GCRO Module TAX Fraud 180 PG - OCT 2023 - 231115 - 130754

TAX
FRAUD
GCRO Module 180 eVer.2.1 OCT 2023 1
INTRODUCTION
• This module will identify the basic principles in tax fraud, such
as elements of tax fraud or tax evasion, their classification and
related techniques;
• Identify the sources of tax fraud cases and indications of
fraud;
• Familiarize and enumerate the stages and methods in fraud
investigation; and
• Differentiate standard of proof required in criminal and civil
tax fraud cases.

TOPIC OUTLINE
 Definition of Terms
 Conceptual Nature of Fraud
 Distinction between Tax Evasion and Tax Avoidance
 Fraud and Negligence
 Classification of Tax Fraud
 Burden of Proof in Establishing Fraud
 Effects of Fraud
 Sources of Fraud Cases
 Indications of Fraud
 Processing of a Tax Fraud Case
 Ways of Conducting Preliminary or Informal Investigation
 Classification of Evidence
 Rules which Govern Documentary Evidence Rule

Definition of Terms
Tax Fraud – an actual evil motive or intent to evade taxes which are
legally due to government or willfully acting contrary to truth within
the taxpayer’s knowledge.
Negligence – the omission to do something to which a reasonable man,
guided by those ordinary considerations which ordinarily regulate
human affair would do, or the doing of something which a reasonable
and prudent man would not do.
Fraud – a generic term embracing all the ways one person can falsely
represent a fact to another in order to induce that person to surrender
something of value. Fraud denotes deceit, deception or trickery.

Definition of Terms
Tax Avoidance – the attempt to minimize the payment or altogether eliminate tax
liability by lawful means. It refers to the exploitation by a taxpayer of legally
permissible alternative tax rates or methods of assessing taxable property or
income in order to reduce tax liability. It is not criminally punishable.
Tax Evasion – the elimination or reduction of one’s correct and proper tax by
fraudulent means. It is criminally punishable, *with a fine of not less than five
hundred thousand pesos (P500,000) but not more than ten million pesos
(P10,000,000) and imprisonment of not less than six (6) years but not more than
ten (10) years. It connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes. *TRAIN Law

Examples of Tax Evasion
1. Omitting to report one’s income
2. Understatement of income done intentionally

3. Overstatement of deduction done improperly and intentionally
On December 15, 2022, an NBI raid conducted a raid thru a valid search warrant on
one company located at Eastwood, Quezon City where boxes of spurious sales
receipts and invoices were found and seized. It was all over the news. From this,
ghost companies has become a familiar term.
Ghost companies are defined as fake companies that issue fraudulent

receipts/invoices so that their clients can claim false deductions. […]

3. Overstatement of deduction done improperly and intentionally
[…] Fictitious Receipts/Invoices these are issued, even in the absence of legit business
transaction, for the main purpose of reducing the income tax and VAT liabilities of the
purchasers/clients by claiming false deductions/expenses and input VAT.
In connection with this, the Run After Fake Transactions(RAFT) was created by CIR
Lumagui Jr. on January 18,2023. Said national task force was created in line with the
thrust of the BIR to stop the selling of fake receipts and/or invoices. Its main purpose
is to conduct the audit and enforcement activities against taxpayers claiming fake
transactions to evade paying correct taxes.

4. Claiming False Personal Exemption
5. Claiming as exempt corporations even if they are not
6. Misdeclaration and under declaration of estate in the estate tax return
7. Making withdrawals of articles subject to excise taxes contrary to the

provisions of the NIRC

Tax Evasion vs. Tax Avoidance
Evasion Avoidance
Elimination or reduction of Attempt to minimize the payment
Definition one’s correct tax by fraudulent or altogether eliminate tax liability
means by lawful means
Minimize, reduce, eliminate tax Same as tax evasion
Purpose
liability to the payment of tax
Illegal means Resort to legal & acceptable
Instrument
means
Prescribes in 10 years from the Prescribes in 3 years after the
Manner of discovery of the falsity, fraud or filing of the tax return or the last
Assessment omission day prescribed by law for filing
the return whichever is later

Fraud vs. Negligence
Fraud Negligence
The fraud contemplated by law is actual and Negligence, whether slight or gross,
not constructive. It must be intentional fraud, is not equivalent to fraud with intent
consisting of deception willfully and to evade the tax contemplated by
deliberately done or resorted to induce the law.
another to give up some legal right.
It necessarily follows that mere mistake cannot be considered as fraudulent intent.

Classification of Tax Fraud
Civil Fraud – one where the guilt of the accused cannot be proven
beyond reasonable doubt, though through a little more than a
mere preponderance of evidence but short of being beyond reasonable
doubt, the fact of fraud can still be proven.
Criminal Tax Fraud – one when all the elements of fraud can be proved
beyond reasonable doubt and that the accused taxpayer can be
charged guilty.

Effects of Fraud under NIRC
1. Civil penalties involving the imposition of the 50% surcharge by the Bureau of
Internal Revenue [Section 248 of the NIRC];
50% surcharge is imposed in following scenarios:

1. In case of willful neglect to file the return within the period prescribed by NIRC or by
rules and regulations, and
2. In case a false or fraudulent return is willfully made.
When is there a prima facie evidence of false or fraudulent return.

1. When there is a substantial underdeclaration of taxable sales, receipts or income (i.e.
failure to report sales, receipts or income) in an amount exceeding 30% of that declared
per return; or
2. When there is a substantial overstatement of deductions (i.e. claim of deductions in
an amount exceeding 30% of actual deductions).

2. Criminal penalties involving the imposition of penal sanctions

[imprisonment and / or fine to be imposed by the Regional Trial
Court (RTC) or Court of Tax Appeals (CTA) upon conviction];

3. Power of the Commissioner to assess is extended up to 10 years from the date

of discovery. However, Sec. 281 of the NIRC provides for a five-year prescription
on the filing of criminal action;
Two kinds of prescriptive periods for the assessment and collection

of taxes:
1. Normal/Regular prescriptive period of assessment and collection. This

prescriptive period of assessment and collection of taxes under Section 203 is
available if the taxpayer filed a return and the return filed is not false or fraudulent.

3. Power of the Commissioner to assess is extended up to 10 years from the date

of discovery. However, Sec. 281 of the NIRC provides for a five-year prescription
on the filing of criminal action;
Two kinds of prescriptive periods for the assessment and collection of taxes:
2. Exceptional prescriptive period of assessment and collection. This prescriptive
period of assessment and collection of taxes under Section 222 is available to the
government in the following cases:
• the taxpayer failed to file a return;
• the taxpayer filed a false return with intent to evade tax;
• the taxpayer filed a fraudulent return with intent to evade tax; or
• the taxpayer and the CIR agreed in writing to waive the prescriptive period of
assessment of tax.

4. Cases involving fraud cannot be the subject of compromise as

mandated by Sec. 204 of the NIRC; and
General rule: All criminal violations may be compromised.
Exception: 1.)Those already filed in court and
2.) those involving fraud.

5. Suspension and temporary closure of the business operations of the taxpayer

for violations of VAT provisions under Sec. 115 of NIRC.
Following violations:
1. In the case of VAT-registered Person-
• Failure to issue receipts or invoices;
• Failure to file a VAT return as required under Sec.114 of NIRC; or
• Understatement of taxable sales or recipts by thirty(30%) or more of his correct
taxable sales or receipts for the taxable quarter.
2. Failure of any person to register as required under Section 236 of NIRC.

Sources of Fraud Cases
1. Routine examination of returns
2. Information furnished
3. Initiative of the Revenue Officers concerned
4. Third party information

Indications of Fraud
 Maintaining two sets of books and records;
 Concealment of assets;
 Destruction of books and records;
 Large or frequent currency transactions;
 Paying fictitious companies or persons;
 False or altered entries of documents;
 Over declaration of purchases or under declaration of sales;

 Use of false names or nominees;
 Large company loans to employees or other persons;
 Payee names on checks left blank and inserted at a later date;
 Excessive billing accounts;
 Excessive spoilage or defects;
 Double payments on billing;

 An individual negotiating checks made to a corporation;
 Second or third- party endorsement on corporate checks;
 Personal expenses paid with corporate fund;
 Excessive use of exchange checks or clearing accounts;
 An understatement of income attributable to specific transactions and

denial by the taxpayer of the receipt of the income or inability to provide
a satisfactory explanation for its omission;
 Use of multiple invoice or duplicate copies of invoices showing smaller

amount than the original;

 Unexplained material expenses or expenditures;
 Substantial unexplained increases in net worth over a period of years;
 Failure to file a return especially for a period of several years, although

substantial amounts of income were received;
 Concealment of bank accounts, brokerage accounts, and other property;
 Inadequate explanation for dealing in large sums of currency, or the

unexplained expenditure of currency (especially when in a business not
calling for large amount of cash);

 Failure to deposit receipts to business account contrary to normal

practices;
 Claiming fictitious or improper deductions;
 Substantial amounts of personal expenditures deducted as business

expenses;
 False entries or alterations made on the books and records, backdated

or postdated documents, false entries on invoice or statements, or
other false documents;

 Failure to keep records, especially if put on notice by the BIR as a result of

prior examination, concealment of records, or refusal to make certain
records available;
 Distribution of profits to fictitious partners;
 False statements, especially if made under oath about a material fact

involved in the investigation;
 Attempts to hinder the investigation, failure to answer pertinent questions

or repeated cancellations of appointment, avoiding the investigator;

 Taxpayer’s knowledge of taxes and business practices where numerous
questionable items appear on the returns;
 Destruction of books and records, especially after the investigation was

started;
 Transfer of assets for purpose of concealment;
 Involvement in illegal activity (illegal income);
 Failure to disclose all relevant facts;
 Unsubstantiated or unexplained wealth;

 Mental handling of one’s affair to avoid keeping records usual in

transactions of the same kind;
 Keeping no records or inadequate records despite substantial

transactions in the return;
 Taxpayer’s standard such as possession of luxurious cars, mansions,

expensive jewelries, etc.; and
 Any conduct or action that would be to mislead or to conceal

material facts.

 Failure or refusal to issue official receipts or sales invoice

– Section 4 (c)
 Use of Multiple TIN – Section 4 (e)

Processing of a Tax Fraud Case
INFORMAL FORMAL FRAUD

INVESTIGATION INVESTIGATION
PREPARATION OF
PRELIMINARY
REPORT

Informal Investigation
 Upon receipt of the complaint, denunciation, confidential information or
referral, a preliminary investigation must first be conducted to establish a prima
facie existence of fraud.
 A preliminary investigation shall include the verification of the allegations on the

confidential information and/or complaints filed and the determination of the
schemes and extent of fraud being perpetrated by the denounced taxpayers.
 A Confidential Information (CI) must be in affidavit form filed either at

Prosecution Division in the National Office or at the Legal Division in the
Regional Offices.

Informal Investigation
 The Revenue Officer who discovers a potential tax fraud case must submit
a memorandum report to his Immediate Supervisor
 This report shall be the basis for the issuance and approval of letters of
authority for tax fraud cases.

Ways of Conducting Preliminary
or Informal Investigation
Covert/Discreet Investigation – undertaken without contact with the

subject of investigation; also known as the surveillance operation
Overt Investigation – done where there is difficulty in the retrieval

process of obtaining information
(i.e., Open Surveillance, Stock-taking, Apprehension, TCVD/MTCVD, Raid)

Open Surveillance – the monitoring of sales or receipts of a subject

taxpayer by assigning Revenue Officers to the subject’s business
establishment or premises
Stock-Taking – inventory taking mentioned in Sec. 6(C) of the NIRC

and consists of the verification of the actual volume, number or level of
inventory or stock for the purpose of determining the correct internal
revenue tax liabilities of the subject

Apprehension – for non-issuance of an invoice or receipt by a VAT-

registered person under Sections 113 and 115, non-issuance of receipts
or sales or commercial invoices under Section 237, and failure or
refusal to issue receipts or sales or commercial invoices, violations
related to the printing of such receipts under Section 238 of the NIRC
Raid – sanctioned under Sec. 15 of the NIRC which gives internal

revenue officers authority to make arrests and seizures.

Tax Compliance Verification Drive (TCVD)/Modified Tax Compliance

Verification Drive (MTCVD) – aimed at establishing cordial relationship
with taxpayer by giving assistance thru tax information drive and
verification of taxpayer’s compliance requirements during the actual
visitation of taxpayer’s establishment and its branches. MTCVD calls for
an information drive prior to the conduct of the TCVD itself so that
businesses can comply and avoid being caught in violation of BIR
business rules and regulation.

Guidelines in Formal Fraud
Investigation
 Review all available information
 Determine the objectives of the investigation
 If it is an investigation referred by an informant, re-contact and

obtain information about the origin of the case, who has been talked
to, what was said, available records, etc. Re-interview the person who
actually provided the information or made the allegations

 Determine the information needed and the best source of the

desired information
 Gather background information about the suspect, obtain tax returns

from RDOs’ concerned and obtain pertinent records from government
offices, i.e., SEC, DTI
 Determine if an examination of the taxpayer’s book of accounts

is warranted and the best method of proof

Classification of Evidence
 Direct and circumstantial evidence

 Prima facie and conclusive evidence
 Object (real) evidence
 Documentary evidence
 Testimonial evidence
 Expert evidence
 Primary evidence and secondary evidence
 Positive and negative evidence
 Corroborative and cumulative evidence

Classification of Evidence
 Relevant evidence and material evidence

 Irrelevant, incompetent, inadmissible and immaterial evidence
 Rebuttal
 Proof Beyond Reasonable Doubt
 Clear and Convincing Evidence
 Preponderance of Evidence
 Substantial evidence
 Competent evidence

Rules which Govern
Documentary Evidence Rule
The Best Evidence Rule (Sec. 3-4, Rule 130)

The Secondary Evidence Rule (Sec. 5-9, Rule 130)
The Parol Evidence Rule (Sec. 10, Rule 130)
Rules on Authentication and Proof of Documents
(Sec.19-33, Rule 132)
*Please take note of the amendments to these rules pursuant to the 2019
Amendments to the 1989 Revised Rules on Evidence (A.M. NO. 19-08-15-SC)

Rules which Govern
Documents as evidence consist of writings, recordings, photographs or

any material containing letters, words, sounds, numbers, figures,
symbols, or their equivalent, or other modes of written expression
offered as proof of their contents. Photographs include still pictures,
drawings, stored images, x-ray films, motion pictures or videos. (Sec. 2,
Rule 130)
*Emphasized words are the new inclusions to the provision pursuant to the 2019

Rules which Govern
Original Document Rule

 Previously known as “Best Evidence Rule”
 When the subject of inquiry is the contents of a document, writing, recording,
photograph or other record, no evidence is admissible other than the original
document itself.
 Exceptions to this rule are also provided for under Sec. 3, Rule 130

Rules which Govern
Sec. 4, Rule 130

(a) An “original” of a document is the document itself or any
counterpart intended to have the same effect by a person
executing or issuing it. An “original” of a photograph includes the
negative or any print therefrom. If data is stored in a computer or
similar device, any printout or other output readable by sight or
other means, shown to reflect the data accurately, is an “original.”

Rules which Govern
Sec. 4, Rule 130

(b) A “duplicate” is a counterpart produced by the same
impression as the original, or from the same matrix, or by
means of photography, including enlargements and
miniatures, or by mechanical or electronic re-recording, or by
chemical reproduction, or by other equivalent techniques
which accurately reproduce the original.

Rules which Govern
Sec. 4, Rule 130

(c) A duplicate is admissible to the same extent as an original
unless (1) a genuine question is raised as to the authenticity
of the original, or (2) in the circumstances, it is unjust or
inequitable to admit the duplicate in lieu of the original.

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TAX

GCRO Module 180 eVer.2.1 OCT 2023 2

GCRO Module 180 eVer.2.1 OCT 2023 3

GCRO Module 180 eVer.2.1 OCT 2023 4

GCRO Module 180 eVer.2.1 OCT 2023 5

1. Omitting to report one’s income

2. Understatement of income done intentionally

GCRO Module 180 eVer.2.1 OCT 2023 6

3. Overstatement of deduction done improperly and intentionally

Ghost companies are defined as fake companies that issue fraudulent

GCRO Module 180 eVer.2.1 OCT 2023 7

3. Overstatement of deduction done improperly and intentionally

GCRO Module 180 eVer.2.1 OCT 2023 8

4. Claiming False Personal Exemption

5. Claiming as exempt corporations even if they are not

6. Misdeclaration and under declaration of estate in the estate tax return

7. Making withdrawals of articles subject to excise taxes contrary to the

GCRO Module 180 eVer.2.1 OCT 2023 9

GCRO Module 180 eVer.2.1 OCT 2023 10

It necessarily follows that mere mistake cannot be considered as fraudulent intent.

GCRO Module 180 eVer.2.1 OCT 2023 11

GCRO Module 180 eVer.2.1 OCT 2023 12

50% surcharge is imposed in following scenarios:

When is there a prima facie evidence of false or fraudulent return.

GCRO Module 180 eVer.2.1 OCT 2023 13

2. Criminal penalties involving the imposition of penal sanctions

GCRO Module 180 eVer.2.1 OCT 2023 14

3. Power of the Commissioner to assess is extended up to 10 years from the date

Two kinds of prescriptive periods for the assessment and collection

1. Normal/Regular prescriptive period of assessment and collection. This

GCRO Module 180 eVer.2.1 OCT 2023 15

3. Power of the Commissioner to assess is extended up to 10 years from the date

GCRO Module 180 eVer.2.1 OCT 2023 16

4. Cases involving fraud cannot be the subject of compromise as

GCRO Module 180 eVer.2.1 OCT 2023 17

5. Suspension and temporary closure of the business operations of the taxpayer

2. Failure of any person to register as required under Section 236 of NIRC.

GCRO Module 180 eVer.2.1 OCT 2023 18

1. Routine examination of returns

3. Initiative of the Revenue Officers concerned

4. Third party information

GCRO Module 180 eVer.2.1 OCT 2023 19

 Destruction of books and records;

 Large or frequent currency transactions;

 Paying fictitious companies or persons;

 False or altered entries of documents;

 Over declaration of purchases or under declaration of sales;

GCRO Module 180 eVer.2.1 OCT 2023 20

 Use of false names or nominees;

 Large company loans to employees or other persons;

 Payee names on checks left blank and inserted at a later date;

 Excessive billing accounts;

 Excessive spoilage or defects;

 Double payments on billing;

GCRO Module 180 eVer.2.1 OCT 2023 21

 Second or third- party endorsement on corporate checks;

 Personal expenses paid with corporate fund;

 Excessive use of exchange checks or clearing accounts;

 An understatement of income attributable to specific transactions and

 Use of multiple invoice or duplicate copies of invoices showing smaller

GCRO Module 180 eVer.2.1 OCT 2023 22

 Unexplained material expenses or expenditures;

 Substantial unexplained increases in net worth over a period of years;