section 6 of the NIRC)

1. Examination of return and determination of tax due

2. Use of the best evidence available
3. Authority to conduct inventory taking, surveillance and prescribe gross sales and receipts if there is
reason to believe that the taxpayer is not declaring his correct income, sales or receipts for internal
revenue purposes
4. Authority to terminate taxable period in the following instances:
a. Taxpayer is retiring from business subject to tax;
b. Taxpayer is intending to leave the Philippines or to remove his property therefrom or to hide or
conceal his property and
c. Taxpayer is performing any act tending to obstruct the proceedings for the collection of taxes.
5. Authority to prescribe real property values
6. Authority to inquire into bank deposits accounts in the following instances:
a. A decedent to determine his gross estate;
b. Any taxpayer who has filed an application for compromise of his tax liability by reason of financial
incapability to pay;
c. A specific taxpayer is subject of a request for the supply of tax information from a foreign tax
authority pursuant to an intentional convention or agreement on tax matters to which the
Philippines is a signatory or a party thereof. Provided that the requesting foreign tax authority is
able to demonstrate the foreseeable relevance of certain information to the request. (Sec. 3 & 8, RA
10021)
d. Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized
representative to inquire into the bank deposits.
7. Authority to accredit and register tax agent.
8. Authority to prescribe additional procedural or documentary requirements.

 Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has
the duty to provide otherwise (BonifacioSy Po vs. CTA, August 18, 1988 [164 SCRA 524]). However, in CIR V.
Hantex Trading, March 31, 2005 the Supreme Court held that the rule does not apply when the CIR
 comes out with a naked assessment (an assessment that is without any foundation and hence,
arbitrary and capricious).

 In this era of developing information-storage technology, there is no valid reason to immunize

companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not
the form of the record but where it might shed light on the accuracy of the taxpayer’s return (CIR vs.
Hantex trading, L-136975).

 The best evidence obtainable rule under Section 6 of the 1997 NIRC, as amended, does not include
mere photocopies of records/documents. The petitioner, in making a preliminary and final tax
deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine
copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight
if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of
paper and are of no probative value as basis for any deficiency income or business taxes against a
taxpayer (CIR vs. Hantex Trading, L-136975).

The Best Evidence Obtainable Rule may be used when:

 No return has been filed when a report is required by law as a basis for the assessment of any tax
within the time fixed by law or regulations; or
 There is reason to believe that any such report is false, incomplete or erroneous.

GENERAL RULE: Assessment is not necessary to establish taxpayer’s liability for internal revenue taxes
because internal revenue taxes are self-assessing (self-computed).

EXCEPTION: If the taxpayer is not cooperating with the tax officials in the investigation of his books of
account (delays its presentation) the CIR may use the Best Evidence Obtainable Rule and prepare a tax
return for and in behalf of the taxpayer to expedite the collection of taxes.

 Notwithstanding the powers of the BIR, the taxpayers are still entitled to their constitutional right
against illegal search and seizure (Bache & Co. (Phil.), Inc. vs. Judge Vivencio M. Ruiz, et. al., 37 SCRA 823).

Power of the Commissioner to Obtain Information, and to Summon/ Examine, and Take
Testimony of Persons (Section 5 of the NIRC)

In ascertaining the correctness of any return, or in making a return when none has been made, or in
collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:
a. To examine any book, paper, record, or other date which may be relevant or material to such
inquiry;
b. To obtain on a regular basis from any person other than the person whose internal revenue tax
liability is subject to audit or investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities, including the BangkoSentral ng Pilipinas
and government-owned or –controlled corporations, any information such as, but not limited to, costs
and volume of production, receipts or sales and gross incomes of taxpayers, and the names,
addresses, and financial statements of corporations, mutual fund companies, insurance companies,
regional operating headquarters of multinational companies, joint accounts, associations, joint
ventures or consortia and registered partnerships, and their members;
c. To summon the person liable for tax or required to file a return, or any officer or employee of such
person, or any person having possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the person liable for tax, or any
other person, to appear before the Commissioner or his duly authorized representative at a time and
place specified in the summons and to produce such books, papers, records, or other data, and to
give testimony;
d. To take such testimony of the person concerned, under oath, as may be relevant or material to such
inquiry; and
e. To cause revenue officers and employees to make a canvass from time to time of any revenue
district or region and inquire after and concerning all persons therein who may be liable to pay any
internal revenue tax, and all persons owning or having the care, management or possession of any
object with respect to which a tax is imposed.

The above notwithstanding, nothing in Sec. 5 shall be construed as granting the Commissioner the
authority to inquire into bank deposits other than as provided for in Section 6(F) of the NIRC, as earlier
enumerated. (Please see E(a)(ii)(6) above, Authority to inquire into bank deposits account).

Note: Sec. 5(B) is also known as the Third Party Information Rule.

 Sec. 5 of NIRC allows the BIR access to all relevant or material records and data in the person of the
taxpayer, and the BIR can accept documents which cannot be admitted in a judicial proceeding
where the Rules of Court are strictly observed. The consent of the taxpayer is NOT necessary for the
procurement of the books of accounts needed for it to be given an assessment. To require the
consent of the taxpayer would defeat the intent of the law to help the BIR assess and collect the
correct amount of taxes (Fitness By Design, Inc. vs. CIR, G.R. No. 177982).

 The power of CIR to issue assessments is discretionary and not ministerial in character (Meralco vs.
Savellano, 117 SCRA 804).

When Assessment is Made

An assessment is deemed made when the demand letter or notice is released, mailed or sent by the BIR
to the taxpayer. The law does not require that the taxpayer receive the notice within the three-year or
ten-year period (CIR vs. Bautista [May 27, 1959) . So, even if the taxpayer actually received the assessment
after the expiration of the prescriptive period, provided the release thereof was effected before
prescription sets in, the assessment is deemed made on time.

 When a mail matter is sent by registered mail, there exists a presumption set forth under Sec. 3(v)
Rule 131 of the Rules of Court, that it was received in the regular course of mail. The facts to be
proved in order to raise this presumption are: a) The letter was properly addressed with postage
prepaid; and b) That it was mailed. While a mailed letter is deemed received by the addressee in the
ordinary course of mail, this is still merely a disputable presumption subject to contravention, and a
direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to
prove that the mailed letter was indeed received by the addressee (BarcelonRoxas Securities vs. CIR, G.R. No.
157064, August 7, 2006).

 Service of assessment notice on the trust officer/agent of the decedent made after the death is
invalid since at that time the legal relationship between the principal and his agent had been
automatically severed by the death of the principal even if the agent continued to act as such by
filing the decedent’s ITR (Estate of Late Julian Diez V. CIR, January 27, 2004).

a.1.4. Prescriptive Period for Assessment

i. General Rule:
Taxes shall be assessed within three (3) years after either:
(a) The last day prescribed by law for the filing of the return, or
(b) The actual filing of the return, whichever is later (Sec. 203, NIRC).

Exception:
1. Compromise (waiver through agreement). If before the expiration of the time prescribed in Section
203 for the assessment of the tax [3 years], both the Commissioner and taxpayer have agreed in
writing to its assessment after such time, the tax may be assessed within the period agreed upon,
extendible by subsequent agreements (Sec. 222(b), NIRC).

 Waiver: The waiver of the statute of limitations, whether on assessment or collection, should not be
construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement
between the taxpayer and the BIR to extend the period to a date certain, within which the latter
could still assess or collect taxes due. The waiver does not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally (Philippine Journalists, Inc. vs. CIR, G.R. No. 162852, 16 December 2004,
447 SCRA 214).

 The indefinite extension of the period for assessment is unreasonable because it deprives the said
taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after
the expiration of a reasonable period of time (Philippine Journalists, Inc. vs. Commissioner of Internal Revenue,
G.R. No. 162852, 16 December 2004, 447 SCRA 214).

Requisites of a valid waiver (RMO No. 20-90, issued on 4 April 1990) – A waiver must:
 Indicate the expiry date of the period agreed upon to assess/collect the tax
 Be signed by the taxpayer himself or his duly authorized representative
 Be duly notarized
 Be signed by the CIR or the revenue official authorized by him, indicating that the BIR has accepted
and agreed to the waiver.
 Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before
the expiration of the period of prescription or before the lapse of the period agreed upon in case a
subsequent agreement is executed.
 Be executed in three (3) copies

Revised policies on the execution of waiver pursuant to Revenue Memorandum Order No.
14-2016 dated April 4, 2016

The revised policies aim to address rampant practice by taxpayers of contesting the validity of their
own waivers after having availed of the benefits thereof. 

Waivers may be, but not necessarily, in the form prescribed by RMO No. 20-90 or RDAO No. 05-
01. Compliance with the following shall render the waivers valid:

a. Waiver shall be executed before the expiration of the period to assess or collect taxes. The
date of execution shall be specifically indicated in the waiver.

b. Waiver shall be signed by the taxpayer himself or his duly authorized representative.

For corporations, any responsible official may sign the waiver.

c. Expiry date of the agreed period to assess/collect the tax after the regular three-year period
of prescription should be indicated. 

The particular taxes or amount need not be specified considering that the amounts may not yet
be determinable at the time of the execution.  It may simply state “all internal revenue taxes”.

Since the taxpayer is the applicant, he is charged with the burden of ensuring that the  Waiver is
validly executed, as follows:

a. The Waiver shall be binding on the taxpayer upon its execution.

 b. Taxpayer cannot anymore contest the authority of the signatory for purposes of invalidating
the Waiver.  

c. lt shall be the duty of the taxpayer to submit its duly executed Waiver to the official designated
in existing issuances or the RDO or group supervisor as designated in the LOA who shall then
indicate acceptance by signing the same. Such Waiver shall be executed and accepted prior to
the expiration of the period to assess or to collect. The taxpayer shall have the duty to retain a
copy of the accepted Waiver. 

All provisions of RMO 2-90 and other issuances inconsistent with this RMO are repealed or
modified accordingly.

Rationale, Construction, Interpretation

 The law prescribing a limitation of actions for collection of income tax is beneficial both to the
government and to its citizens. a) The Government – because tax officers would be obliged to act
promptly in making of assessment; b) The Citizens – because after the lapse of the period of
prescription, citizens would have the feeling of security against unscrupulous tax agents who will
always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability,
but to take advantage of every opportunity to molest, peaceful law-abiding citizens. Without such
legal defenses, taxpayers would furthermore be under obligation to always keep their books and
keep them open for inspection subject to harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be interpreted in a way conducive to bring about the
beneficent purpose of affording protection to the taxpayer within the contemplation of the
Commissioner which recommends the approval of the law (Republic of the Philippines vs. Luis Ablaza).

 A waiver of statute of limitations, to a certain extent, is a derogation of the taxpayer’s right to

security against prolonged and unscrupulous investigations and must therefore be carefully and
strictly construed. The waiver of statute of limitations is not a waiver of a right to invoke the defense
of prescription as erroneously held by the CA. It is an agreement between the taxpayer and the BIR
that the period to issue an assessment and collect the taxes due is extended to a date certain. The
waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequally
particular where the language of the document is equivocal. For the purpose of safeguarding
taxpayers from an unreasonable examination, investigation or assessment, our tax law provides a
statute of limitations in the collection of taxes. The law of prescription being a remedial measure
should be liberally construed in order to afford such protection. The exception to the law on
prescription should perforce be strictly construed (Philippine Journalists, Inc. vs. CIR, G.R. No. 162852, December
16, 2004).

 The waiver of the statute of limitations executed by the taxpayer cannot be deemed to include taxes
already prescribed (Republic v. Lim De Yu, April 30, 1964)

 The doctrine of estoppel cannot be applied as an exception to the statute of limitations on the
assessment of taxes considering that there is a detailed procedure for the proper execution of the
waiver (CIR V. Kudos Metal Corporation, G.R. No. 178087,May 5, 2010).

Section 228 of the Tax Code requires that the taxpayer shall be informed in writing of the law and the
facts on which the assessment is made. Otherwise, the assessment is void. The CTA found that the basis
of the Estrada’s alleged deficiency tax arose from the investigation and findings of another tribunal. The
BIR has the burden to determine the amount of deficiency taxes due from a taxpayer. Such mandate is
vested upon the BIR as the primary agency tasked to assess and collect all internal revenue taxes, fees,
charges, and the enforcement of all forfeitures, penalties, and fines connected therewith. The BIR should
have conducted an independent investigation in the determination of the amount of deficiency taxes due
 the taxpayers and not merely rely on the findings of another agency or tribunal. In the absence of vital
documents from which the CTA can verify the correctness of the assessment, the deficiency income tax
assessment cannot be sustained. (Spouses Estrada v CIR, CTA 7847, November 23, 2015)

Invalidity of the Waiver cannot be raised if the taxpayer partially paid the assessment:

 Had petitioner truly believed that the waiver was invalid and that the assessments were issued
beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the
revised assessment. RCBC’s subsequent action effectively belies its insistence that the waiver is
invalid. The records show that on December 6, 2000, upon receipt of the revised assessment, RCBC
immediately made payment on the uncontested taxes. Thus, RCBC is estopped from questioning the
validity of the waivers. To hold otherwise and allow a party to gainsay its own act or deny rights
which it had previously recognized would run counter to the principle of equity which this institution
holds dear. (RCBC vs. CIR, GR No. 170257, September 7, 2011)

Counting of periods

 A year is composed of 12 calendar months. The Administrative Code of 1987, being the more recent
law than the New Civil Code, governs the computation of legal periods (CIR vs. Primetown Property Group,
G.R. No. 162155, August 8, 2007).

 Where the government has not by express statutory provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible. Thus, there is no such time limit on the right of the
Commissioner of Internal Revenue to assess the IAET under Section 29 of the Tax Code (CIR vs. Ayala
Securities, G.R. No. L-29485, November 21, 1980).

ii. False, fraudulent, and non-filing of returns

Extra-ordinary prescription. The tax may be assessed, or a proceeding in court for the collection of
such tax may be filed without assessment, at any time within ten (10) years after the discovery of either
of the following (Sec. 222(a), NIRC):
 False return, (regardless of intent to evade tax)
 Fraudulent return with intent to evade tax, or
 Failure to file a return, as in the case of:

 A wrong return (Butuan Sawmill, Inc. vs. CTA, G.R. No. L-20601)
 A grossly defective return (CIR vs. Gonzales, 18 SCRA 757)

Note: Nothing in Sec. 222(A) shall be construed to authorize the examination and investigation or inquiry
into any tax return filed in accordance with the provisions of any tax amnesty law or decree.

Under Sec. 222 of the NIRC, in the case of false or fraudulent return with intent to evade tax, or of
failure to file a return, either:

1. Assessment and Collection:

a. The tax may be assessed within 10 years after discovery of the falsity, fraud or omission (Sec. 222[a],
NIRC), and
b. Collected within five (5) years following the assessment of the tax (Sec. 222[c], NIRC);

OR

2. Collection only: A proceeding in court for the collection of tax is filed within ten (10) years after the
discovery of the falsity, fraud or omission. (Sec. 222(a), NIRC)
False vs. Fraudulent Return

In a False Return, there is a deviation from the truth, whether intentional or not. It may be due to
mistake, ignorance, or carelessness.

A Fraudulent Return, on the other hand, is intentional and deceitful with the aim of evading the correct
taxes due.

Rationale for the 10-year prescriptive period on false or fraudulent return with intent to
evade taxes and failure to file a return:

 The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 222 of
NIRC should be applicable to normal circumstances, but where the government is placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false
return, fraudulent returns intended to evade payment of tax or failure to file returns, the period of 10
years provided in Sec. 222(a) of NIRC, from time of discovery of the falsity, fraud or omission even if
it seems to be inadequate, should be the one enforced (Aznar vs. CTA, & CIR, August 23, 1974 – G.R. 20569).

Counting of the 10-year period:

 The omission was discovered only in 1971. CIR has 10 years from 1971 or until 1981 within which to
assess. The assessment of deficiency income tax was issued on 1973, which is well within the period
prescribed by law (CIR vs. CTA, March 20, 1991, G.R. No. 44007).

Filing of Fraudulent Return

Fraud must be alleged and proved as a fact. It must be the product of a deliberate intent to evade taxes.
It may be established by the integration of three factors:
a. Intentional and substantial understatement of tax liability by the taxpayer;
b. Intentional and substantial overstatement of deductions of exemptions; and/or
c. Recurrence of the above circumstances. (CIR vs. Estate of Benigno Toda Jr, GR No. 147188, Sept. 14, 2004)

Fraud-related decisions:

1. Fraud must be the product of a deliberate intent to evade taxes (Jalandoni vs. Republic)
2. Simple statement that return filed was not fraudulent does not disprove existence of fraud (Tayengco
vs. Collector)
3. Substantial under-declarations of income for six consecutive five years demonstrate fraudulence of
return (Perez vs. CTA)
4. Presence of fictitious expenses, with no evidence presented, proves existence of fraud (Tan Guan vs.
Commissioner)

However, the courts did not consider the tax returns filed as false or fraudulent with intent to evade
payment of tax in the following cases:
a. Mere understatement in the tax return will not necessarily imply fraud (Jalandoni vs. Republic)
b. Sale of a real property for a price less than its fair market value is not necessarily a false return
(Commissioner vs. Ayala Securities).
c. Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in
the trial court (Commissioner vs. Ayala Securities).
d. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances that only
create suspicion (Commissioner vs. Javier)
e. Mistakes of revenue officers on three different occasions remove element of fraud (Aznar vs. CTA and
Collector).
Rule on wrong returns or amended returns

 An income tax return cannot be considered as a return for compensating tax for purposes of
computing the period of prescription under Section 222 of the Tax Code, and that the taxpayer must
file a return for the particular tax required by law in order to avail himself of the benefits of Sec. 222
of the Tax Code; otherwise, if he does not file a return, an assessment may be made within the time
stated in Sec. 222(a) of the same Code (Butuan Sawmill Inc. vs. CTA, G.R. No. L-20601).

 The filing of a wrong return is equivalent to no return at all – the third situation in Sec. 229.
Therefore in this case, the 10 years prescriptive period would apply.

 The SC is persuaded by the fundamental principle invoked by CIR that limitations upon the right of
the government to assess and collect taxes will not be presumed in the absence of clear legislation to
the contrary and that where the government has not by express statutory provision provided a
limitation upon its right to assess unpaid taxes, such right is imprescriptible. The SC, therefore,
reconsiders its ruling in its decision under reconsideration that the right to assess and collect the
assessment in question had prescribed after 5 years, and instead rules that there is no such time limit
on the right of the CIR to assess the 25% tax on unreasonably accumulated surplus provided in Sec.
25 of NIRC, since there is no express statutory provision limiting such right or providing for its
prescription. The underlying purpose of the additional tax in question on a corporation’s improperly
accumulated profits or surplus is as set forth in the text of Sec. 25 of NIRC itself to avoid the
situation where a corporation unduly retains its surplus instead of declaring and paving dividends to
its shareholders or members who would then have to pay the income tax due on such dividends
received by them. The record amply shows that Ayala Securities is a mere holding company of its
shareholders through its mother company, a registered co-partnership then set up by the individual
shareholders belonging to the same family and that the prima facie evidence and presumption set up
by the Tax Code, therefore applied without having been adequately rebutted by the Ayala Securities
(CIR vs. Ayala Securities Co., November 21, 1980 – G.R. L-29485).

Defective Return

A wrong return, however, is different from a defective return. Defective returns may be sufficient if there
is a substantial compliance.

There is substantial compliance when:

(1) The return is made in good faith and is not false or fraudulent;
(2) It covers the entire period involved; and
(3) It contains information as to the various items of income, deduction and credit with such definiteness
as to permit the computation and assessment of the tax (CIR vs. Lilia Gonzales, [18 SCRA 757]).

 Where the return was made in the wrong form, the filing thereof did not start the running of the
period of limitations, and where the return was very deficient; there was no return at all. If the
taxpayer failed to observe the law, Sec. 222 of the NIRC grants CIR a 10 year period within which to
bring an action for tax collection, applies. The return filed in this case was so deficient that it
prevented the Commissioner from computing the taxes due on the estate. It was though no return
was made. The Commissioner had to determine and assess the taxes on date obtained, not from the
return, but from other sources (CIR vs. Lilia Gonzales, [18 SCRA 757]).\

iii. Suspension of Running of Statute of Limitations

1. When taxpayer cannot be located in the address given by him in the return, unless he informs the
CIR of any change in his address thru a written notice to the BIR;
  The suspension of the three-year period to assess applies only if the BIR Commissioner is not
aware of the whereabouts of the taxpayer. Hence, despite the absence of a formal written notice
of respondent's change of address, the fact remains that petitioner became aware of
respondent's new address as shown by documents replete in its records. As a consequence, the
running of the three-year period to assess respondent was not suspended and has already
prescribed. (CIR vs. BASF Coating + Inks Phils., GR No. 198677 dated November 26, 2014).

2. When the taxpayer is out of the Philippines (Sec. 223, NIRC)

3. Where the CIR is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court for 60 days thereafter, such as where there is a pending petition for review in
the CTA from the decision on the protested assessment (Republic v. Ker & Co., GR L-21609);
4. Where CIR and the taxpayer agreed in writing for the extension of the assessment, the tax may be
assessed within the period so agreed upon (Sec. 222 [b], NIRC);
5. When the taxpayer requests for reinvestigation which is granted by the Commissioner (Collector v.
Suyoc Consolidated Mining Co., GR L-11527, Nov. 25, 1958);

Note: A request for reconsideration alone does not suspend the period to assess/collect.

6. When there is an answer filed by the BIR to the petition for review in the CTA (Hermanos v. CIR, GR. No.
L-24972. Sept. 30, 1969) where the court justified this by saying that in the answer filed by the BIR, it
prayed for the collection of taxes.
7. When the Warrant of distraint and levy is duly served upon the taxpayer, his authorized
representative or a member of his household with sufficient discretion and no property is located
(proper only for suspension of the period to collect);

a.1.5. Civil Penalties, additions to the tax

i. Delinquency interest and Deficiency interest

There shall be assessed and collected an interest at 20% per annum on any unpaid amount of tax or
higher rate prescribed by rules and regulations from the date prescribed for payment until the amount is
fully paid.

Delinquency interest – In case of failure to pay:

 Tax due on any return required to be filed, or
 Tax due for which no return is required, or
 Deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and
demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest
at the rate prescribed until the amount is fully paid, which interest shall form part of the tax . (Sec.
249[C] of the NIRC)

Deficiency interest – The term ‘deficiency’ means the amount by which the taxed imposed under the
Code exceeds the amount shown on the return filed (Sec. 249[B] of the NIRC).

ii. Surcharge
a. There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to 25% of the
amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the provisions of the
NIRC or rules and regulations on the date prescribed;

Note: The imposition of the 25% surcharge is on the failure to file the return AND pay the tax
due thereon. Thus, in an amended return with increased tax liability, the 25% surcharge does
 not attach, since the return was filed and only an increase amount of tax is due as a result of the
amendment.

(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer
other than those with whom the return is required to be filed.

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment.

Note: Failure to pay in this case is for the payment of DEFICIENCY tax and not failure to pay
the tax stated on the return. Such that if the taxpayer filed a return, paid P100,000 income tax
and upon investigation, the income tax liability was determined to be P120,000, no surcharge is
imposed if the taxpayer paid the P20,000 deficiency tax on time. However, if he paid after the
date specified in the demand letter, there shall be a 25% surcharge on the P20,000 deficiency
tax.

(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under
the provisions of the NIRC or rules and regulations, or the full amount of tax due for which no
return is required to be filed, on or before the date prescribed for its payment.

b. In case of willful neglect to file the return within the period prescribed by the NIRC or by rules and
regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall
be 50% of the tax or of the deficiency tax, in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud:

Provided, that a substantial under declaration of taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a
false or fraudulent return:

Provided Further, that failure to report sales, receipts or income in an amount exceeding 30% of that
declared per return, and a claim of deductions in an amount exceeding 30% of actual deductions,
shall render the taxpayer liable for substantial under declaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein. (Section 248, NIRC)

 Good faith and honest belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax are sufficient justification to delete the imposition
of surcharges (Michel J. Lhuillier Pawnshop v. CIR, September 11, 2006).

iii. Compromise Penalties

Compromise Penalty is a certain amount of money which the taxpayer pays to compromise a tax
violation. The penalty is paid in lieu of criminal prosecution, and cannot be imposed in the absence of a
showing that the taxpayer consented thereto.

"All criminal violations may be compromised except : (a) those already filed in court , or (b)
those involving fraud." (Sec. 204, NIRC)

Based on the above provision of the NIRC, under Sec. 6 of RR No. 12-99, in general, the taxpayer's
criminal liability arising from his violation of the pertinent provision of the Code may be settled extra-
judicially instead of the BIR instituting against the taxpayer a criminal action in Court.

Except: Those already filed in court or those involving criminal tax fraud. (Sec. 6, RR No. 12-99)
Consent of the taxpayer necessary

A compromise in extra-judicial settlement of the taxpayer's criminal liability for his violation is
consensual in character, hence, may not be imposed on the taxpayer without his consent. Hence, the
BIR may only suggest settlement of the taxpayer's liability through a compromise.

a.1.6 Assessment process and reglementary periods

i. Letter of Authority and Tax Audit

 Letter of Authority (LOA) is the authority given to the appropriate Revenue Officer assigned to
perform assessment functions. Under Sec. 13 and 6(A), there must be a grant of authority before any
revenue office can conduct an examination or assessment. In the absence of such an authority, the
assessment or examination is a nullity (CIR vs. Sony Phil., Inc., G.R. No. 178697, November 17, 2010).

Cases which need not be covered by a valid LOA:

1. Cases involving civil or criminal tax fraud which fall under the jurisdiction of the tax fraud division of
the Enforcement Services; and
2. Policy cases under audit by the Special Teams in the National Office (RMO 36-99)

 A Letter of Authority should cover a taxable period not exceeding one (1) taxable year. The practice
of issuing LAs covering audit of “unverified prior years” is therefore prohibited (CIR vs. Sony Phil., Inc. G.R.
No. 178697, November 17, 2010).

It must be served to the taxpayer within 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. It can be revalidated through the issuance of a new LA. It can be revalidated only once, if
issued by the Regional Director; twice, if issued by the CIR. The suspended LA(s) must be attached to
the new issued LA. (RMO 38-88)

LOA and Request for Documents: The initial request for documents is usually attached to the LOA.
Non-compliance therewith will result to the issuance of a second and final notice.

Subpoena Duces Tecum (SDT): After 10 days from receipt of the Second and Final Notice and the
taxpayer still did not comply, the authorized BIR officer shall request for the issuance of a subpoena.
Non-compliance with the SDT may eventually lead to criminal prosecution.

Can the Assessment Process Start without LOA but with Letter Notice?

The CTA ruled that according to RMO 30-2003 and RMC 40-2003, LOA is issued to authorize a Revenue
Officer to examine the taxpayer's books of account. Thus, when there is no examination of taxpayer's
books of account, it necessarily follows that there is no need to issue LOA with regard thereto.

Under the Tax Code, CIR is authorize to issue tax assessment other than by force of LOA alone, such as
on the basis of “best obtainable evidence” or through inventory taking, surveillance and prescribing
presumptive’s gross sales and receivables. In the present case, respondent is under no obligation to issue
a LOA to examine petitioner's books of account when there is no examination thereof.

Thus, the finding of discrepancies between petitioner's income tax returns and VAT returns leading to
VAT deficiency assessment by matching petitioner's declarations therein, suffice to initiate the
assessment process. The mere absence of an LOA in this case does not invalidate the aforesaid
assessment. (Medicard Philippines Inc. v. CIR, CTA E.B. 1224, September 2, 2015)

Tax audit

 A Revenue Officer is allowed only 120 days to conduct the audit and submit the required report of
investigation from the date of receipt of a LA by the taxpayer. If the RO 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 LA for revalidation.

BIR Audit Program

The report of investigation/verification of cases covered by electronic letter of authority (eLA) pursuant to
this Order shall be submitted by the RO within the following prescribed number of calendar days:

Cases covered by eLAs - 180 days for Regional cases and 240 days for LT cases, from the date of
issuance of eLA

VAT Audit – Within 60 to 90 days from the date of issuance of eLA covering 1 or 2 quarters, respectively

 As a general rule, a taxpayer can be subjected to examination and inspection for the same taxable
year ONLY ONCE.

The following are the exceptions:

1. When the CIR determines that fraud, irregularities, or mistakes were committed by the taxpayer;
2. When the taxpayer himself requests for the re-investigation or re-examination of his books of
accounts and it was granted by the Commissioner;
3. When there is a need to verify the taxpayer’s compliance with withholding and other internal revenue
taxes as prescribed in a Revenue Memorandum Orders issued by the Commissioner;
4. When the taxpayer’s capital gains tax liabilities must be verified; and
5. When the commissioner chooses to exercise his power to obtain information relative to the
examination of other taxpayers (Secs. 5 and 235, NIRC)

No, Section 228 of the Tax Code requires that the taxpayer shall be informed in writing of the law and
the facts on which the assessment is made. Otherwise, the assessment is void. The CTA found that the
basis of the Estrada’s alleged deficiency tax arose from the investigation and findings of another tribunal.
The BIR has the burden to determine the amount of deficiency taxes due from a taxpayer. Such mandate
is vested upon the BIR as the primary agency tasked to assess and collect all internal revenue taxes,
fees, charges, and the enforcement of all forfeitures, penalties, and fines connected therewith. The BIR
should have conducted an independent investigation in the determination of the amount of deficiency
taxes due the taxpayers and not merely rely on the findings of another agency or tribunal. In the absence
of vital documents from which the CTA can verify the correctness of the assessment, the deficiency
income tax assessment cannot be sustained. (Spouses Estrada v CIR, CTA 7847, November 23, 2015)

ii. Notice of Informal Conference

The requirement for the issuance of a letter of informal conference before a Preliminary Assessment
(PAN) is issued has been removed under RR No. 18-13.

However, on January 31, 2018, Finance Secretary Carlos G. Dominguez issued RR No. 7-2018 which
restored the provision on Notice of Informal Conference as a due process requirement in the issuance of
a deficiency tax assessment.
The Notice of Informal Conference is a written statement issued by the BIR informing the taxpayer of the
discrepancies in the taxpayer’s tax payments for the purpose of conducting an informal conference
wherein the taxpayer will be given an opportunity to present his side of the case.

iii. Issuance of Preliminary Assessment Notice; General rule and exceptions

The PAN 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.

The requirements of a valid PAN:

1. In writing; and
2. Should inform the taxpayer of the law and the facts on which the assessment is made (Sec. 228, NIRC)

Under RR No. 12-99, as amended by RR No. 18-13, the PAN shall show in detail the facts and the law,
rules and regulations, or jurisprudence on which the proposed assessment is based. (Sec. 3.1.1)

Exceptions to Issuance of PAN

(a) When the finding for any deficiency tax is the result of MATHEMATICAL ERROR in the computation
of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the TAX WITHHELD and the amount ACTUALLY
REMITTED by the withholding agent; or
(c) When a taxpayer who opted to claim a REFUND OR TAX CREDITof 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
(d) When the EXCISE TAX due on excisable articles has not been paid; or
(e) 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
a non-exempt person. (Sec. 228, NIRC)

NOTE: In the above-cited cases, a FLD/FAN shall be issued outright. (RR No. 18-13)

Absence of PAN:

The issuance of the PAN is part of the due process requirement under RR No. 18-13. Thus, if the BIR did
not issue a PAN or did not give the taxpayer an opportunity to respond within 15 days, this will be a
violation of the due process right of a taxpayer.

 The Supreme Court has already ruled that if a taxpayer is not given an opportunity to respond to a
PAN, any resulting assessment will be considered null and void . (Metro Star Superama, Inc. vs. Commissioner
of Internal Revenue, G.R. No. 185371, December 8, 2010)

Reply to Preliminary Assessment Notice

Previously, a PAN issued by the BIR will state the following:

"Pursuant to the provisions of Section 228 of the 1997 NIRC and its implementing Revenue Regulations,
you are hereby given the opportunity to present in writing your side of the case within fifteen (15)
days from receipt thereof. However, if you are amenable to pay xxx.”

However, after the effectivity of RR No. 18-2013, a PAN now states the following:

“Pursuant to the provisions of Section 228 of the 1997 NIRC and its implementing Revenue Regulations,
you are hereby given fifteen (15) days from receipt hereof to pay the aforesaid deficiency tax
liabilities in a duly authorized agent bank in which you are enrolled using the BIR Payment Form (BIR
Form 0605) attached herewith. Afterwards, submit proof of payment for updating of your records and
cancellation of the herein PAN, if warranted.”

Based on the above amendment, the taxpayer is already directed to pay the deficiency tax indicated in
the PAN, unlike in the previous version of the provision where the taxpayer is merely directed to respond
with his side of the case.

Under RMC No. 11-14, the BIR clarified that this new practice is not violative of the due process rights of
the taxpayer, to wit:

“An FLD/FAN issued reiterating the immediate payment of deficiency taxes and penalties previously made
in the PAN is a denial of the response to the PAN. A final demand letter for payment of delinquent taxes
may be considered a decision on a disputed assessment (Isabela Cultural Corporation vs. Commissioner of Internal
Revenue, G.R. No. 135210, July 11, 2001). This includes a disputed PAN. So long as the parties are given the
opportunity to explain their side, the requirements of due process are satisfactorily complied with (Calma
vs. Court of Appeals, G.R. No. 122787, February 9, 1999).

iv. Issuance of Formal Letter of Demand and Assessment Notice/Final Assessment Notice

Notice of Assessment (Final Assessment Notice “FAN” and/or Formal Letter of Demand “FLD”)

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. This is commonly known as the Final Assessment Notice (FAN). An assessment contains
not only a computation of tax liabilities, but also a demand for payment with a prescribed period.

 The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to pay. An
assessment is a notice to the effect that the amount therein stated is due as tax and a demand for
payment thereof (Tupaz vs. Ulep, G.R. No. 127777, October 1, 1999).

Requirements for validity:

1. The formal letter of demand shall be issued by the Commissioner or his duly authorized
representative.
2. The letter of demand calling for the payment of the taxpayer’s deficiency taxes shall state the FACTS,
the LAW, RULES and REGULATIONS or JURISPRUDENCE on which the assessment is based.

OTHERWISE, the formal letter of demand or assessment notice shall be VOID (Sec. 3.1.3 of RR No. 12-99, as
amended by RR No. 18-13).

v. Disputed Assessment

The taxpayer or its authorized representative or tax agent may protest administratively against the
aforesaid FLD/FAN within thirty (30) days from date of receipt thereof. The taxpayer protesting an
assessment may file a written request for reconsideration or reinvestigation. (Sec. 3.1.4 of RR No. 12-99 as
amended by RR No. 18-13)
Administrative Decision on a Disputed Assessment

The decision of the Commissioner or his duly authorized representative shall state the (i) facts, the
applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the
decision shall be void; and (ii) that the same is his final decision. (Sec. 3.1.5 of RR No. 12-99, as amended by RR
No. 18-13)

a.2 Collection

a.2.1 Requisites

Collection is only allowed when there is already a final assessment made for the determination of the tax
due. Assessments are deemed final when:
1. The taxpayer fails to file a protest 30 days from receipt of the assessment; or
2. After 30 days from the receipt of the decision of the CIR and the taxpayer fails to appeal.

a.2.2 Prescriptive periods

General Rule:

1. Where an assessment was made - period for collection (by distraint or levy or by a proceeding in
court) is within 5 years following the assessment of tax. (Sec. 222[c], NIRC)
2. In the case of a false or fraudulent return with intent to evade tax or of failure to file a return , a
proceeding in court for the collection of such tax may be filed without assessment, at any time within
10 years after the discovery of the falsity, fraud or omission . ( Sec.222 [a], NIRC)

Exceptions
1. The same exceptions relative to the prescriptive periods for assessment are also applicable.
2. If the government makes another assessment or the assessment made is revised, the prescriptive
period for collection of such tax should be counted from the date the last or revised assessment was
made.
3. Where an action is brought to enforce a compromise , the prescriptive period is 10 years from the
time the right of action accrues as fixed in the Civil Code. (Art. 1144 [1], NCC)

b. Taxpayer’s remedies

b.1 Protesting Assessment

b.1.1 Protest of Assessment by Taxpayer

It is the act by the taxpayer of questioning the validity of the imposition of the corresponding delinquency
increments for internal revenue taxes as shown in the notice of assessment and letter of demand.

An assessment becomes a “disputed” assessment when petitioner requests for the cancellation and or
withdrawal of the same.

A protested assessment or a disputed assessment is where the taxpayer questions an assessment and
asks the BIR to reconsider or cancel the same because he believes he is not liable therefore.

b.1.2 Period to file protest

An assessment may be protested administratively by filing a request for reconsideration or reinvestigation
within thirty (30) days from receipt of the assessment. (Section 228, NIRC)

b.1.3 Form, content and validity of protest

Forms of protest

1. Request for reconsideration- a claim for re-evaluation of the assessment based on existing
records without need of additional evidence. It may involve a question of fact or law or both. It does
not toll the statute of limitations.
2. Request for reinvestigation- a claim for re-evaluation of the assessment based on newly-
discovered or additional evidence. It may also involve a question of fact or law or both. It tolls the
statute of limitations.

Under Sec. 223 of the NIRC, the running of the prescriptive period can only be suspended by a request
for reinvestigation, not a request for reconsideration.

In a request for reinvestigation, the taxpayer is given 60 days from the filing of the protest to provide all
relevant supporting documents. (see b.1.4. )

Content and validity of protest

A protest is considered validly made if it satisfies the following conditions:

1. In writing;
2. Addressed to the CIR;
3. Accompanied by a waiver of the Statute of Limitations in favor of the Government. Without the
waiver the prescriptive period will not be tolled; (BPI v. CIR, GR 139736, October 17, 2005)
4. State the facts, applicable law, rules and regulations or jurisprudence on which the protest is based
otherwise the protest would be void; and
5. Must contain the following:
a. Name of the taxpayer and address for the immediate past 3 taxable years;
b. Nature of the request, specifying the newly discovered evidence to be presented;
c. Taxable periods covered by the assessment;
d. Amount and kind of tax involved and the assessment notice number;
e. Date of receipt of the assessment notice or letter of demand;
f. Itemized statement of the finding to which the taxpayer agrees (if any) as basis for the
computation of the tax due, which must be paid upon filing of the protest;
g. Itemized schedule of the adjustments to which the taxpayer does not agree;
h. Statements of facts or law in support of the protest; and
i. Documentary evidence as it may deem necessary and relevant to support its protest to be
submitted 60 days from the filing thereof.

NOTE: RR 18-13 mandates that protests should include the facts, law, rules, regulations on which the
protest is based. Otherwise, the protest is void and of no effect.  For items in the assessment not
properly protested, these shall become final and demandable and a collection letter shall be issued
immediately.

b.1.4. Submission of Documents Within 60 Days From Filing of Protest (Allowed Only in
Reinvestigation)

Within sixty (60) days from filing of the protest, all relevant supporting documents must be submitted,
otherwise the assessment shall become final. (Section 228 of the NIRC)
NOTE: RR 18-13 requires an identification of the kind of protest filed – whether a reconsideration or
reinvestigation.  The submission of additional documents within 60 days from filing of protest is allowed
only in the case of reinvestigation.  For motion for reconsideration, the decision of the BIR will be based
only on documents already submitted to the BIR prior to the issuance of FAN and no new evidence will
be accepted.

Relevant Supporting Documents:

 The CIR cannot demand other supporting documents, particularly if they do not exist and eventually
hold that failure to provide within the 60-day period makes the assessment final and executory. “The
term "relevant supporting documents" should be understood as those documents necessary to
support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can
only inform the taxpayer to submit additional documents. The BIR cannot demand what type of
supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR,
which may require the production of documents that a taxpayer cannot submit.” (CIR vs. First Express
Pawnshop Company, Inc.; GR No. 172045-46; June 16, 2009)

b.1.5 Effect of Failure to file Protest

When no protest is seasonably made by the taxpayer, the assessment shall become final, executory and
demandable, and no request for reconsideration or reinvestigation shall be granted thereon .(Sec. 3.1.4 of RR
No. 12-99, as amended by RR No. 18-13)

b.1.6. Decision of the Commissioner on the protest filed

i. Period to act upon or decide on protest filed

The CIR has 180 days from the date of:

1. Filing of the protest, in case of a request for reconsideration; or
2. Submission by the taxpayer of the required documents within 60 days from filing of the protest, in
case of a request for reinvestigation.

(vii) Rendition of decision by Commissioner

(a) Denial of Protest

Direct Denial of Protest– The protest may be denied by an administrative decision on a disputed
assessment, stating the facts, applicable law, rules and regulations or jurisprudence on which such
decision is based otherwise, the decision shall be void in which case the same shall not be considered a
decision on a disputed assessment and that the same is his final decision. (RR 12-99)

Indirect Denial of Protest:

a. Formal and final letter of demand from the BIR to the taxpayer.
b. Civil collection can also be considered as denial of protest of assessment (BIR v. Union Shipping Corp., G.R.
No. 66160, May 21, 1990)
c. Commissioner did not rule on the taxpayer’s motion for reconsideration of the assessment, the period
to appeal will only start when the respondent would receive the summons for the civil action for
collection of deficiency tax (BIR v. Union Shipping Corp., G.R. No. 66160, May 21, 1990)

 Preliminary collection letter may serve as assessment notice. (United International Pictures v. CIR, G.R. No.
110318, August 28, 1996)

d. Issuance of warrant of distraint and levy to enforce collection of deficiency assessment is outright
denial of the request for reconsideration (Hilado v. CIR. CTA case no. 1256, Feb. 25, 1964)
(1) Commissioner’s actions equivalent to denial of protest

a. Filing of criminal action against taxpayer

The filing of a criminal action against a taxpayer after the filing of a protest is deemed a denial of such
protest. However, the institution of a criminal action cannot in itself be considered as an assessment. In
the first instance, there is already an assessment made by the BIR, and the protest thereon is denied
through the criminal action. In the latter, there is no assessment yet, and the criminal charges filed,
cannot be deemed an assessment in itself. (see Pascor Realty case under [E] Tax Remedies under the NIRC, [a]
Assessment)

b. Issuing a warrant of distraint and levy

Issuance of warrant of distraint and levy to enforce collection of deficiency assessment is outright denial
of the request for reconsideration (Hilado v. CIR. CTA case 1256, February 25, 1964)

(2) Inaction by Commissioner

An indirect denial of protest results if the CIR through its actions, in relation to a pending protest, does
either of the following:

1. Inaction by the CIR within the 180-day period (Sec. 228, last par., NIRC) provided to act upon a protest.
2. Filing of a collection case before the regular courts for the collection of the tax (Yabes vs. Flojo, G.R.
No. L-46954).
3. Issuance of a warrant of distraint or levy, except:
a. When the protest was not taken into account before the warrant of distraint and levy was issued
b. When the taxpayer is left in the dark as to which action of the Commissioner is appealable
4. Sending of a Final Notice before seizure, indicating that the CIR is giving the taxpayer “the LAST
OPPORTUNITY to settle the assessment”.
5. Sending of a Demand letter, containing a text with the words “final decision” and “appeal”, similar
to the tenor of the following:
a. “This constitutes our final decision on the matter. If you are not agreeable, you may appeal to
the CTA within 30 days from receipt of this letter.”
b. “This is our final decision based on the investigation. If you disagree, you may appeal this final
decision within 30 days from receipt hereof, otherwise said deficiency tax assessment shall
become final, executory and demandable.”
6. Referral by the Commissioner of the request for reinvestigation to the Solicitor General because this
shows the insistence of the Commissioner to collect tax.
7. Service of a Preliminary Collection Letter, since it presupposes the existence of a valid
assessment notice.

In all these cases, the 30-day period is reckoned from such implicit denial of protest.

CIR fails to act on the protest within 180 days from submission of relevant documents

 In cases of inaction, Sec. 228 of Tax Code merely gave taxpayer an option: (1)he may appeal to CTA
w/in 30 days from lapse of 180-day period provided for; or (2)he may wait until Commissioner
decides on his protest before he elevates his case. The taxpayer was given this option so that in case
his protest is not acted upon within the 180-day period, he may be able to seek immediate relief and
need not wait for indefinite period of time for Commissioner to decide. But if he chooses to wait for
positive action on the part of the Commissioner, then the same could not result in assessment
becoming final, executory and demandable. (Lascona Land Co. Inc. vs. CIR).
 RR No. 12-99 is not inconsistent with Sec 228 of the NIRC. It merely implements Sec 228 by
establishing guidelines on the nature of decision rendered by the authorized representative of the CIR
on a disputed assessment. The taxpayer is given a choice whether to appeal a decision to the CIR or
to the CTA. The decision of the authorized representative will not attain finality if the taxpayer
appeals the same to the CIR who shall then be required to decide on the protest himself (Moog Controls
Corp. Phil. Branch vs. CIR)

 Jurisdiction of the CTA has been expanded to include not only decisions or rulings, but also inaction
of the CIR. Decisions, rulings, inaction of the CIR are necessary to vest the CTA with jurisdiction to
entertain appeal, provided it is filed within 30 days after receipt of decision or ruling or within 30 days
after expiration of the 180-day period fixed by law for the CIR to act on a disputed assessment. The
30-day period is jurisdictional and failure to comply bars appeal and deprives the CTA of jurisdiction.
In case the CIR failed to act on a disputed assessment within the 180-day period, the taxpayer can
either: (1) file petition for review with CTA within 30 days, or (2) await the final decision of the CIR
on disputed assessments and appeal such final decision to CTA within 30 days after receipt of the
copy of the decision. These options are mutually exclusive (RCBC vs. CIR, June 16, 2006).

ii. Remedies of Taxpayer to Action by Commissioner

(a) In Case of Denial of Protest

The remedy is to appeal such decision to the CTA within 30 days from receipt of the decision. Otherwise,
the assessment will become final, executory and demandable.

Note: If the taxpayer elevates his protest to the CIR within 30 days from date of receipt of the final
decision of the CIR’s duly authorized representative, such decision will not be final and executory.

Proper venue for the filing of the request of reconsideration

Request for reconsideration to the Commissioner within thirty (30) days from date of receipt of the said
decision. No request for reinvestigation shall be allowed in administrative appeal and only issues raised in
the decision of the Commissioner’s duly authorized representative shall be entertained by the
Commissioner.

The request for reconsideration should be filed to the Office of the Commissioner and not with the Office
of the concerned Regional Director (RD), Assistant Commissioner-Large Taxpayers Service (ACIRLTS) and
Assistant Commissioner-Enforcement Service (ACIR-ES), who signed the assessment notices. (RR No. 18-
2013)

(b) In Case of Inaction by Commissioner Within 180 Days From Submission of Documents

The taxpayer has two alternative options:

1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period; or
2. Wait for the final decision of the CIR on the disputed assessment and appeal the final decision to the
CTA within 30 days from the receipt of the decision.

iii. Effect of Failure to Appeal

1. The decision or assessment becomes final and executory.

2. In an action for the collection of the tax by the government, the taxpayer is barred from re-opening
the question already decided.
3. The assessment is considered correct which may be enforced by summary or judicial remedies.
4. In a proceeding for collection of tax by judicial action, the taxpayer’s defenses are similar to those of
the defendant in a case for the enforcement of a judgment by judicial action.
5. The assessment which has become final and executory cannot be superseded by a new assessment.

Protesting an Assessment/Remedy During Collection Stage after Assessment has attained

Finality:

General Rule

Once the assessment has become final and executory, the taxpayer in a collection case cannot go into
the merits of the assessment.

Exception:

1. Non-service of PAN (CIR vs. Metro Star Superama, Inc., G.R. 185371, December 2010)
2. Waiver on part of Government (Republic vs. Ker, 18 SCRA 208 [1966])
3. No valid waiver of the prescriptive period on the part of the taxpayer (Philippine Journalists, Inc. vs. CIR,
G.R. No. 162852, 16 December 2004, 447 SCRA 214).

 The fact that the assessment had reached finality for failure to protest must be raised by the CIR as
defense for the court to dismiss the case in its favor. Failure to do so would amount to a waiver on
the part of the government (Republic vs. Ker, 18 SCRA 208).

 The validity of the assessment itself is a separate and distinct issue from the issue of whether the
right of the CIR to collect the validity assessed tax has prescribed (Marcos II vs. CA, G.R. No. 120880).

 The finality of the assessment, as worded in the provision of law, simply means that where the
taxpayer decides to forego with its opportunity to present the documents in support of its claim
within sixty (60) days from the filing of its protest, it merely lost its chance to further contest the
assessment (Solidbank Corporation vs. CIR, G.R. No. 148191, November 25, 2003).

 Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer’s
request for reconsideration before he can go to court for the purpose of collecting the tax assessed
(Republic vs. Lim Tian Teng Son & Co., Inc., 16 SCRA 584 (1966)).

b.2 Compromise and abatement of taxes

Basis for Acceptance of Compromise Settlement (RR No. 30-2002):

A. Doubtful validity of the assessment

The offer to compromise a delinquent account or disputed assessment under these Regulations on the
ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that:
1. The delinquent account or disputed assessment is one resulting from a jeopardy assessment (For this
purpose, “jeopardy assessment” shall refer to a tax assessment which was assessed without the
benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that
the assessment and collection of a deficiency tax will be jeopardized by delay because of the
taxpayer’s failure to comply with the audit and investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or
credits claimed in his return); or
2. The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is
reason to believe that it is lacking in legal and/or factual basis; or
3. The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice
of assessment and there is reason to believe that the assessment is lacking in legal and/or factual
basis; or
4. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of
final assessment notice and there is reason to believe that the assessment is lacking in legal and/or
factual basis; or
5. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the
Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof
and there is reason to believe that the assessment is lacking in legal and/or factual basis; or
6. The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed
to comply with the formalities prescribed under Sec. 228 of the National Internal Revenue Code of
1997; or
7. Assessments made based on the “Best Evidence Obtainable Rule” and there is reason to believe that
the same can be disputed by sufficient and competent evidence; or
8. The assessment was issued within the prescriptive period for assessment as extended by the
taxpayer’s execution of Waiver of the Statute of Limitations the validity or authenticity of which is
being questioned or at issue and there is strong reason to believe and evidence to prove that it is not
authentic .

B. Financial incapacity - The offer to compromise based on financial incapacity may be accepted
upon showing that:

1. The corporation ceased operation or is already dissolved. Provided, that tax liabilities corresponding
to the Subscription Receivable or Assets distributed/distributable to the stockholders representing
return of capital at the time of cessation of operation or dissolution of business shall not be
considered for compromise; or
2. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal
Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by
at least 50%, provided that amounts payable or due to stockholders other than business-related
transactions which are properly included in the regular “accounts payable” are by fiction of law
considered as part of capital and not liability, and provided further that the taxpayer has no sufficient
liquid asset to satisfy the tax liability; or
3. The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) computed by
deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners
reflected as liabilities, except business related transactions) from total assets (net of prepaid
expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets),
taken from the latest audited financial statements, provided that in the case of an individual
taxpayer, he has no other leviable properties under the law other than his family home; or
4. The taxpayer is a compensation income earner with no other source of income and the family’s gross
monthly compensation income does not exceed the levels of compensation income provided for
under Sec. 4.1.1 of these Regulations, and it appears that the taxpayer possesses no other leviable
or distrainable assets, other than his family home; or
5. The taxpayer has been declared by any competent tribunal/authority/body/government agency as
bankrupt or insolvent.

Note: The Commissioner shall not consider any offer for compromise settlement by reason of financial
incapacity unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits
under R.A. No. 1405 or under other general or special laws, and such waiver shall constitute as the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.

The compromise settlement is subject to the following minimum amounts:

1. For cases of financial incapacity, a minimum compromise rate of 10% of the basic assessed tax;
2. For other cases, a minimum compromise rate equivalent to 40% of the basic tax assessed.
Where the basic tax involved exceeds P1,000,000.00 or the settlement offered is less that the prescribed
minimum rates, the compromise shall be subject to the approval of the Evaluation Board composed of
the Commissioner and the four (4) Deputy Commissioners.

ABATEMENT

An abatement is a diminution or decrease in the amount of tax imposed such that to abate is to nullify or
reduce in value or amount.

Grounds:
1. The tax or any portion thereof appears to have been unjustly or excessively assessed; or
2. The administration and collection costs involved do not justify collection of the amount due

Refund or Credit: The Commissioner may refund or credit any tax where on the face of the return upon
which payment was made appears clearly to have been erroneously paid. .

No abatement of basic taxes: Based on RMO No. 20-07, the BIR now only process application for
abatement of surcharges, interest and compromise penalties. Under this RMO, application for abatement
of basic tax assessed are not covered by any existing regulations and therefore will not be processed.

Process of abatement: The process for abatement of taxes under current rules:
1. The Revenue District Office or Large Taxpayer’s Service shall receive the application for abatement,
evaluate the same, and prepare a report containing the basis of the recommendation.
2. The report will be submitted to the Technical Working Committee (TWC) who will review the same
and prepare final recommendation for the approval of the CIR.
3. No application for abatement shall be processed or evaluated without the payment of 100% of the
basic tax due

Delegation of Power to Abate/Compromise: The power to abate/compromise may be delegated by

the Commissioner to the Regional Evaluation Board, in the following cases:
1. Assessments issued by Regional Offices involving basic deficiency taxes of P500,000;
2. Minor criminal violations

b.3 Recovery of Tax Erroneously or Illegally Collected

b.3.1 Tax refund as distinguished from tax credit

They are essentially modes of recovering taxes that have been either erroneously or illegally paid to the
government. Refund takes place when there is actual reimbursement. Tax credit takes place upon the
issuance of a tax certificate or tax credit memo, which can be applied against any sum that may be due
and collected from the taxpayer.

TAX CREDIT TAX REFUND

Works by applying the refundable amount, as shown on
the final adjustment return (FAR) of a given taxable
year, against the estimated quarterly income tax
liabilities of the succeeding taxable year.
There is no prescriptive period for the carrying over of
the same (CIR vs. BPI, G.R. No. 178490, July 7, 2009); It
may be repeatedly carried over to succeeding taxable
years until fully utilized.
Any tax on income that is paid in excess of the amount
due the government may be refunded, provided that a
taxpayer properly applies for the refund (Philam Asset
Management, Inc. vs. CIR, G.R. Nos. 156637/162004,
December 14, 2005).
Prescribes after two years from the filing of the final
adjustment return (FAR) (Sec. 229, NIRC).
Pursuant to the foregoing cases, the choice of the taxpayer, whether tax refund or tax credit, may be
deduced as follows:

1. Tax refund, when the taxpayer files a written claim for the same, although it failed to signify its
intention in its return (Philam Asset Managament, Inc. vs. CIR, G.R. Nos. 156637/162004, December 14, 2005, with
respect to its 1997 FAR).
2. Tax credit, when the taxpayer filled out the portion “Prior Year’s Excess Credits” in its FAR (Philam
Asset Management, Inc. vs. CIR, G.R. Nos. 156637/162004, December 14, 2005, with respect to its 1998 FAR, and CIR vs.
BPR, G.R. No. 178490, July 7, 2009).
3. Tax credit for the succeeding taxable years after tax credit was chosen for the prior taxable year
(CIR vs. BPI, G.R. No. 178490, July 7, 2009).

Irrevocability Rule if the sum of the quarterly tax payments made during the said taxable year is
greater than the total tax due on the entire taxable income of that year, the corporation is entitled to a
refund and under Section 76 has two (2) options:
a. Carry-over the excess credit [Tax Credit]; or
b. Be credited or refunded with the excess amount paid [Tax Refund].

 If the option to carry over the excess credit is exercised, the same shall be irrevocable for that
taxable period and no application for cash refund or issuance of a tax credit certificate shall be
allowed. This is known as the irrevocability rule and is embodied in the last sentence of Sec. 76 of
the Tax Code. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: As
automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit
certificate will be issued or which will be claimed for cash refund (SystraPhils. Vs. CIR, G.R. No. 176290,
September 21, 2007).

 Carry-over of excess income tax payments will result in the denial of a claim for refund of excess
income tax payment. (United International Pictures, AB vs. CIR, G.R. No. 168331, October 11, 2012)

b.3.2 Grounds, requisites and period for filing a claim for refund or issuance of tax credit
certificate

Grounds
1. Tax is erroneously or illegally collected.
2. Sum collected is excessive or in any manner wrongfully collected.
3. Penalty is collected without authority.

Requisites of Tax Refund

1. There must be a written claim with the CIR, as it would enable the CIR to correct the errors of his
subordinate and to notify the government;
2. Must be a categorical claim for refund or credit;
3. Must be filed within 2 years after the payment of the tax or penalty otherwise no refund or credit
could be taken. No suit or proceeding shall be instituted after the expiration of the 2 year period
regardless of any supervening cause that may arise after payment; and
4. Present proof of payment of the tax.

 It partakes of the nature of an exemption and is strictly construed against the claimant. The burden
of proof is on the taxpayer claiming the refund that he is entitled to the same (Commissioner of Internal
Revenue vs. Tokyo Shipping Co., Ltd., G.R. No. 68282, May 26, 1995, 244 SCRA 332).

(i) Requirements for Refund as Laid Down by Cases

(a) Necessity of written claim for refund
(b) Claim containing a categorical demand for reimbursement
(c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from
date of payment regardless of any supervening cause

General Rule: A claim for refund or credit must be duly filed with the Commissioner for tax erroneously
or illegally collected may be recovered (Sec. 229, NIRC).

Exception:
a) Where on the face of the return upon which payment was made, such payment appears clearly to
have been erroneously paid (Sec. 229, par. 2, NIRC), or
b) When the petitioner paid the disputed assessments under protest before filing his petition for review
with the CTA (Vda. de San Agustin vs. CIR, G.R. No. 138485, September 10, 2001) .

Note: A return filed showing an overpayment shall be considered as a written claim for credit or refund .
(Sec. 204C, NIRC)

b.3.3 Statutory basis and proof for claim for refund or tax credit

Legal Basis of Tax Refunds

 Tax refunds are based on the principle of quasi-contract or solution indebiti and the pertinent laws
governing this principle are found in Art. 2142 and Art. 2154 of the NCC. When money is paid to
another under the influence of a mistake of fact, on the mistaken supposition of the existence of a
specific fact, where it would not have been known that the fact was otherwise, it may be recovered.
The ground upon which the right of recovery rests is that money paid through misapprehension of
facts belongs in equity and in good conscience to the person who paid it. The government comes
within the scope of solution indebiti principle, where that: “enshrined in the basic legal principles is
the time honored doctrine that no person shall unjustly enrich himself at the expense of another. It
goes without saying that the Government is not exempt from the application of this doctrine (CIR vs.
Acesite (Philippines) Hotel Corporation, G.R. No. 147295, February 16, 2007).

Scope of claims for refund – Tax recovery or refunds may encompass the following payments:
 Erroneously or illegally assessed or collected internal revenue taxes;
 Penalties imposed without authority;
 Any sum alleged to have been excessive or in any manner wrongfully collected.

Necessity of proof for claim or refund – Claim for refund partakes the nature of an exemption, hence
it is strictly construed against the claimant and the failure to discharge said burden is fatal to the claim
(CIR vs. S.C. Johnson and Son, Inc., et al., G.R. No. 127105).

Burden of proof for claim of refund - Burden of proof for claim of refund rests with the claimant.
Hence, it is strictly construed againsthim.

Nature of erroneously paid tax/illegally assessed collected - Taxes are erroneously paid when a
taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at
the time that payment is made. Taxes are illegally collected when payments are made under duress.

Essential requisites for claim of refund of creditable withholding income tax

There are three (3) essential conditions for the grant of a claim for refund of creditable withholding
income tax, to wit:
1. The claim must be filed with the CIR within the two-year period from the date of payment of the tax;
2. It must be shown on the return that the income received was declared as part of the gross income,
and
3. The fact of withholding must be established by a copy of a statement duly issued by the payor to the
payee showing the amount paid and the amount of the tax withheld therefrom (CIR vs. Team [Philippines]
Operations Corp. [formerly Mirant (Phils.)], G.R. No. 179260,April 2, 2014).

 Tax refunds are based on the general premise that taxes have either been erroneously or excessively
paid. Though the Tax Code recognizes the right of taxpayers to request the return of such
excess/erroneous payments from the government, they must do so within a prescribed period.
Further, “a taxpayer must prove not only his entitlement to a refund, but also his compliance with the
procedural due process as non-observance of the prescriptive periods within which to file the
administrative and the judicial claims would result in the denial of his claim.” (CIR vs. MERALCO, G.R. No.
181459, June 9, 2014)

 The time for bringing an action for a refund of income tax, fixed by statute, is not extended by the
delay of the Collector of Internal Revenue in giving notice of the rejection of such claim (Koppel (Phil),
Inc. vs. CIR, G.R. No. L-10550, September 19, 1961).

 A taxpayer, resident or non-resident, who contributes to the withholding tax system, does not really
deposit an amount to the BIR Commissioner, but, to perform or extinguish his tax obligation for the
year concerned. He is paying his tax liabilities for that year. Consequently, a taxpayer whose income
is withheld at the source will be deemed to have paid his tax liability when the same falls due at the
end of the tax year. It is from this date then, or when the tax liability falls due, that the 2-year
prescriptive period under Sec. 306 of the Tax Code starts to run with respect to payments effected
through the withholding tax system. It is of no consequence whatever that a claim for refund or
credit against the amount withheld at the source may have been presented and may have remained
unresolved since the delay of the Collector is rendering the decision does not extend the peremptory
period fixed by the statute (Finley J. Gibbs & Diane P. Gibbs vs. CIR, CTA, G.R. No. L-17406, November 29, 1965).

 It is the duty of the taxpayer to urge the Collector for his decision and wake him up from his lethargy
or file his action within the time prescribed by law. Koppel not having filed his claim within the time
fixed by law, his cause of action has prescribed, and the court should not give a premium to a litigant
who sleeps on his rights. Having failed to file his action for refund on time of Koppel may not now
invoke estoppels when he himself is guilty of laches. The government is never estopped by error or
mistake on the part of its agents (Koppel (Philippines), Inc. vs. CIR, G.R. No. L-10550, September 19, 1961).

 Where a taxpayer seeking a refund of estate and inheritance taxes whose request is denied and
whose appeal to the CTA was dismissed for being filed out of time, sues anew to recover such taxes,
already paid under protest, his action is devoid of merit. For in the same way that the expedient of
an appeal from a denial of a tax request for cancellation of warrant of distraint and levy cannot be
utilized to test the legality of an assessment which had become conclusive and binding on the
taxpayer, so is Sec. 360 of the Tax Code not available to revive the right to contest the validity of an
assessment which had become final for failure to appeal the same on time (CIR vs. Jose Concepcion, G.R.
No. L-23912, March 15, 1968).

 The SC has repeatedly held that the claim for refund with the BIR and the subsequent appeal to the
CTA must be filed within the 2-year period. “If, however, the Collector takes time in deciding the
claim, and the period of 2 years is about to end, the suit or proceeding must in the CTA before the
end of the 2-year period without awaiting the decision of the Collector.” In the light of the above
quoted ruling, the SC finds that the right of Victorias Milling to claim refund of P2,817.08 has
prescribed (CIR vs. Victorias Milling Co., & CTA, G.R. L-24108, January 03, 1968).

c.3.4 Proper party to claim for refund or tax credit

Taxpayer/Withholding Agents of Non-Resident Foreign Corporation

 A “taxpayer” is any person subject to tax imposed by the Tax Code. Under Sec. 53(c), the
withholding agent who is required to deduct and withhold any tax is made “personally liable for such
tax” and is indemnified against any claims and demands which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent in accordance with the
provisions of NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the
correct amount of the tax that should be withheld from the dividend remittances. The withholding
agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should
the amount of the tax withheld be finally found to be less than the amount that should have been
withheld under the law. A “person liable for tax” has been held to be a “person subject to tax” and
“subject to tax” both connote legal obligation or duty to pay a tax. By any reasonable standard, such
a person should be regarded as a part-in-interest or as a person having sufficient legal interest, to
bring a suit for refund of taxes he believes were illegally collected from him (CIR vs. Procter & Gamble
Philippines Manufacturing Corporation & CTA, G.R. No. 66838, December 2, 1991).

 The proper party to question or seek a refund of an indirect tax is the statutory taxpayer, the person
on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to
another. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as purchaser.
(Silkair vs. CIR, G.R. Nos. 171383 & 172379, November 14, 2008)

 A withholding agent has a legal right to file a claim for refund for two reasons: first, he is considered
a “taxpayer” under the NIRC as he is personally liable for the withholding tax as well as for deficiency
assessments, surcharges and penalties; and second, as an agent of the taxpayer, his authority to file
the necessary income tax return and to remit the tax withheld to the government impliedly includes
the authority to file a claim for refund and to bring an action for recovery of such claim . (CIR vs. Smart
Communications, Inc., G.R. Nos. 179045-46, August 25, 2010)

Prescriptive Period for Recovery of Tax Erroneously or Illegally Collected

The filing of an administrative case for refund or a case in court must be done within (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:

Provided, however, that the Commissioner may, even without a written claim therefore, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.

Commencement of the two (2) year period (Jurisprudence)

1. Tax sought to be refunded is illegally or erroneously collected

From the date the tax was paid (Commissioner vs. Victorias Milling, G.R. No. L-24108, January 31, 1968).

2. Tax is paid only in installments or only in part

From the date the last or final installment or payment because for tax purposes, there is no payment until
the whole or entire tax liability is fully paid (Collector vs. Prieto, G.R. No. L-11976, August 29, 1961).

3. Taxpayer merely made a deposit

Counted from the conversion of the deposit to payment (Union Garment vs. Collector, CTA Case No. 416, November
17, 1958)
 Merely making a deposit is not equivalent to payment until the amount is actually applied to the
specific purpose for which it was deposited.

4. Tax has been withheld from source (through the withholding tax system)

Counted from the date it falls due at the end of the taxable year

 A taxpayer who contributes to the withholding tax system does not really deposit an amount to the
government, but in truth, performs and extinguishes his tax obligation for the year concerned (Gibbs
vs. Commissioner, G.R. No. L-17406, November 29, 1965).

5. End of taxable year vs. date of the filing of the final adjusted return

From the date when the final adjusted return was filed.

 The rationale in computing this period is the fact that it is only then the corporation can ascertain
whether it made profits or incurred losses in its business operations (ACCRA Investments vs. Court of
Appeals, G.R. No. 96322, December 20, 1991).

6. Date when quarterly income tax was paid vs. date when final adjusted return was filed

From the date when final adjusted return was filed

 The filing of the quarterly income tax return (Sec. 68) and payment of quarterly income tax should
only be considered mere installments of the annual tax due (Commissioner vs. TMX Sales, G.R. No. 83736,
January 15, 1992).

7. Date when the final adjustment return was actually filed (e.g. Apr. 2) vs. Last day when
the adjustment return could still be filed (e.g., April 15)

 From the date the final adjustment return was actually filed (Commissioner vs. Court of Appeals, G.R. No.
117254, January 21, 1999).

8. Tax was not erroneously or illegally paid but the taxpayer became entitled to refund
because of supervening circumstances

 From the date the taxpayer becomes entitled to refund and not from the date of payment
(Commissioner vs. Don Pedro Central Azucarera, GR No. L-28467, February 28, 1973).

Payment under protest is not necessary under NIRC

A suit or proceeding for tax refund may be maintained “whether or not such tax, penalty or sum has
been paid under protest or duress” (Sec. 229, NIRC).

Q: XYZ Company was assessed by the BIR on its deficiency taxes. XYZ Company made a
partial payment covering the portion of the CTA judgment. The company avers that
partial payment made should be applied to the basic tax deficiency and not to the entire
tax in order to reduce interest and penalties. Is the contention of XYZ Company correct?

A: Yes, any partial payment of the tax liability shall have an impact on what is due at the tie of such
payment and said liability shall be reduced. The partial payment of Liquigaz should have the effect of
reducing the interest imposed on the total assessment. The CTA En Banc rejected the application of
Article 1252 of the Civil Code which allows a debtor to choose to which debt the payment must be
applied. In disallowing the application of the partial payment to the basic tax deficiency only, the CTA
 ruled that the government and the company are not creditors and debtors of each other. (Liquigaz vs
CIR, CTA En Banc 1117, September 21, 2015.)

Note: Similarly, payment under protest is not necessary in refund for local taxes (See Sec. 196, LGC).

However, payment under protest is necessary in claim for refund for real property taxes (Sec. 252, LGC) and
for customs duties (Sec. 2308, TCC).

Suspension of the two-year prescriptive period

1. There is a pending litigation between the Government and the taxpayer; and
2. CIR in that litigated case agreed to abide by the decision of the SC as to the collection of taxes
relative thereto (Panay Electric Co. vs. Collector, G.R. No. L-10574, May 28, 1958).

Other Consideration Affecting Tax Refunds

Refunds of Corporate Taxpayers

 The two-year prescriptive period within which to claim a refund commences to run, at the earliest, on
the date of the filing of the adjusted final tax return (ACCRA Investments Corp vs. CA, 204 SCRA 957).

 There is a need to file a return first before a claim for refund can prosper inasmuch as the
Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask
for a refund must show in its final adjustment return the income it received from all sources and the
amount of withholding taxes remitted by its withholding agents to the BIR. ACCRA filed its final
adjustment return for its 1981 taxable year on April 15, 1982. The 2-year prescriptive period within
which to claim a refund commences to run at the earliest, on the date of the filing of the adjusted
final tax return. Hence, ACCRA had until April 15, 1984 within which to file its claim for refund (ACCRA
Investments Corporation vs. CA, CIR, & CTA, G.R. No. 96322, December 20, 1991).

 The filing of quarterly ITRs required in Sec. 68 and implemented per BIR
Form 1702-Q and payment of quarterly income tax should only be considered mere installments of
the annual tax due. These quarterly tax payments which are computed based on the cumulative
figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated
as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or
fiscal year. This is reinforced by Sec. 69 which provides for the filing of adjustment returns and final
payment of income tax. Consequently, the 2-year prescriptive period provided in Sec. 230 of the Tax
Code should be computed from the time of filing of the Adjustment Return or Annual ITR and final
payment of income tax (CIR vs. TMX Sales Inc., & CTA, G.R. No. 83736, January 15, 1992).

 In exercising its option either to carry over the excess credit or to claim for tax refund, the
corporation must signify in its annual corporate adjustment return (by marking the option box
provided in the BIR Form) its intention either to carry over the excess credit or to claim a refund.
(Systra Philippines, Inc. vs. CIR, G.R. No. 176290, September 21, 2007).

 It should be stressed that the rationale of the rules of procedure is to secure a just determination of
every action. They are tools designed to facilitate the attainment of justice. But there can be no just
determination of the present action if we ignore, on the grounds of strict technicality, the Return
submitted before the CTA and even before this Court. The undisputed fact is that BPI suffered a net
loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be applied.
Consequently, there is no reason for the BIR and this Court to withhold the tax refund which
rightfully belongs to BPI. CIR argues that tax refunds are in the nature of tax exemptions and are to
be construed strictissimi juris against the claimant. Under the facts of the case, the SC holds that BPI
has established its claim. BPI may have filed to strictly comply with the rules of procedure; it may
have even been negligent. These circumstances, however, should not compel the Court to disregard
 this cold, undisputed fact: that BPI suffered a net loss in 1990, and that it could not have applied the
amount claimed as tax credits. Substantial justice, equity and fair play are on the side of BPI (BPI-
Family Savings Bank, Inc. vs. CA, CTA, & CIR, G.R. No. 122480, April 12, 2000).

Two year prescriptive period, not applicable

 The Tax Code allows the refund of taxes to a taxpayer that claims it in writing within 2 years after
payment of the taxes erroneously received by the BIR. Despite the failure of Philam to make the
appropriate marking in the BIR from, the filing of its written claim effectively serves as an expression
of its choice to request a tax refund, instead of a tax credit. To assert that any future claim for refund
will be instantly hindered by a failure to signify one’s intention in the FAR is to render nugatory the
clear provision that allows for a 2-year prescriptive period. In BPI-Family Savings Bank vs. CA,
the court ordered the refund of a taxpayer’s excess creditable taxes, despite the express declaration
in the FAR to apply the excess to the succeeding year. When circumstances show that a choice of tax
credit has been made, it should be respected. But when indubitable circumstances clearly show that
another choice – a tax refund – is in order, it should be granted. “Technicalities and legalisms,
however exalted, should not be misused by the government to keep money not belonging to it and
thereby enrich itself at the expense of its law abiding citizens.

When two (2) year period does not apply

The instant case ought to be distinguished from a situation where, owing to net losses suffered during a
taxable year, a corporation was also unable to apply to its income tax liability taxes which the law
requires to be withheld and remitted. In the latter instance, such creditable withholding taxes, able it also
legally collected, are in the nature of “erroneously collected taxes” which entitled the corporate taxpayer
to a refund under Section 230 of the Tax Code.
Government Remedies
The procedure for the collection of taxes can be summarized in the diagram below:

MOA

(simultaneous)

PLC

FNS

WG
WD/L

(To the TP) YES (To the Bank)

Refus
es? Subpoen
a
NO

NS/L End when tax is

collected

Legend:
MOA = Memorandum of Assignment
The MOA is similar to the letter of authority for
PLC = Preliminary Collection Letter assessments. If at any stage of the collection process
FNS = Final Notice Before Seizure there is a settlement, it (referring to the process)
WD/L = Warrant of Distraint/Levy would terminate immediately. Otherwise, collection
WG = Warrant of Garnishment will ensue.
NS/L = Notice of Seizure (for distraint) or Notice of Levy
TP = Taxpayer 1. IF the service of warrant of distraint or levy
was filed on time, and the taxpayer have
sufficient properties to cover the taxes, THEN the property can be sold even beyond the prescriptive
period.
2. IF a judicial proceeding was initiated on time and the taxpayer has sufficient properties, THEN
the property can be sold even beyond the prescriptive period.
3. IF the service of warrant of distraint or levy was file on time, and the taxpayer does not have
sufficient properties, THEN the running of the prescriptive period to collect will be suspended. Only
a warrant of distraint or levy duly served upon the taxpayer who has no properties will suspend the
prescriptive period to collect. Thus,
4. IF a judicial proceeding was initiated on time, and the taxpayer does not have sufficient
properties, THEN the running of the prescriptive period to collect will NOT be suspended.

 However, as regards the judicial proceeding, Rule 39 of the Rules of Court governs, providing that
the execution of judgment may be done within five (5) years from the writ of execution, and a
motion for revival of judgment may be granted by the court, until such judgment is satisfied (Republic
vs. Hizon, G.R. No. 130430, December 13, 1999; and Advertising Associates Inc. vs. CA [133 SCRA 765] in relation to Sec. 223
of the NIRC).
c. Government Remedies

c.1 Administrative remedies

c.1.1 Tax lien

A tax lien is a charge on all leviable property of the taxpayer to secure the proper payment of the tax,
surcharges, interests and costs.

 It is a legal claim or charge on property, real or personal, established by law as security in default of
the payment of tax (HSBC vs. Rafferty, 39 Phil. 145).

Notice required: The lien is not valid against any mortgagee, purchaser, or judgment creditor until
notice of such lien shall have been filed in the proper register of deeds of the province or city where the
property of the taxpayer is located. (Sec. 219, NIRC)

Distinguished from Distraint: Distraint of the property seized must be that of the taxpayer, although
it need not be the property in respect to which the tax is assessed; a tax lien, however, is directed to the
property subject to the tax regardless of its owner.

Preference of credit: A tax lien due respectively on specific property are absolutely preferred claims
against an insolvent taxpayer.

A tax (not due on specific property) due the National Government come 9 th, and taxes due cities or
municipalities come 10th in the order of preference of credits on the other assets of the debtor. (Art. 2244,
Civil Code)

When applicable:
1. With respect to personal property– Tax lien attaches when the taxpayer neglects or refuses to pay
tax after demand and not from the time the warrant is served (Sec. 219, NIRC)
2. With respect to real property– from time of registration with the register of deeds.

Tax lien is extinguished:

1. By payment or remission of the tax
2. By prescription of the right of government to assess or collect
3. By failure to file notice of such tax lien in the office of Register of Deeds
4. By destruction of property subject to tax lien
5. By replacing it with a bond

Note: A buyer in an execution sale acquires only the rights of the judgment creditor.

 The tax lien attaches not only from the service of the warrant of distraint of personal property but
from the time the tax became due and payable (HSBC vs. Rafferty, 39 Phil. 145).

 Likewise, the claim of the government predicated on a tax lien is superior to the claim of the laborers
who won in a labor dispute, notwithstanding the provision in the Labor Code on worker’s preference
(CIR vs. NLRC, 218 SCRA 42).

c.1.2 Distraint and Levy

Levy of real property refers to the same act of seizure as in distraint, but in this case, of real property, an
interest in or rights to such property in order to enforce the payment of taxes. The real property under
levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy.

DISTRAINT LEVY
Personal property only Real property only
Pre-emption only (no right of redemption) Pre-emption and redemption (w/in 1 year from sale)
available.
No forfeiture in favor of government in case there is no Sec. 215 provides that forfeiture is available in case
bidder/bid is insufficient, but BIR may purchase the there is no bidder/bid is insufficient.
property.
There is constructive distraint There is NO constructive levy

Thus, the constructive distraint may be done when the taxpayer, regardless of whether he is delinquent
or not, is either:
1. Retiring from any business subject to tax, or
2. Intending to leave the Philippines or
3. Intending to remove his property therefrom or
4. Intending to hide or conceal his property or
5. Intending to perform any act tending to obstruct the proceedings for collecting the tax due or which
may be due from him (Sec. 206, NIRC).

c.1.3 Forfeiture of real property to the government for want of bidder

If there is no bidder for the real property or if the highest bid is not sufficient to pay the taxes, penalties
and costs, the IR Officer conducting the sale shall declare the property forfeited to the government in
satisfaction of the claim.

The Commissioner may resell the property at a public auction after the giving of not less than twenty
(20) days notice. (Sec. 216, NIRC)

Further distraint and levy

The remedy by distraint of personal property and levy on realty may be repeated if necessary until the
full amount due including all expenses, is collected. (Sec. 217, NIRC)

c.1.4 Suspension of business operation

The Commissioner or his authorized representative is hereby empowered to suspend the business
operations and temporarily close the business establishment of any person: in the case of VAT-registered
person, if there is failure to issue receipts or invoices, failure to file a VAT return as required under Sec.
114, or if there is understatement of taxable sales or receipts by thirty percent (30%) or more of his
correct taxable sales or receipts for the taxable quarter; in case of failure of any person to register as
required under Sec. 236, the temporary closure of the establishment shall be for the duration of not less
than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the
Commissioner in the closure order. (Sec. 115, NIRC)

c.1.5 Non-availability of injunction to restrain collection of tax

No court shall have the authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by the NIRC. (Sec. 218, NIRC)

c.2. Judicial Remedies – civil or criminal action

Civil and Criminal Actions

Suit to Recover Tax Based on False or Fraudulent Returns

Aside from the summary remedy of distraint and levy, the BIR may also avail of the remedy of collecting
delinquent taxes through the filing of a civil or criminal action. (Sec. 205[b], NIRC)

Precondition Before a Criminal Case May Be Filed

 An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat
and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a
fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the
government’s failure to discover the error and promptly to assess has no connections with the
commission of the crime (Ungab vs. Cusi, 97 SCRA 877). In plain words, for criminal prosecution to proceed
before assessment, there must be a prima facie showing of willful attempt to evade taxes (CIR vs. CA,
257 SCRA 2000).

Note: The conviction or acquittal obtained under this Section [Sec. 254] shall not be a bar to the filing of
a civil suit for the collection of taxes (Sec. 254, NIRC)

The following are punished under Sec. 254 and 255 of the NIRC:
1. Attempt to evade or defeat tax
2. In case of a person required to (a) Make a return, (b) keep any record, or (c) Supply correct and
accurate information who at the time or times required by law or rules and regulations willfully fails
to do either of the following:
a. pay such tax,
b. makes such return,
c. keep such record, or
d. supply correct and accurate information, or
e. withhold or remit taxes withheld, or
f. refund excess taxes withheld on compensation.

3. Attempting to make it appear for any reason that he or another has in fact filed a return or
statement, or
4. Actually filing a return or statement and subsequently withdraws the same return or statement after
securing the official receiving seal or stamp of receipt of internal revenue office wherein the same
was actually filed.

Criminal violations of the tax code prescribed after 5 five years, to be counted either from:
1. The commission of the violation of the law, if known at that time, or
2. From: (a) The discovery and (b) The institution of judicial proceeding for its investigation and
punishment (Lim vs. CA, 190 SCRA 616)

Civil and criminal action and proceedings instituted in behalf of the Government under the authority of
the NIRC or other law enforced by the BIR
 Shall be brought in the name of the Government of the Philippines
 Shall be conducted by legal officers of the BIR

No civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture
under the NIRC shall be filed in court without the approval of the Commissioner. (Sec. 220, NIRC)

There are 3 ways to collect judicially:

1. By the BIR, upon its filing of a complaint for collection [Sec. 205(B), NIRC].
2. By the Taxpayer’s appeal, upon the answer of the BIR with a prayer for collection [Hermanos vs. CIR, GR
No. L-21551, September 30, 1969].
3. By the 3rd party’s petition before the court, with a prayer for collection of taxes, where such petitioner
was granted by the CIR [PNOC vs. CIR, G.R. No. 109976, April 26, 2005].

 Where the assessment has already become final and executory, the action to collect is akin to an
action to enforce a judgment. No inquiry can be made therein as to the merits of the original case or
the justness of the judgment relied upon, other than fraud in the party was committed in the doing
of the act (Mambulao Lumber Company vs. RP, G.R. No. L-37061, September 5, 1984).

 Payment of tax not a defense: Payment of the tax due after a case has been filed shall not
constitute a valid defense in any prosecution for violation of the provisions under the Code. (Sec. 253
[a], NIRC)