Tax Assessment Process

• Tax assessments involve computation of the sum due, giving notice to the taxpayer, and making a demand for payment of the tax or deficiency.
• A tax assessment is an official action of an officer authorized by law to ascertain the amount of tax due under the law from a taxpayer.
• Tax assessment objectives are to enhance voluntary compliance and ensure correctness of taxes paid.

Tax Assessment Process Overview

• The tax assessment process generally consists of a Letter of Authority, Notice of Discrepancy, Preliminary Assessment Notice, Formal Assessment Notice, and Final Decision on Disputed Assessment.
• A reply to the Preliminary Assessment Notice may be filed within 15 days from receipt.
• The discussion of discrepancy (Notice of Discrepancy) shall in no case extend beyond 30 days from receipt of the Notice of Discrepancy.
• The Formal Assessment Notice must be protested within 30 days from receipt. Otherwise, the assessment becomes final, executory, and demandable.
• The Final Decision on Disputed Assessment must be appealed with the CIR or CTA within 30 days from receipt.

Letter of Authority (LOA)

• A Letter of Authority is a document authorizing revenue officers to conduct a tax audit.
• An assessment without an LOA is considered null and void.
• The mandatory character of an LOA has been established in various Supreme Court cases, most notably in the Medicard case (G.R. No. 222743 dated 5 April 2017), and circularized in RMC No. 75-2018.
• The eLA should be served to the taxpayer immediately upon its issuance per RMC 82-2022.
• RMC 82-2022 provides that an eLA 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.
• Re-assignment or transfer of a case to another revenue officer shall require a new LOA (CIR vs McDonald's Philippines Realty Corp, G.R. No. 242670 dated 10 May 2021).
• Generally, taxpayers shall not be investigated for the succeeding period by the same revenue officers.
• The LOA should indicate whether the tax audit is regular or specialized as well as the taxes covered.
• Books and other accounting records of a taxpayer shall be subject to investigation for income tax purposes only once in a taxable year.
• Authorized signatories of an LOA: Commissioner, Deputy Commissioner of the Legal and Inspection Group, Assistant Commissioner for Large Taxpayers' Service, Regional Directors.
• Any manually written character, notation, or erasure shall render the LOA invalid.
• Coverage of an LOA includes: Tax audits/investigations, Verifications for claims of tax refund, Retirement or closure of business, Corporate reorganizations.
• LOA does not cover limited scope audits involving capital gains tax, withholding tax and documentary stamp tax involving sale or transfer of properties, estate tax, and donor's tax returns & discrepancies identified through the BIR's "No Contact Audits."

Proper Modes of Service of Electronic Letter of Authority (eLA)

• Manner of effecting personal service, substituted service and service by mail are proper modes of service of an eLA.
• Substituted service can only be resorted to when the party is not present at the registered or known address.
• Service by mail shall be done through registered mail, reputable professional courier service, or ordinary mail.
• Personal or substituted service shall be effected by the Revenue Officer assigned to the case.
• Personal service is complete upon actual delivery of the eLA to the taxpayer or his representative.
• Service through registered mail is complete upon actual receipt by the taxpayer or after five (5) days from the date of receipt of the first notice of the postmaster, whichever is earlier.
• Service by ordinary mail is complete upon the expiration of 10 days after mailing.
• Service to the tax agent who is appointed or authorized by the taxpayer shall be deemed service to the taxpayer.

Letter of Authority Notice for Document Submission

• Process: Receipt of LOA with checklist of requirements -> 1st Notice of Presentation of Records -> 2nd and Final Notice for Presentation of Records -> Subpoena Duces Tecum.
• 10 days are given after Receipt of LOA for presenting Records.
• 10 days are given after 1st Notice of Presentation of Records.
• Failure to comply with the Subpoena Duces Tecum shall be a ground for criminal prosecution of the company's representatives or officials.

Notice of Discrepancy (NOD)

• Gives a taxpayer an opportunity to present his side regarding the preliminary findings through a personal discussion of discrepancy.
• The discussion of discrepancy shall in no case extend beyond 30 days from receipt of the NOD.
• Brief history of the NIC and NOD: RR No. 12-1999 (NIC was introduced) -> RR No. 18-2013 (NIC was removed) -> RR No. 7-2018 (NIC was reinstated) -> RR No. 22-2020 (NIC was replaced by the NOD effective 3 October 2020).

Preliminary Assessment Notice (PAN)

• Shows in detail the facts, laws, rules, regulations, or jurisprudence on which the proposed assessment is based.
• Under RR No. 18-2013 a FAN shall be issued.
• Within 15 days from the serving of PAN, if uncontested.
• Within 15 days from receipt of the position paper to the PAN.
• PAN is not required when: Deficiency tax is the result of a mathematical error, discrepancy is between the tax withheld and the amount remitted, opt to to claim for a refund
• Articles purchased by an exempt person that have been sold or distributed to non-exempt persons and excise tax due on excisable articles has not been paid

Formal Assessment Notice (FAN)

• Official demand by the BIR to pay the deficiency taxes.
• Facts, law, rules, regulations, or jurisprudence on which the assessment is based must be stated; otherwise, the FAN is void.
• Failure to file a valid protest against the FAN within 30 days from receipt thereof makes the assessment final and executory.
• Formal requirements for assessment notices (PAN/FAN): Each shall be done in two parts (Division into 2) , attachment of guidlines.
• The Preliminary Assessment Notice (PAN) and a Final Assessment Notice (FAN) shall have two parts under RMO No. 3-2022. Part I shall pertain to deficiency basic tax/es and civil penalties, and Part II shall pertain to the assessed compromise penalty/ies relative to violations uncovered during the conduct of audit. Preparation of BIR Form No. 0605 - Payment Form for the settlement/payment of "Part I" and "Part II" shall also be done separately.

Protesting the FAN

• A Protest is an administrative remedy available to a taxpayer against a tax assessment which involves three crucial periods.
• A written request for reconsideration or reinvestigation must be filed within 30 days from receipt of FAN.
• A submission of relevant supporting documents is required within 60 days from the filing of a request for reinvestigation.
• The appeal before the CTA is upon lapse of the 180-day period from the filing of the protest or submission of documents.
• Mandatory items that should be stated in the protest letter: Date of the assessment notice, the nature of the protest (reconsideration or reinvestigation -- with a specification of the new evidence intended to be submitted within 60 days from the date of filing the request for reinvestigation), applicable law, rules and regulations or jurisprudence on which the protest is based.
• In case where a request for reinvestigation is required along with submission of all relevant supporting documents within 60 days from filing of the protest letter
• Relevant supporting documents necessary to support the legal and factual bases in disputing the tax assessment as determined by the taxpayer (CIR v. First Express Pawnshop Company, G.R. No. 172045-46 dated 16 June 2009).
• If the taxpayer fails to file a valid protest within 30 days from receipt of the FAN, the assessment shall become final, executory, and demandable.
• If there are several issues in the FLD/FAN but the taxpayer only protests against the validity of some of the issues raised, the undisputed issues shall become final, executory and demandable.
• If there are several issues in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the issues, the same shall be considered undisputed issues, in which case, the related assessment shall become final, executory and demandable.
• In either of the two circumstances, a collection letter shall be issued to the taxpayer calling for the payment of the undisputed deficiency tax, inclusive of the applicable surcharge and/or interest.

Prescriptive Period of Assessment

• General Rule: The authority to make an assessment (i.e., issuance of a FAN) may be exercised by the BIR not later than three (3) years from the due date of filing the tax return or the actual filing thereof, whichever is later outlined in Section 203 of the Tax Code
• Exceptions to the 3-year prescriptive period (Section 222 of the Tax Code): For false or fraudulent returns, the prescriptive period is ten (10) years from the date of discovery of the falsity, fraud or omission.
• Under-declaration of revenue or over-declaration of deductions by 30% is prima facie evidence of fraud.
• A taxpayer may extend the BIR's 3-year prescriptive period to assess, through the execution of a waiver (Execution of the Waiver of the Statute of Limitations).
• Essential elements of a Waiver (RMO No. 14-2016): Date of execution, Expiry date of the extended period, Signature of authorized representative, Type of tax.

Clarifications on the Suspension of the Statute of Limitation and Illustration

• For calendar year 2018, ABC Corporation's deadline for filing tax returns, actual date of filing, and the last day for the BIR to make an assessment are as follows:Deadline of filing (15 April 2019) , Actual date of filing ( 12 April 2019), Last day of prescriptive period* (26 March 2023),
• *(which includes adjustments under RMC Nos. 136-2020, 80-2021, 93-2021 which adds a total of 345 days to make up for the suspension of the Statute of Limitation)
• period ending, Deadline of filing, Actual date of filing, Last day of prescriptive period for Valuation added tax and value added tax
• For calendar year 2019 :Period Ending, Deadline of filing, Actual date of filing, Last day of prescriptive period
• where the due date falls on a Saturday, Sunday, or holiday, the deadline for filing shall be on the next working day
• Already includes adjustments under RMC Nos. 136-2020, 80-2021, 93-2021 which adds a total of 345 days to make up for the suspension of the Statute of Limitation.

Final Decision on Disputed Assessment

• Serves as the final decision of the BIR on a disputed assessment
• The decision of the Commissioner or his duly authorized representative shall state and the decision otherwise, the decision shall be void
• The facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based.
• That the same is his final decision
• Available courses of action
  • Accept and settle the assessment contained in the FDDA, partially or fully
  • File a motion for reconsideration with the CIR within 30 days from receipt
  • Elevate protest to the Court of Tax Appeals within 30 days from receipt.
• 30 days to file a protest
• 60 days to submit documents
• 180 days before you appeal due to inaction

Tax Assessment Process

• LOA: Issued to inform the taxpayer that a tax examination will be conducted.
• NOD: Issued to inform taxpayer of discrepancies and purpose of "Discussion of Discrepancy."
• PAN: File protest within 15 days from the receipt of PAN.
• FAN: File protest within 30 days from the receipt of FAN with either with request for reinvestigation or reconsideration.
• FAN: Submit supporting documents within 60 days from filing of protest if the protest is a request for reinvestigation
• FAN: File an appeal with the CTA within 30 days from the lapse of 180 days of inaction of the Commissioner or await the issuance of the FDDA.
• FDDA: Issued to inform taxpayer of the BIR's final decision on a disputed assessment; file an appeal with the Commissioner or the CTA within 30 days from receipt.