AUDIT PROCEDURES AND DOCUMENTATION
1. When does the audit process
begin?The audit process commences with the issuance of
a Letter of Authority to a taxpayer who has been selected for
2. What is a Letter of Authority?
The Letter of Authority is an official document that empowers
a Revenue Officer to examine and scrutinize a Taxpayers
books of accounts and other accounting records, in order to
determine the Taxpayers correct internal revenue tax liabilities.
3. Who issues the Letter
of Authority? Letter of Authority, for audit/investigation
of taxpayers under the jurisdiction of National Office, shall
be issued and approved by the Commissioner of Internal Revenue,
while, for taxpayers under the jurisdiction of Regional Offices,
it shall be issued by the Regional Director.
4. When must a Letter of
Authority be served? A Letter of Authority must be served
to the concerned Taxpayer within thirty (30) days from its date
of issuance, otherwise, it shall become null and void. The Taxpayer
shall then have the right to refuse the service of this LA,
unless the LA is revalidated.
5. How often can a Letter
of Authority be revalidated? A Letter of Authority is
revalidated through the issuance of a new LA. However, a Letter
of Authority can be revalidated
Only once, for LAs issued in the Revenue Regional
Offices or the Revenue District Offices; or
Twice, in the case of LAs issued by the National
Any suspended LA(s) must be attached to the new
LA issued (RMO 38-88).
6. How much time does a Revenue
Officer have to conduct an audit?A Revenue Officer is
allowed only one hundred twenty (120) days from the date of
receipt of a Letter of Authority by the Taxpayer to conduct
the audit and submit the required report of investigation. If
the Revenue Officer is unable to submit his final report of
investigation within the 120-day period, he must then submit
a Progress Report to his Head of Office, and surrender the Letter
of Authority for revalidation.
7. How is a particular taxpayer
selected for audit?Officers of the Bureau (Revenue District
Officers, Chief, Large Taxpayer Assessment Division, Chief,
Excise Taxpayer Operations Division, Chief, Policy Cases and
Tax Fraud Division) responsible for the conduct of audit/investigation
shall prepare a list of all taxpayer who fall within the selection
criteria prescribed in a Revenue Memorandum Order issued by
the CIR to establish guidelines for the audit program of a particular
year. The list of taxpayers shall then be submitted to their
respective Assistant Commissioner for pre-approval and to the
Commissioner of Internal Revenue for final approval. The list
submitted by RDO shall be pre-approved by the Regional Director
and finally approved by Assistant Commissioner, Assessment Service
(RMOs 64-99, 67-99, 18-2000 and 19-2000).
8. How many times can a taxpayer
be subjected to examination and inspection for the same taxable
year? A taxpayers books of accounts shall be subjected
to examination and inspection only once for a taxable year,
except in the following cases:
When the Commissioner determines that fraud, irregularities,
or mistakes were committed by Taxpayer;
When the Taxpayer himself requests a re-investigation
or re-examination of his books of accounts;
When there is a need to verify the Taxpayers
compliance with withholding and other internal revenue taxes
as prescribed in a Revenue Memorandum Order issued by the Commissioner
of Internal Revenue.
When the Taxpayers capital gains tax liabilities
must be verified; and
When the Commissioner chooses to exercise his
power to obtain information relative to the examination of other
Taxpayers (Secs. 5 and 235, NIRC).
9. What are some of the powers
of the Commissioner relative to the audit process?In
addition to the authority of the Commissioner to examine and
inspect the books of accounts of a Taxpayer who is being audited,
the Commissioner may also:
Obtain data and information from private parties
other than the Taxpayer himself (Sec.5, NIRC); and
Conduct inventory and surveillance, and prescribe
presumptive gross sales and receipts (Sec. 6, NIRC).
10. What is a Notice for
Informal Conference ?A Notice for Informal Conference
is a written notice informing a Taxpayer that the findings of
the audit conducted on his books of accounts and accounting
records indicate that additional taxes or deficiency assessments
have to be paid.
If, after the culmination of an audit, a Revenue Officer recommends
the imposition of deficiency assessments, this recommendation
is communicated by the Bureau to the Taxpayer concerned during
an informal conference called for this purpose. The Taxpayer
shall then have fifteen (15) days from the date of his receipt
of the Notice for Informal Conference to explain his side.
11. Within what time period
must an assessment be made?An assessment must be made
within three (3) years from the last day prescribed by law for
the filing of the tax return for the tax that is being subjected
to assessment or from the day the return was filed if filed
late. However, in cases involving tax fraud, the Bureau has
ten (10) years from the date of discovery of such fraud within
which to make the assessment.
Any assessments issued after the applicable period are deemed
to have prescribed, and can no longer be collected from the
Taxpayer, unless the Taxpayer has previously executed a Waiver
of Statute of Limitations.
12. What is "Jeopardy
Assessment"? A Jeopardy Assessment is a tax assessment
made by an authorized Revenue Officer without the benefit of
complete or partial audit, in light of the ROs belief
that the assessment and collection of a deficiency tax will
be jeopardized by delay caused by the Taxpayers failure
Comply with audit and investigation requirements
to present his books of accounts and/or pertinent records, or
Substantiate all or any of the deductions, exemptions
or credits claimed in his return.
13. What is a Pre-Assessment
Notice (PAN)? The Pre-Assessment Notice is a communication
issued by the Regional Assessment Division, or any other concerned
BIR Office, informing a Taxpayer who has been audited of the
findings of the Revenue Officer, following the review of these
If the Taxpayer disagrees with the findings stated
in the PAN, he shall then have fifteen (15) days from his receipt
of the PAN to file a written reply contesting the proposed assessment.
14. Under what instances
is PAN no longer required? A Preliminary Assessment Notice
shall not be required in any of the following cases, in which
case, issuance of the formal assessment notice for the payment
of the taxpayers deficiency tax liability shall be sufficient:
When the finding for any deficiency tax is the
result of mathematical error in the computation of the tax appearing
on the face of the tax return filed by the taxpayer; or
When a discrepancy has been determined between
the tax withheld and the amount actually remitted by the withholding
When a taxpayer who opted to claim a refund or
tax credit of excess creditable withholding tax for a taxable
period was determined to have carried over and automatically
applied the same amount claimed against the estimated tax liabilities
for the taxable quarter or quarters of the succeeding taxable
When the excise tax due on excisable articles
has not been paid; or
When an article locally purchased or imported
by an exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.
15. What is a Notice of Assessment/Formal
Letter of Demand?
A Notice of Assessment is a declaration of deficiency
taxes issued to a Taxpayer who fails to respond to a Pre-Assessment
Notice within the prescribed period of time, or whose reply
to the PAN was found to be without merit. The Notice of Assessment
shall inform the Taxpayer of this fact, and that the report
of investigation submitted by the Revenue Officer conducting
the audit shall be given due course.
The formal letter of demand calling for payment
of the taxpayers deficiency tax or taxes shall state the
facts, the law, rules and regulations, or jurisprudence on which
the assessment is based, otherwise, the formal letter of demand
and the notice of assessment shall be void.
OBLIGATIONS AND PRIVILEGES
16. What is required of a
taxpayer who is being audited?A Taxpayer who is being
audited is obliged to:
Duly acknowledge his receipt of the appropriate
Letter of Authority upon its presentation by the Revenue Officer
authorized to conduct the audit by affixing in the Letter of
Authority the name of the recipient and the date of receipt.
Present within a reasonable period of time, his
books of accounts and other related accounting records that
may be required by the Revenue Officer; and
Submit the necessary schedules as may be requested
by the Revenue Officer within a reasonable amount of time from
his (Taxpayers) receipt of the Letter of Authority.
17. What is the recourse
of a Taxpayer who cannot submit the documents being required
of him within the prescribed period of time? If a Taxpayer,
believing that he cannot present his books of accounts and/or
other accounting records, intends to request for more time to
present these documents in order to avoid the issuance of a
Jeopardy Assessment, the Taxpayer may execute what is referred
to as a Waiver of the Statute of Limitations.
18. What is a Waiver of the
Statute of Limitations? The Waiver of the Statute of
Limitations is a signed statement whereby the Taxpayer conveys
his agreement to extend the period within which the Bureau may
validly issue an assessment for deficiency taxes. If a Taxpayer
opts to execute a Waiver of the Statute of Limitations, he shall
likewise be, in effect, waiving his right to invoke the defense
of prescription for assessments issued after the reglementary
No Waiver of the Statute of Limitations shall
be considered valid unless it is accepted by a duly authorized
19. If a Taxpayer does not
agree with the assessment made following an audit, can he protest
this Assessment?Yes, he can. A Taxpayer has the right
to contest an assessment, and may do so by filing a letter of
protest stating in detail his reasons for contesting the assessment.
20. What are the characteristics
of a valid protest? A protest is considered valid if
it satisfies the following conditions:
It is made in writing, and addressed to the Commissioner
of Internal Revenue;
It contains the information, and complies with
the conditions required by Sec. 6 of Revenue Regulations No.
12-85; to wit:
a.) Name of the taxpayer and address for the immediate
past three (3) taxable year.
b.) Nature of request whether reinvestigation
or reconsideration specifying newly discovered evidence he intends
to present if it is a request for investigation.
c.) The taxable periods covered.
d.) Assessment number.
e.) Date of receipt of assessment notice or letter
f.) Itemized statement of the findings to which
the taxpayer agrees as a basis for computing the tax due, which
amount should be paid immediately upon the filing of the protest.
For this purpose, the protest shall not be deemed validly filed
unless payment of the agreed portion of the tax is paid first.
g.) The itemized schedule of the adjustments with
which the taxpayer does not agree.
h.) A statement of facts and/or law in support
of the protest.
The taxpayer shall state the facts, applicable
law, rules and regulations or jurisprudence on which his protest
is based, otherwise, his protest shall be considered void and
without force and effect on the event the letter of protest
submitted by the taxpayer is accepted, the taxpayer shall submit
the required documents in support of his protest within sixty
(60) days from date of filing of his letter of protest, otherwise,
the assessment shall become final, executory and demandable.
It is filed within thirty (30) days from the Taxpayers
receipt of the Notice of Assessment and formal Letter of Demand.
21. In the event the Commissioners
duly authorized representative denies a Taxpayers protest,
what alternative course of action is open to the Taxpayer?
If a protest filed by a Taxpayer be denied by the Commissioners
duly authorized representative, the Taxpayer may request the
Commissioner for a reconsideration of such denial and that his
tax case be referred to the Bureaus Appellate Division.
The Appellate Division serves as a "Court", where
both parties, i.e. the Revenue Officer on one hand, and the
Taxpayer on the other, can present testimony and evidence before
a Hearing Officer, to support their respective claims.
22. What recourse is open
to a Taxpayer if his request for reconsideration is denied or
his protest is not acted?
Should the Taxpayers request for reconsideration
be denied or his protest is not acted upon within 180 days from
submission of documents by the Commissioner, the Taxpayer has
the right to appeal with the Court of Tax Appeals (CTA).
Any appeal must be done within thirty (30) days
from the date of the Taxpayers receipt of the Commissioners
decision denying the request for reconsideration or from the
lapse of the 180 day period counted from the submission of the
documents. (Sec. 228 of the Tax Code, as amended).
23. If the Taxpayer is not
satisfied with the CTAs decision, can he appeal the decision
to a higher Court? Yes, he can. Decisions of the Court
of Tax Appeals may be appealed with the Court of Appeals within
fifteen (15) days from the Taxpayers receipt of the CTAs
decision. In the event that the Taxpayer is likewise unsatisfied
with the decision of the Court of Appeals, he may appeal this
decision with the Supreme Court.
24. Can a Taxpayer claim
a refund or tax credit for erroneously or illegally collected
taxes? Yes, he can. The Taxpayer may file such a claim
with the Commissioner of Internal Revenue (Sec.229, NIRC), within
two (2) years from the payment of the tax or penalty sought
to be refunded. Failure of the Taxpayer to file such a claim
within this prescribed period shall result in the forfeiture
of his right to the refund or tax credit.
25. If a Taxpayer has filed a claim for refund
and the Bureau has yet to render a decision on this claim, can
the Taxpayer elevate his claim to the CTA?
Yes, he can, if the two (2) year period stated
above is about to end, and the Commissioner has yet to render
a decision on the claim. (Gibbs v. Collector, L-13453, February
OF THE BUREAU IN THE AUDIT PROCESS AND COLLECTION OF DELINQUENT
26. What means are available
to the Bureau to compel a Taxpayer to produce his books of accounts
and other records? A Taxpayer shall be requested, in
writing, not more than two (2) times, to produce his books of
accounts and other pertinent accounting records, for inspection.
If, after the Taxpayers receipt of the second written
request, he still fails to comply with the requirements of the
notice, the Bureau shall then issue him a Subpoena Duces Tecum.
27. What course of action
shall the Bureau take if the Taxpayer fails to comply with the
Subpoena Duces Tecum?
If, after the Taxpayer fails, refuses, or neglects
to comply with the requirements of the Subpoena Duces Tecum,
the Bureau may:
File a criminal case against the Taxpayer for
violation of Section 5 as it relates to Sections 14 and 266,
of the NIRC, as amended; and/or
Initiate proceedings to cite the Taxpayer for
contempt, under Section 3(f), Rule 71 of the Revised Rules of
28. What alternatives are
open to Government for the collection of delinquent accounts?
Once an assessment becomes final and demandable,
the Government may employ any, or all, of the following remedies
for the collection of delinquent accounts:
Distraint of personal property;
Levy of real property belonging to the Taxpayer;
Civil Action; and
29. What is "Distraint
of Personal Property"? Distraint of personal property
involves the seizure by the Government of personal property
- tangible or intangible - to enforce the payment of taxes,
followed by the public sale of such property, if the Taxpayer
fails to pay the taxes voluntarily.
30. What is "Levy of
Real Property"? Levy of real property refers to
the same act of seizure, but in this case of real property,
and interest in or rights to such property in order to enforce
the payment of taxes. As in the distraint of personal property,
the real property under levy shall be sold in a public sale,
if the taxes involved are not voluntarily paid following such
31. In what time period must
collection be made? Any internal revenue tax, which has
been assessed within the period prescribed shall be collected
within three (3) years from date of assessment. However, tax
fraud cases may be collected by distraint or levy or by a court
proceeding within five (5) years from assessment of the tax
or from the last waiver.