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There are nine types of different letters that may be issued by the BIR: mission orders, benchmarking notices, letters of authority (LOA), subpoena duces tecum (SDT), Notice of Discrepancy (NOD), Preliminary Assessment Notice (PAN), Final Assessment Notice (FAN) and Formal Letter of Demand (FLD), Final Decision on Disputed Assessment (FDDA), and the Warrant of Distraint and/or Levy (WDL).
The first part of this three-part series will cover mission orders, benchmarking notices, and letters of authority (LOAs).
In line with the BIR’s Tax Compliance Verification Drive (TCVD) and Oplan Kandado, the BIR established the guidelines in the conduct of surveillance and stock-taking activities.
A mission order, signed by the regional director, is issued for the conduct of surveillance activities on identified business establishments. Without it, no surveillance may be conducted.
By virtue of a mission order, the BIR can:
- monitor sales and/or place the business establishment under observation or surveillance for violation of bookkeeping rules and regulations, particularly on non-issuance of sales or receipts;
- take inventory of the number of active units of register machines / point-of-sale machines authorized to issue receipts in lieu of the regular sales invoices or receipts and check the taxpayer’s compliance governing the use of cash register machines and point-of-sale machines in lieu of sales invoices and receipts;
- and others which include authorizing specific Revenue Officers from different RDOs who compose the tax mapping team to tax map the specified area on the specified date and time.
A benchmarking notice is served upon taxpayers who fall below certain thresholds determined by the BIR. These benchmarks are based on the performance level of taxpayers in a given line of industry or sector. This notice is not conclusive since, without a valid LOA, there is no valid assessment. However, taxpayers whose tax compliance is below the duly established and approved benchmark shall be classified as follows:
- High risk taxpayers – over 30% below benchmark
- Medium risk taxpayers – 16% to 30% below benchmark
- Low risk taxpayers – 15% or less below benchmark
Once the taxpayer receives the notice, taxpayers are advised to amend their VAT and income tax returns to rectify any possible omission or error in reporting their VAT due and taxable income. If ever they want to refute the findings, taxpayers must provide an explanation in writing within 15 days upon receipt of the notice.
If taxpayers ignore the notice or fail to respond accordingly, the BIR would conduct the following enforcement activities pursuant to Section 6(C) of the National Internal Revenue Code (NIRC) and other related revenue issuances in order to verify true business performance such as:
- Conduct overt surveillance at the establishment for at least 10 days under Oplan Kandado
- Conduct inventory stocktaking or Tax Compliance and Verification Drive
- Tax audit under Section 6(A) in relation to Section 56(B) of the NIRC
Again, it is important to emphasize that the benchmarking notice is not a valid assessment and cannot be used to enforce collections. It is only a tool that is used to improve the compliance of taxpayers and avoid a potential tax audit and investigation.
Letter of Authority
The service of the Letter of Authority (LOA) marks the beginning of the BIR Audit process. Previously, under Revenue Audit Memorandum Order (RAMO) No. 1-2000, the LOA must be served or presented to the taxpayer within 30 days from its date of issuance. Otherwise, it becomes null and void unless revalidated. If the LOA is presented beyond the 30-day period, then the taxpayer has the right to refuse the service of the LOA. Under that old rule, assessments conducted by revenue officers who served a LOA beyond that 30-day period are invalid.
However, RAMO No. 1-2020 removed the requirement to serve the LOA within thirty (30) days. As provided under the updated guidelines, the LOA is now to be served through an Electronic Letter of Authority (eLA), which must be served by the authorized Revenue Officer assigned to the case. Alongside issuing Letter of Authority, is the request for accounting records.
Even though service of eLA is not explicitly provided in the updated guidelines, it is still necessary for the Revenue Officer to serve the eLA immediately, considering that the entire audit process must be completed within a period of 180 days for RDO cases and 240 days for Large Tax cases from the date of issuance of eLA. Thus, an eLA which remains unserved or has been served beyond the 30-day period from the date of its issuance shall still be considered valid and enforceable, provided that the 180-day/240-day period to complete the audit process has not yet expired.
Furthermore, the LOA will specify which tax types will be examined such as all internal revenue taxes, income and value added tax or withholding taxes. It will also state the taxable year to be examined and the dates covered. Taxpayers should also check the date of issuance of Letter of Authority in order to determine whether the audit process period under RAMO No. 1-2020 has been prescribed.
Note also that, in relation to Section 203 of the Tax Code, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return. This means that, for the calendar year ending December 2020, whose ITR must be filed not later than April 15, 2021, the BIR can make assessments until April 2024. If the BIR fails to issue an assessment within that period, then the BIR loses their right to examine and assess the accounting records of the taxpayer.
Relatively, business owners and CEOs should know the different types of letters BIR are issuing. Failure to respond and understand these letters may cause penalties and other unnecessary charges. The Executive Tax Management Program of the Asian Consulting Group will help CEOs and business owners learn how to properly deal with these kinds of letters as well as educate themselves on game-changing strategies to handle BIR audits without compromises. Join the program through this link or scan the QR code. – Rappler.com