A Deputy Commissioner of Internal Revenue explained that the use of matching costs against revenue in computing deficiency taxes of taxpayers who allegedly either understated their income or overstated their expenses is justifiable even through the audited financial statements, specifically, the Statement of Comprehensive Income (formerly known as Income Statement) because unreliable and unworthy due to the stated under/over statements. The good DCIR contented that wrong facts and figures in the audited statement of comprehensive income does not mean that the gross profit derived thereat is also erroneous. To test the DCIR’s official position, let we put it into a simulation, viz; Wrongly audited statement of comprehensive income
Sales Cost of Sale Gross Margin Amount 2,000 1,500 500 Ratio 100 75 25 benefit of having a 75% cost of sale (deduction). Even if such deduction really exists, the failure to include it in the wrongly audited statement of income and tax return considered by laws of the state as a waiver of right to claim it. Another example is when an importer under declare its importation by 1,000 pesos, the gross profit rate would also changed viz; Sale (2,000 + 500) Cost of Sale Gross Margin Amount 2,000 2,500 (500) Ratio 100 125 (25)

Contrary to a BIR rule, the under-declaration of cost of sale constitutes under declaration of sale. Thus, the 1,000 pesos should be taxed in its gross without the benefit of deduction. The failure of the importer to include the 1,000 pesos to its cost of sale connotes a waiver of right to claim it as an expense or allowable deduction while the cash used to pay the said amount presumably came from taxable source. Therefore, the use of gross profit rate in computing deficiency taxes of those who deliberately failed and refused to declare their true and correct sales and expenses is contrary to the legal doctrine laid down by the laws of the State. As personal conviction and belief, this cannot either be used for any legal purposes or an evidence in any forum.

Using the third party information the DCIR unearthed on unreported sale amounting to 500 pesos. Amount Sale (2,000 + 500) 2,500 Cost of Sale 1,500 Gross Margin 1,000 Ratio 100 60 40

According to a BIR rule, all expense, whether paid, incurred or accrued, should be deliberately Please email if you reported by the taxpayer. Thus, it is presumably want ETM to discuss any tax issues. current to tax the unreported sales without the visit /