TAX REMEDIES

Issues and Problems to Tax Audit and Investigations

Speaker: Mark Joseph Illustrisimo,CPA

UNDERSTANDING FRAUD
SOURCES OF FRAUD

1. From return and records of taxpayers:

 keeping no records or inadequate records despite substantial transactions reflected in the returns;
 standard of living of the taxpayer, such as the possession of expensive cars and jewelries; or staying in luxurious
mansion, and ownership of properties whose fair values far exceed his probable source of income as declared in
the return;
 records verified were not property declared for tax purposes;
 false vouchers and receipts
 matching of VAT Returns and Income Tax Returns

2. From information furnished by Third Parties:

 a neighbor who has knowledge of the transactions of the taxpayer which were not properly declared for tax
purposes;
 a disgruntled employee or accountant;
 a professional informer
 referrals from other government offices of from other investigating units of the BIR.

3. Thru the initiative of the BIR investigating officers:

 from newspaper reports;

 from obituaries;
 from TV or Radio interviews
 thru research of available government records such as from officers of the register of deeds, bureau of highways,
and other government offices; and
 In relation to an investigation of another taxpayer, where suspects that certain transactions were not declared
for tax purposes.

EFFECTS OF FRAUD

 civil fraud results in the imposition of 50% surcharge.

 criminal fraud involves imposition of penal sanctions by the RTC or the CTA, depending on the amount of basic
tax, upon conviction;
 the power of the commissioner to access the tax is extended to ten (10) years from date of discovery of the
falsity or fraud;
 Cases involving fraud cannot be the subject of compromise; and
 Suspension and temporary closure of the business operations of a taxpayer.

CIVIL FRAUD vs CRIMINAL FRAUD

- Civil Fraud - when all the elements of fraud cannot be proven beyond reasonable doubt, but these elements can
be established by clear and convincing evidence amounting to more than a mere preponderance of evidence.

- Criminal Fraud - a criminal tax fraud case results when all the elements of fraud can be proven beyond
reasonable doubt. “Proof beyond reasonable doubt”
LEGAL PRESUMPTION OF FRAUD

- A legal presumption under Section 247 that a substantial underdeclaration of sales or overstatement of
deductions are PRIMA FACIE evidence of false or fraudulent return (30% of actual declaration)

BURDEN OF PROOF

 A tax fraud or evasion case is basically criminal case. In the establishment of fraud, the burden of proof is on the
BIR.
 Mere suspicions and doubts as to the intention of the taxpayer are not sufficient proof of fraud. Fraud is never
presumed, it must be proved.

SOURCES OF ASSESSMENT

STATUTORY BASIS OF ASSESSMENT

NATIONAL INTERNAL REVENUE CODE

Sec 6 (a) - “After a return has been filed as required under the provisions of this code, the commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of
tax…”
Any return, statement or declaration files in any BIR office authorized to receive the same shall not be withdrawn.
Provided, that within 3 years from the date of such filing, the same shall be modified, changed, or amended. Provided
further, that no notice for audit or investigation of such returns, statement or declaration has, in the meantime, been
actually served upon the taxpayer.

Sources of BIR Assessment

AUDIT AND INVESTIGATION

1. Table audit and investigation.

2. Issued-based audit
3. Industry audit
4. VATAG
5. Short-period audit
6. No-contact audit
7. Networth Method Audit
8. Run After Tax Evader (RATE)

THIRD-PARTY INFO MATCHING

1. Matching of SLS vs SLP

2. Matching of SAWT and MAP
3. Matching with BOC SLI
4. Matching with records of LGU, BSP, IC, LTO
5. Matching with LTFRB
6. Matching of government contracts with DPWH

Question: When does the audit process begin?

Answer: The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for
audit.
THE LETTER OF AUTHORITY

 is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayer’s books of
accounts and other accounting records, in order to determine the Taxpayer’s correct internal revenue tax
liabilities.
 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.

Revalidation of Letter of Authority

 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.
 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 Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

Question: How much time does a Revenue Officer have to conduct an audit?
Answer: 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.

Question: How many times can a taxpayer be subjected to examination and inspection for the same taxable year?
Answer: Once, except in the following cases:

1. When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer;
2. When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;
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 Order issued by the Commissioner of Internal Revenue.
4. When the Taxpayer’s 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).

Question: What is a Notice for Informal Conference?

Answer: 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.

JEOPARDY ASSESSMENT
 - is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in
light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused
by the Taxpayer’s failure to:
1. Comply with audit and investigation requirements to present his books of accounts and/or pertinent
records, or
2. Substantiate all or any of the deductions, exemptions or credits claimed in his return.

PRELIMINARY ASSESSMENT NOTICE (PAN)

 to be issued if there exists a basis to assess the taxpayer for any deficiency tax or taxes, showing the detail of the
facts and the law, rules, and regulations.
 If the taxpayer disagrees with the findings stated in the PAN, he/she shall have fifteen (15) days from his receipt
of the PAN to file a written reply contesting the proposed assessment.

REMEDIES RELATIVE TO PAN

1. File written request for extension to file a reply to PAN.

2. Ask for source of information or breakdown of certain income and expenses relating to findings of revenue
officers, so that appropriate thereto could be submitted.
3. Agree to file “Waiver of Statute of Limitations” for six months (RMO 20-90)
4. Request for consolidation of tax audits being done thru LA and LN.

In the event the taxpayer cannot submit the documents being required of him within the prescribed period of time,
he can request for more time to present these docs to by executing a WAIVER OF STATUTE OF LIMITATIONS in order to
avoid the issuance of Jeopardy Assessment.
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 period.
No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly authorized
Bureau official.

SUSPENSION OF THE STATUTE OF LIMITATION

1. WHEN TAXPAYER REQUESTS FOR REINVESTIGATION WHICH IS GRANTED BY CIR

2. WHEN TAXPAYER CANNOT BE LOCATED IN THE ADDRESS GIVEN BY HIM IN THE RETURN FILED, UNLESS HE
INFORMS CIR OF CHANGE OF ADDRESS.
3. WHEN WDL IS DULY SERVED UPON TAXPAYER OR HIS REPRESENTATIVE AND NO PROPERTY COULD BE LOCATED;
AND
4. WHEN TAXPAYER IS OUT OF THE PHILIPPINES (SEC 223, NIRC)

EXCEPTION TO PRIOR NOTICE OF ASSESSMENT

RR 18 - 2013

1. When the finding for any deficiency tax is result of mathematical errors in the computation of tax appearing on the
face of the return filed by the taxpayer;
2. When discrepancy has been determined between the tax withheld and the amount actually remitted by the
withholding agent;

3. 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 quarters;
4. When the excise tax due on excisable articles has not been paid; and
5. 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.

FORMAL LETTER OF DEMAND / FINAL ASSESSMENT NOTICE

(FLD/FAN)
If taxpayer fails to respond within 15 days from the receipt of PAN, he shall be considered in default, in which
case the FAN/FLD shall be issued. A taxpayer has the right to contest an assessment, and may do so by filing a letter of
protest stating in detail his reason for contesting the assessment within thirty (30) days from the taxpayer’s receipt of
the Notice of Assessment and Formal letter of demand.

FAILURE TO FILE A VALID PROTEST FOR FLD/FAN

1. If the taxpayer fails to file a valid protest against the FLD/fan within (30) days from date of receipt thereof, the
assessment shall become final, executory and demandable.
2. No request for reconsideration or reinvestigation shall be granted on tax assessments that have already
become final, executory, and demandable.

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 vent 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 the date of filing of his letter of protest, otherwise, the assessment shall become
final, executory, and demandable.

REQUEST FOR RECONSIDERATION vs REINVESTIGATION

The taxpayer shall submit all relevant supporting documents in support of his protest within sixty (60) days from
date of filing his letter of protest, otherwise, the assessment shall become final.
The 60-day period for the submission of all relevant supporting documents shall not apply to requests for
reconsideration.

DISPUTED ASSESSMENT
RR 18-2013
If a protest filed by a Taxpayer be denied by the Commissioner’s duly authorized representative, the Taxpayer
may request the Commissioner for a reconsideration of such denial and that his tax case be referred to the Bureau’s
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.
Should the Taxpayer’s 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).
Full payment of docket fees is required for the perfection of an appeal with the court of tax appeals. Non-
compliance will divest the CTA of jurisdiction. (DNATA, Inc. vs. CIR, CTA Case No. 7780, July 18, 2011 and Res. October 11,
2011)
Any appeal must be done within thirty (30) days from the date of the Taxpayer’s receipt of the Commissioner’s
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).
 If the Taxpayer is not satisfied with the CTA’s decision, he can appeal the decision to a higher Court within fifteen
(15) days from the Taxpayer’s receipt of the CTA’s 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.

CASE CANNOT BE CONTESTED

A tax assessment that has become final can no longer be contested (Transfield Philippines, Inc. vs CIR, CTA No.
7842, Sept. 20, 2011 citing Oceanic Wireless Network vs. CIR, GR No. 148380, Dec 9, 2005)

PROOF OF RECEIPT OF FAN

Case: (Mallari vs RP, CTA EB Criminal Case No. 002,1-8-08)

Ruling:Where the assessment notice was released and mailed by the BIR to the taxpayer and the original was not
returned to the BIR, the taxpayer is presumed to have received it. But such presumption is disputable. When the same is
directly denied by taxpayer, the burden to prove receipt is shifted to the BIR. The transmittal list presented by BIR is self
serving and did not sufficiently establish receipt of FAN.

PRESCRIPTION PERIOD
ASIA INTL AUCTIONEERS vs CIR, CTA EB 276, August 3, 2007
Date of mailing is considered the date of filing of any petition or pleading.
A mailed letter is deemed received by the addressee in the ordinary course of mail. However, a direct denial of
the receipt thereof by the addressee shifts the burden of proving the same to the sender.
In the said case, the taxpayer failed to prove that the letter mailed (per evidence) is the protest letter for the
subject assessment. BIR was able to show inconsistencies in the chronology of events.

ASSESSMENT BASED ON TENTATIVE RETURN

Case: (Magnetic Resonance Imaging Services vs CIR, CTA Case No. 6608, October 20, 2009)
Assessment is valid even if it is based on “tentative return”. The BIR is not prohibited from looking into a taxpayer’s
tentative return in ascertaining the correctness of its final return. Under Sec. 5 of the NIRC, the Commissioner of Internal
Revenue or his duly authorized representative is allowed to examine any book, paper, record or other data which may be
relevant or material in determining the correct liability of a taxpayer. The law states “any return” which is indicative that
it includes not only the “final return” but also the Tentative Return.

WAIVER OF PRESCRIPTION
CTA Case No. 7853 Feb 16, 2012
First Gas Power Corporation vs CIR

Absence of proof that the waiver has been executed in 3 copies invalidated the waiver.
In CIR vs Kudos Metal Corporation, the SC ruled that “the waiver must be executed in three copies, the original
copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy of the office accepting
the waiver.”
1st waiver was accepted by the LTS OIC-ACIR, followed by the 2nd waiver. The BIR LTAID subsequently issued a
PAN based on an LN.
Waiver was invalid for failure to comply with the formalities under existing relues as follows: (1) no proof that
1st,2nd, and 3rd waivers were executed in 3 copies; (2) the 3rd waiver does not indicate that the taxpayer has received
its file copy.

WAIVER OF PRESCRIPTION
CTA Case No.7965 Dec 11, 2012
Next Mobile, Inc. vs CIR
 CTA stressed that the doctrine of estoppel cannot be applied as an exception to the statute of limitations
considering that there is a detailed procedure for the proper execution of the waiver which the BIR must follow.
The BIR cannot hide behind the doctrine of estoppel to cover its own failure to comply with the formalities
which the BIR itself required.

PAN is Part of Due Process

CTA 8331 Nov 28, 2013
Yumex Philippines vs CIR

PAN Issued Dec 16, 2010

FAN issued Jan 10, 2011
Both PAN and FAN received on January 18, 2011
Issuance of a FLD/FAN without giving the taxpayer an opportunity to respond to the PAN makes the assessment void.

PAN is Part of Due Process

CTA EB Case No. 878 May 14, 2013
Laurence Lee V. Luang vs CIR
Petitioner was issued a FLD/ and FAN for the year 2005, without prior issuance of a PAN.

The court ruled that the issuance of PAN is an integral part of procedural due process, laying down the factual
and legal basis for the assessment. The court emphasized the indispensable nature of the PAN in the issuance of
assessments and gave emphasis to the fact that the 1997 NIRC provided that the issuance of PAN is mandatory in tax
assessments except in five (5) instances, where it is not required (Read RR 18-2013)

ASSESSMENT IS NOT REQUIRED FOR TAX EVASION CASES

SEC 269. Exceptions as to period of limitation of assessment and collection of taxes. - (a) in the case of a false or
fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed, or a proceeding in court
after the collection of such may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud, or omission.

SUBPOENA DUCES TECUM

RMO NO. 45-2010

GUIDELINES IN ISSUANCE OF SUBPOENA DUCES TECUM

1. If the taxpayer, upon receipt of the letter of authority (LA) and checklist of presentation of the requirements for
the audit, or access to records request, the Revenue Officer (RO) concerned shall send a First Notice, signed by
himself and/or his group supervisor, to the taxpayer, after (ten) calendar days from receipt of the LA and
checklist of requirements/access to records request, demanding, the taxpayer to furnish to the RO the
requirements previously requested.
2. If the taxpayer ignores the 1st notice and continues to disregard the demand the demand for the submission of
the required documents, a 2nd and Final Notice, signed by the Head of Office concerned, shall be sent after 10
calendar days from receipt of 1st notice.
3. If the taxpayer’s receipt of the Second and Final Notice, said taxpayer still refuses to comply with the
requirements for the notice, the Head of Office shall request for the issuance of a Subpoena Duces Tecum (SDT)
from the legal service (National Office), Legal Division (Regional Office), after ten (10) calendar days from receipt
of the Second and Final Notice.
4. The legal service, Legal Division or any other authorized officer shall act on the request from the issuance of SDT
within five (5) calendar days from receipt of such request.
 5. The RO must serve immediately the SDT to the taxpayer and shall return a served copy of the SDT to the office
which issued the same within (5) calendar days from the issuance thereof.
6. If the taxpayer refuses to comply with the SDT, the concerned BIR legal offices shall perform the following
courses of action:
a. File a criminal case against the taxpayer for violation of section 5 in relation to section 14 and 266 of the
National Internal revenue Code; and/or
b. Initiate a proceeding to cite the taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules of
Court.
7. If the taxpayer subsequently requests for the dismissal of the cases filed in court and submits the requested
information, the concerned BIR Office shall occur with such request for dismissal upon the submission of the
requested document/s and the payment of penalty by the taxpayer of P10,000.00 for the delayed compliance
and violation of pertinent provisions of the rev. regs.

REMEDIES

PROFESSIONAL ADVICES
DURING AUDIT:

MAKE ANALYSES OF ACCOUNTS AND COMPARISON OF FIGURES SHOWN IN INCOME TAX RETURN, VALUE-ADDED TAX
RETURNS, AUDITED FINANCIAL STATEMENTS, SUMMARY LIST OF SALES, SUMMARY LIST OF PURCHASES, ALPHA LIST
OF COMPENSATION INCOME AND FRINGE BENEFITS, INVENTORY, ETC. MANY FINDINGS OF REVENUE OFFICERS RELATE
TO DISCREPANCIES BETWEEN OR AMONG ABOVE DOCUMENTS.

PROFESSIONAL ADVICES
REMEDIES BEFORE AND AFTER TAX PAYMENT

ADMINISTRATIVE REMEDIES

A. BEFORE PAYMENT
1. FILING A PETITION FOR RECONSIDERATION OR REINVESTIGATION
2. ENTERING INTO COMPROMISE
B. AFTER PAYMENT
1. FILING OF CLAIM FOR TAX REFUND
2. FILING OF CLAIM FOR TAX CREDIT

REMEDIES AVAILABLE TO GOVERNMENT

ADMINISTRATIVE

1. DISTRAINT OF PERSONAL PROPERTY; 6. REQUIRING PROOF OF FILING INCOME TAX

2. LEVY OF REAL PROPERTY; RETURNS;
3. ENFORCEMENT OF TAX LIEN; 7. GIVING OF REWARDS TO INFORMERS;
4. ENTERING INTO COMPROMISE OF TAX CASES; 8. IMPOSITION OF SURCHARGE AND INTEREST
5. REQUIRING THE FILING OF BONDS;

DISTRAINT
DISTRAINT (SOMETIMES ALSO CALLED DISTRESS) IS THE SEIZURE BY THE GOVERNMENT OF PERSONAL PROPERTY,
TANGIBLE OR INTANGIBLE, TO ENFORCE THE PAYMENT OF TAXES TO BE FOLLOWED, BY ITS PUBLIC SALE OF THE TAXES
ARE NOT VOLUNTARILY PAID.

KINDS OF DISTRAINT
 1. ACTUAL DISTRAINT - IS THE TAKING OF POSSESSION OF THE PERSONAL PROPERTY OUT OF THE TAXPAYER INTO
THAT OF THE GOVERNMENT PHYSICAL TRANSFER OF POSSESSION.
2. CONSTRUCTION DISTRAINT - THE OWNER IS MERELY PROHIBITED FROM DISPOSING OF HIS PROPERTY.

DISTRAINT
No protest of distraint in Court of Tax Appeals
A WARRANT OF DISTRAINT AND LEVY CANNOT BE THE SUBJECT OF AN APPEAL AT THE COURT OF TAX APPEALS BECAUSE
IT DOES NOT INVOLVE A DISPUTED ASSESSMENT BUTA COLLECTION CASE.

(Central Metro Trade Distributors, Inc., vs. Commissioner Guillermo Parayno, Jr. CTA EB Case No. 179, January 3, 2007)

LEVY
LEVY, AS A SUMMARY ADMINISTRATION REMEDY, REFERS TO THE ACT OF SEIZURE OF REAL PROPERTY IN ORDER
TO ENFORCE THE PAYMENT OF TAXES.

How effected:
BY SERVING UPON THE TAXPAYER A WRITTEN NOTICE OF LEVY IN THE FORM OF A CERTIFICATE CONTAINING: (1) A
DESCRIPTION OF THE PROPERTY UPON WHICH LEVY IS MADE; (2) THE NAME OF THE TAXPAYER; AND (3) THE AMOUNT
OF THE TAX AND PENALTY DUE FROM THEM.

FORFEITURE
FORFEITURE IS DIVESTITURE OF PROPERTY WITHOUT COMPENSATION IN CONSEQUENCE OF A
DEFAULT/OFFENSE.
IN CASE OF PERSONAL PROPERTY - FORFEITURE OF CHATTELS AND REMOVAL OF FIXTURES OF ANY SORT IS
ENFORCED BY SEIZURE AND SALE OR DESTRUCTION OF THE SPECIFIC FORFEITED PROPERTY.
IN CASE OF REAL PROPERTY - THE FORFEITURE OF REAL PROPERTY IS ENFORCED BY A JUDGEMENT OF
CONDEMNATION AND SALE IN A LEGAL ACTION OR PROCEEDING, CIVIL OR CRIMINAL, AS THE CASE MAY REQUIRE.

LIEN
TAX LIEN IS A LEGAL CLAIM OR CHARGE ON PROPERTY, EITHER REAL OR PERSONAL, ESTABLISHED BY LAW AS A
SECURITY IN DEFAULT OF THE PAYMENT OF TAXES.

GARNISHMENT
BANK ACCOUNTS SHALL BE GARNISHED BY SERVING A WARRANT OF GARNISHMENT UPON THE TAXPAYER AND
UPON THE PRESIDENT, MANAGER, TREASURER, OR OTHER RESPONSIBLE OFFICER OF THE BANK. UPON RECEIPT OF
WARRANT OF GARNISHMENT, THE BANK SHALL TURN OVER TO THE COMMISSIONER SO MUCH OF THE BANK ACCOUNTS
AS MAY BE SUFFICIENT TO SATISFY THE CLAIM OF THE GOVERNMENT.

AUDIT ISSUES AND PROBLEMS

1. ACCOUNTING AND TAX RECONCILIATION

NET INCOME Per FS vs NET INCOME PER ITR

NET PROFIT PER FINANCIAL STATEMENT XXX
ADD: EXPENSES NOT ALLOWED XXX

TOTAL XXX
LESS: INCOME NOT SUBJECT TO ORDINARY INCOME TAX RATE (XXX)

ALLOWABLE EXPENSES NOT RECOGNIZED BY ACCOUNTING (XXX)

NET TAXABLE INCOME XXX

NET PROFIT PER FINANCIAL STATEMENT xxx

ADD: UNREALIZED FOREIGN EXCHANGE LOSS xxx

EXCESS EXPENSES OVER THRESHOLD xxx

DEPRECIATION OF APPRAISAL INCREASE xxx

AMORTIZATION OF GOODWILL xxx

BAD DEBT EXPENSE, NOT WRITTEN OFF xxx

RECOVERY OF BAD DEBTS PREVIOUSLY WRITTEN OFF xxx

SURCHARGE AND COMPROMISE PENALTIES xxx

NON-DEDUCTIBLE INTEREST EXPENSE xxx xxx

LESS: INTEREST INCOME SUBJECTED TO FWT xxx

DIVIDENDS FROM DOMESTIC CORPORATION xxx

GAIN FROM SALE OF ASSETS SUBJECT TO CGT xxx

AMORTIZATION OF PAST SERVICE COST xxx

UNREALIZED FOREIGN EXCHANGE GAIN xxx

WRITE-OFF OF UNCOLLECTIBLE RECEIVABLE xxx (xxx)

TAXABLE INCOME xxx

BOOKS FOR TAX ACCOUNTING RECONCILIATIONS

RR 8-2007

CONCERNED TAXPAYERS ARE HEREBY MANDATED TO MAINTAIN BOOKS AND RECORDS THAT WOULD REFLECT THE
RECONCILING ITEMS BETWEEN FINANCIAL STATEMENTS FIGURES AND/OR DATA WITH THOSE REFLECTED/PRESENTED IN
THE FILED INCOME TAX RETURN (ITR).

2. ERROR ON WHEN TO WITHHOLD

THE OBLIGATION OF THE PAYOR TO DEDUCT AND WITHHOLD ARISES AT THE TIME AN INCOME IS PAID OR PAYABLE,
WHICHEVER COMES FIRST.
THE TERM “PAYABLE” REFERS TO THE DATE THE OBLIGATION BECOME DUE, DEMANDABLE OR ENFORCEABLE.
3. FAILURE TO ACCRUE EXPENSES (ALL EVENTS TEST)
G.R. 172231 Feb 12, 2007
Commissioner of Internal Revenue vs Isabela Cultural Corporation

For the accrual of expenses, a deduction can be made when the liability of the expense becomes fixed, rather than
contingent or estimated, and the amount of the liability can be determined with reasonable accuracy.
The propriety of an accrual must be judged by the fact that a taxpayer knew, or can reasonably be expected to have
known, at the closing of its books for the taxable year, the amount of expenses to be accrued.

All Events Test: fixing of right to income or liability to pay/availability of reasonable accurate determination.
G.R. 172231 Feb 12, 2007
Commissioner of Internal Revenue vs Isabela Cultural Corporation

For TY 1986, BIR

Disallowed auditing SGV for Dec 1985

Disallowed legal service Bengzon for 1984 and 1985
Disallowed security expense for April and May 1986
Alleged understatement of interest income on 3 PNs

2003 Feb 26 - CTA set aside assessment for IT and EWT

2005 Sep 30 - CA affirmed decision of CTA
2007 Feb 17 - Supreme Court decided:
Auditing SGV for Dec 1985 – DISALLOWED
Legal Service Bengzon for 1984 and 1985 – DISALLOWED
Security Expense for 1986 – ALLOWED
Interest Income - Compute simple interest not compounded

4. SUBJECT TO EWT
TOP 20,0000 CORP, LT, GO

1. MERALCO 9. CHARGES OF HOTELS, MOTELS, RESORTS

2. TELECOMMUNICATIONS COMPANIES 10. MOVIE AND CONCERT TICKETS
3. LIFE AND NON-LIFE INSURANCE PREMIUMS 11. PAYMENT TO PRIVATE HOSPITALS
4. INTEREST ON BANK LOANS 12. TV AND RADIO STATIONS
5. PAYMENT THROUGH CREDIT CARDS 13. PRINT ADVERTISEMENTS
6. MAGAZINES AND NEWSPAPERS 14. HEALTH MAINTENANCE ORGANIZATIONS
7. PAYMENT TO BROKERS FOR ARRASTRE, 15. COOPERATIVES THAT DO NOT HAVE CTE
WHARFAGE, ETC. 16. PAYMENT FOR CAR BOUGHT THROUGH
8. MEMBERSHIP FEES FOR COUNTRY AND SPORTS FINANCING
CLUB
5. VAT WITHHOLDING
SEC 4.114-2, RR 16-2005

GOVERNMENT SHALL, FOR EACH PAYMENT, DEDUCT AND WITHHOLD A FINAL 5% VAT FROM ITS THE GROSS PAYMENT
TO THE VAT-REGISTERED SELLER.
GOVERNMENT AS WELL AS PRIVATE CORPORATIONS/INDIVIDUALS SHALL FOR PAYMENT FOR THE LEASE OR USE OF
PROPERTIES OR PROPERTY RIGHTS TO NONRESIDENT OWNERS SHALL WITHHOLD 12% AT THE TIME OF PAYMENT.

6. W-TAX AGENT IS VAT REGISTERED

SEC 4.114-2, RR 16-2005
VAT WITHHELD AND PAID FOR THE NON-RESIDENT RECIPIENT BY A VAT-REGISTERED WITHHOLDING AGENT,
WHICH VAT IS PASSED ON HIM BY THE NON-RESIDENT RECIPIENT OF INCOME, MAY BE CLAIMED AS INPUT TAX UPON
FILING VAT RETURN OF THE VAT-REGISTERED WITHHOLDING AGENT, EVIDENCED BY THE OFFICIAL RECEIPT AND DULY
FILED FORM 1600.

6. W-TAX AGENT IS NON-VAT REGISTERED

SEC 4.114-2, RR 16-2005
IF THE RESIDENT WITHHOLDING AGENT IS A NON-VAT TAXPAYER, SAID PASSED-ON VAT BY THE NON-RESIDENT
RECIPIENT OF INCOME, EVIDENCED BY THE DULY FILED BIR FORM NO. 1600, SHALL FORM PART OF THE COST OF
PURCHASED SERVICES, WHICH MAY BE TREATED EITHER AS AN “ASSET” OR “EXPENSE”, WHICHEVER IS APPLICABLE, OF
THE RESIDENT WITHHOLDING AGENT.

7. TREATMENT OF REAL PROPERTY TRANSACTIONS

GUIDELINES IN CLASSIFYING REAL PROPERTIES:

1. ALL REAL PROPERTIES ACQUIRED BY REAL ESTATE DEALER ARE ORDINARY ASSETS.
2. ALL REAL PROPERTIES ACQUIRED BY REAL ESTATE DEVELOPER, WHETHER DEVELOPED OR UNDEVELOPED, ARE
ORDINARY ASSETS.
3. ALL REAL PROPERTIES OF REAL ESTATE LESSOR, WHETHER LAND OR IMPROVEMENTS WHICH ARE FOR LEASE OR
OFFERED FOR LEASE ARE ORDINARY ASSETS.

DEEMED ENGAGED (SEC 3(4), RR 7-2003):

SUBSTANTIAL EVIDENCE MAKING TAXPAYER DEEMED ENGAGED IN REAL ESTATE BUSINESS:

1. CONSUMMATION DURING THE PRECEDING YEAR OF AT LEAST (6) TAXABLE REAL ESTATE TRANSACTIONS,
REGARDLESS OF AMOUNT.
2. CERTIFICATE OF REGISTRATION WITH BIR AS SUCH

GUIDELINES FROM E.R.E.B.----CHANGING TO N.E.R.E.B.

SEC 3(C), RR 7-2003

TAXPAYER WHICH CHANGED ITS REAL ESTATE BUSINESS FROM EREB TO NEREB, WHO AMENDED ITS ARTICLES OF
INCORPORATION ( SUCH AS HOLDING CO, MFG CO, TRADING CO), THE CHANGE OF BUSINESS SHALL NOT RESULT IN THE
RE-CLASSIFICATION OF REAL PROPERTY FROM ORDINARY TO CAPITAL ASSET.

NON REDEEMED PROPERTIES

RR 9-2012
IF THE PROPERTY SOLD THROUGH INVOLUNTARY SALE IS AN ORDINARY ASSET OF A VAT-REGISTERED
OWNER/MORTGAGOR, THE VAT SHALL BECOME DUE.

8. UNDERDECLARED PURCHASES
CTA CASE 8345 MAY 29, 2013

AGRINURTURE, INC V CIR

RESPONDENT ALLEGED THAT PETITIONER HAD UNDER-DECLARATION OF PURCHASES AS A RESULT OF RECONCILIATION
OF THE BOC DATA AGAINST PETITIONER’S PURCHASES PER RETURNS FILED.
THE PRESUMPTION OF THE CORRECTNESS OF ASSESSMENT BEING A MERE PRESUMPTION CANNOT BE MADE TO REST
ON ANOTHER PRESUMPTION. ELEMENTS IN THE IMPOSITION OF INCOME:

1. THERE MUST BE A GAIN OR PROFIT,

2. THE GAIN OR PROFIT IS REALIZED OR RECEIVED, ACTUALLY, OR CONSTRUCTIVELY
3. IT IS NOT EXEMPTED BY LAW OR TREATY FROM INCOME TAX.

AGRINURTURE, INC V CIR

IT IS ON THIS ALLEGED UNDER-DECLARATION OF PURCHASES THAT PETITIONER WAS ASSESSED WITH DEFICIENCY
INCOME TAX AND VAT ON THE PREMISE THAT THE UNDER-DECLARATION OF PURCHASES WILL TRANSLATE TO
UNDERDECLARATION OF INCOME.
IN THE IMPOSITION OF INCOME TAX, IT MUST BE CLEAR THAT THERE WAS AN INCOME, AND SUCH INCOME WAS
RECEIVED BY THE TAXPAYER, NOT WHEN THERE IS UNDER-DECLARATION OF EXPENSES.

THE COURT RULED THAT THE ASSESSMENT HAS NO FACTUAL OR LEGAL BASIS BECAUSE UNDER-DECLARATION OF
PURCHASES DOES NOT MEAN UNDERDECLARATION OF INCOME.

9. DEPRECIATION EXPENSE OF VEHICLES

RR NO. 12-2012

A. NO DEDUCTION FOR DEPRECIATION SHALL BE ALLOWED UNLESS SUBSTANTIATED BY OFFICIAL RECEIPTS OR

OTHER RECORDS WITH
1. SPECIFIC MOTOR VEHICLE IDENTIFICATION NUMBER, CHASSIS NUMBER, OR REGISTRABLE ID NUMBER OF
THE VEHICLE;
2. THE TOTAL PRICE SUBJECT TO DEPRECIATION; AND
3. THE DIRECT CONNECTION OR RELATION OF THE VEHICLE TO THE DEVELOPMENT, MANAGEMENT,
OPERATIONS, AND/OR CONDUCT OF THE TRADE OR BUSINESS OR PROFESSION OF THE TAXPAYER

B. ONLY ONE VEHICLE IS ALLOWED FOR THE USE OF AN EMPLOYEE, THE VALUE OF WHICH SHOULD NOT EXCEED PHP
2.4M

C. ALL MAINTENANCE EXPENSE ON ACCOUNT OF NON-DEPRECIABLE VEHICLE FOR TAXATION PURPOSES ARE
DISALLOWED IN ITS ENTIRETY;

D. THE INPUT TAXES ON THE PURCHASE OF NON-DEPRECIABLE VEHICLES AND ALL INPUT TAXES ON MAINTENANCE
EXPENSES INCURRED THEREON ARE LIKEWISE DISALLOWED.

10. ANCILLARY EDUCATIONAL SERVICES

SUBJECT OR NOT TO VAT?

CTA DECISION NO. 7246 / 7293, MARCH 11, 2010

ATENEO DE MANILA UNIVERSITY VS. COMMISSIONER OF INTERNAL REVENUE
BIR ARGUES THAT ATENEO DOES NOT OPERATE THE CAFETERIAS BUT BY DIFFERENT CONCESSIONAIRES BUT BY
DIFFERENT CONCESSIONAIRES HENCE, ASSESSED BY BIR.

IS ATENEO LIABLE FOR THE INCOME TAX AND VAT ON THE RENTAL INCOME FROM THE CONCESSIONAIRES?

THE COURT OF TAX APPEALS RULED IN FAVOR OF ATENEO.

11. MARGINAL INCOME EARNERS

RMC 4 - 2015

MIE WITH GROSS RECEIPT OF PHP 100K/YEAR OR LESS

1. EXEMPT FROM THE PAYMENT OF RF AFTER SUBMISSION OF:

a. SWORN STATEMENT OF INCOME FOR THE YEAR, AND
b. NSC CERTIFIED BIRTH CERTIFICATE
2. MUST ISSUE OF RECEIPTS/INVOICES
3. MUST REGISTER OF BOOKS OF ACCOUNTS
4. FILING OF ITR(1701) AND PAYMENT OF VAT OR %TAX

YES: FARMERS, FISHERMEN, ONE-UNIT TRICYCLE OWNER/DRIVER, SARI-SARI STORES, SMALL CARENDERIAS-PRINCIPALLY
FOR SUBSISTENCE
NO: PROFESSIONAL, CONSULTANTS, AGENTS, THOSE SUBJECT TO EWT

COMPROMISE SETTLEMENT
AUTHORITY OF THE CIR TO COMPROMISE THE PAYMENT OF INTERNAL REVENUE TAX LIABILITIES IS UNDER SECTION
204(A) WHEN:

1. A REASONABLE DOUBT AS TO THE VALIDITY OF THE CLAIM AGAINST THE TAXPAYER OR;
2. THE FINANCIAL POSITION OF THE TAXPAYER DEMONSTRATES A CLEAR INABILITY TO PAY THE ASSESSED TAX.

(a) FOR CASES OF FINANCIAL INCAPACITY, A MINIMUM COMPROMISE RATE EQUIVALENT TO TEN PERCENT
(10%) OF BASIC ASSESSED TAX; AND

(b) FOR OTHER CASES, A MINIMUM COMPROMISE RATE EQUIVALENT TO FORTY PERCENT (40%) OF THE
BASIC ASSESSED TAX

COMPROMISE SETTLEMENT COVERAGE

1. DELINQUENT ACCOUNTS;
2. CASES UNDER ADMINISTRATIVE PROTEST (FAN) PENDING IN THE REGIONAL OFFICES, RDO, LEGAL SERVICE, LTS,
COLLECTION SERVICE, ENFORCEMENT SERVICE AND OTHER OFFICES IN THE NATIONAL OFFICE;
3. CIVIL TAX CASES FILED IN COURTS;
4. COLLECTION CASES FILED IN COURTS;
5. CRIMINAL VIOLATIONS, OTHER THAN THOSE ALREADY FILED IN COURT OR THOSE INVOLVING CRIMINAL TAX
FRAUD.

COMPROMISE SETTLEMENT
DOUBTFUL VALIDITY

1. JEOPARDY ASSESSMENT
2. ARBITRARY ASSESSMENT
 3. FAILURE TO FILE A REQUEST FOR INVESTIGATION/RECONSIDERATION WITHIN 30 DAYS FROM RECEIPT OF FAN
4. FAILURE TO APPEAL TO CTA, ASSESSMENT FAILED TO COMPLY WITH SEC 228
5. ASSESSMENT ON “BEST EVIDENCE OBTAINABLE RULE”
6. QUESTIONABLE VALIDITY OF THE WAIVER
7. ISSUE HAS BEEN DECIDED BY LOWER COURTS IN FAVOR OF TAXPAYER BUT STILL PENDING WITH SUPREME
COURT.

COMPROMISE SETTLEMENT
FINANCIAL INCAPACITY

1. CAPITAL DEFICIT BY AT LEAST 50% - 40%

2. NETWORTH DEFICIT (TOTAL LIAB > TOTAL ASSETS) - 10%
3. PURELY COMPENSATION INCOME EARNER AND NO OTHER LEVIABLE OR DISTRAINABLE ASSETS, OTHER THAN HIS
FAMILY HOME - 10%
4. BANKRUPT/INSOLVENT AS DECLARED BY COMPETENT TRIBUNAL/AUTHORITY - 20%
5. DISSOLVED CORPORATION - 20%
6. NON-OPERATING COMPANIES FOR A PERIOD OF:
a. 3 YEARS OR MORE - 10%
b. LESS THAN 3 YEARS - 20%

NOTE: NEED WAIVER ON SECRECY OF BANK DEPOSITS

COMPROMISE SETTLEMENT EXCLUSIONS

1. WITHHOLDING TAX CASES, UNLESS THE APPLICANT-TAXPAYER INVOKES PROVISIONS OF LAW THAT CAST DOUBT
ON THE TAXPAYER’S
2. CRIMINAL TAX FRAUD CASES CONFIRMED BY CIR OR HIS REP;
3. CRIMINAL VIOLATIONS ALREADY FILED IN COURT;
4. DELINQUENT ACCOUNTS WITH DULY APPROVED SCHEDULE OF INSTALLMENT PAYMENTS;
5. CASES WHERE TAXPAYER AGREED TO PAY REDUCED ASSESSMENT
6. CASES WHICH TAXPAYER AGREED TO PAY REDUCED ASSESSMENT OF COMPROMISE IS DOUBTFUL VALIDITY OF
THE ASSESSMENT; AND
7. ESTATE TAX CASES WHERE COMPROMISE IS REQUESTED ON THE GROUND OF FINANCIAL INCAPACITY OF THE
TAXPAYER

WHEN TO ABATE OR CANCEL

1. THE TAX OR ANY PORTION THEREOF APPEARS TO BE UNJUSTLY OR EXCESSIVELY ASSESSED; OR

2. THE ADMINISTRATION AND COLLECTION COSTS INVOLVED DO NOT JUSTIFY THE COLLECTIONS OF THE AMOUNT
DUE
3. ALL CRIMINAL CASES MAY BE COMPROMISED EXCEPT
a. THOSE ALREADY FILED IN COURT, OR
b. THOSE INVOLVING FRAUD

ALL COMPROMISE SETTLEMENT WITHIN THE JURISDICTION OF THE NATIONAL OFFICE (NO) SHALL BE APPROVED BY A
MAJORITY OF ALL THE MEMBERS OF THE NATIONAL EXECUTIVE BOARD.

COMPETENCE BUILDS CONFIDENCE

IN ADDRESSING TAX PROBLEMS...

1. KNOW YOUR TAX LAWS AND REGULATIONS AND HOW THESE ARE INTERPRETED BY THE BIR, DOF, AND THE
COURTS, SO THAT YOU CAN AVOID PAYMENT OF TAXES LEGALLY
2. LEARN THE ASSESSMENT CYCLE AND HANDLING BIR AUDITS
3. KNOW THE ERROR AND PITFALLS COMMITTED BY OTHER TAXPAYERS; LEARN FROM THEM AND AVOID
COMMITTING THE SAME MISTAKES
4. BE AWARE OF THE COMMON AUDIT FINDINGS OF REVENUE OFFICERS THAT ARE THE SOURCES OF DEFICIENCY
TAX ASSESSMENT
5. KNOW THE TAXPAYERS’ RIGHT AND REMEDIES
6. GET PROFESSIONAL HELP FROM A GOOD TAX CONSULTANT