Have you received a Letter of Authority (LOA) today?
If yes, chances are you are in panic mode because you do not know how to handle your company’s LOA. You are starting to experience anxiety and sleepless nights, and your business suffers. Worry no more because now you will learn the due process, stages, and procedures of Bureau of Internal Revenue (BIR) tax audit investigations.
1. Letter of Authority (LOA)
This is a formal document issued by the BIR to authorize the examination of your books of accounts and other accounting records. Only the BIR Revenue Officers and Group Supervisor named in the LOA have the authority to conduct a tax audit and examination of your company. In other words, NO LOA, NO AUDIT.
The main goal of this audit is to determine whether you paid the correct taxes to the BIR during the taxable year covered in the LOA. As a taxpayer subject to a tax audit, your only job at this stage is to comply with the submission of books of accounts, records, and documents. LOA is not an assessment. You have nothing to pay during the stage of LOA.
Words of caution: some BIR Revenue Officers (RO) and Group Supervisors (GS) assigned to the tax audit of taxpayers are asking for bribes to settle and close immediately the LOA. Do not be fooled by this scheme because if you do, they will come back again to your company to issue another LOA for a different taxable year to ask again for a higher bribe. This will continue until you stop paying them and start educating yourself about your rights under the law Tax Code, as amended.
Watch related ATC Video
2. Checklist of Requirements
This is usually attached to the LOA upon service to the taxpayer. This document is the list of books, records, and documents to be submitted to the BIR. However, it must be emphasized that not all listed in this Checklist applies to taxpayers. An example is the submission of Subsidiary Sales Journal and Purchases Journal books. These books of accounts apply only to VAT-registered taxpayers, and not to Non-VAT-registered taxpayers. You have ten (10) days to comply from the date of receipt of the LOA and this Checklist.
Carefully scanned the contents of the Checklist. Identify which are Applicable and Not Applicable. If the books, records, or documents are not applicable, explain in writing why these are not applicable and cannot be submitted to BIR. If applicable, prepare these books, records, or documents to be submitted to BIR. Take note, the books of accounts must be updated; otherwise, a serious penalty will be imposed.
Words of caution: the submission of books, records, and documents to BIR must be evidenced by a Transmittal Letter. This letter specifies the different books, records, and documents to be submitted for compliance with the LOA (Applicable) and explains why some books, records, or documents cannot be submitted to BIR (Not Applicable). Further, submit only certified true copies of records and documents. Do not submit original copies to BIR but only books of accounts.
Watch related ATC Video
3. First Notice
In the event of your failure to comply with the LOA by non-submission of books, records, and documents or incomplete submission, the BIR will issue this document First Notice to remind you of your obligations in the submission. Again, you have ten (10) days from the date of receipt of this notice to comply. Kindly refer to the above Checklist of Requirements for proper submission.
4. Second and Final Notice
Everyone deserves a second chance, right? In case you fail again to submit the books, records, and documents or incomplete submission, the BIR will give you a second chance by issuing a Second and Final Notice. This is your SECOND AND FINAL NOTICE to remind you again of your obligations to submit the books, records, and documents as listed in the Checklist of Requirements. You have another ten (10) days from the date of receipt of this notice to comply. Otherwise, an SDT shall be issued against you.
5. Subpoena Duces Tecum (SDT)
Do you want another chance? Ok! The BIR will issue SDT to you in the event of your failure with a Second Notice by non-submission of the requested books, records, and documents or in case of incomplete submissions. Unlike Checklist, First Notice, and Second Notice, an SDT bears criminal liability consequences under Sec. 266 of the Tax Code, as amended, if you still fail to comply with the submission. We strongly encourage you to comply with the submission of your books, records, and documents as early as possible because non-compliance will result in the issuance of SDT and possible jail time.
Words of caution: The submission at this stage of SDT is usually to the Regional Office of the BIR who issued a LOA. The date, time, and specific book, records, and documents are listed in the SDT. However, the submission and compliance with the SDT must be evidenced by a Transmittal Letter as discussed earlier in the Checklist of Requirements.
Watch related ATC Video
6. Notice of Discrepancy (NOD)
After submitting books, records, and documents to the BIR, the RO and GS will start now their tax audit. They will submit Reports of Investigation to the Revenue District Officer (RDO) after the completion of their tax audit investigation. The RDO shall issue NOD to a taxpayer to inform you of deficiency tax or taxes and for the purpose of “Discussion of Discrepancy”. The issuance of NOD to you by the BIR is the first stage of assessment.
You have two options at this stage: Pay and protest. Pay if you agree to the findings of deficiency tax or taxes as indicated in the NOD. Protest if you disagree. In case of disagreement, you have thirty (30) days, from the date of receipt of NOD, to file your protest to the BIR. Your protest must be in writing, with factual and legal basis, and supported by the documents and records.
Words of caution: we strongly do not recommend attending to “Discussion” by verbally explaining to RO your disagreement with audit findings in the NOD. Why? Because you may end up giving them additional information which may result in increasing your assessment. Remember that the NOD is only the first stage of the BIR assessment; hence, the BIR can adjust this assessment depending on the information they have against you as a taxpayer subject to audit investigations. Less talk, less assessment.
Watch related ATC Video
7. Preliminary Assessment Notice (PAN)
The second stage of BIR assessment is PAN. The PAN contains a factual and legal basis for your assessment. Otherwise, this assessment is null and void under Sec. 228 of the Tax Code, as amended.
Again, you have two options: Pay and protest. In case of protest, you have fifteen (15) days, from the date of receipt of PAN, to file your protest to the BIR. And this protest must be in writing, with factual and legal basis, and supported by the documents and records. The filing of the protest is only either personal or registered mail with a return card through Philippine Postal Office. Private courier is not allowed.
Words of caution: the filing of the protest to PAN is sometimes useless because the BIR will issue a Final Assessment Notice (FAN) with the same amount of assessment. Thus, the BIR will ignore only your effort in the filing of this protest. However, we strongly recommend filing this protest even though this will be ignored by the BIR. Why? Because you may use this as an additional defense against FAN by invoking violations of taxpayer’s rights to due process as decided by the Supreme Court in Avon Products Manufacturing, Inc. vs CIR/CIR vs. Avon Products Manufacturing, Inc., G.R. Nos. 201418-19/G.R. Nos. 201398-99, Oct. 3, 2018.
8. Final Assessment Notice (FAN)
As its name suggests, this is the final assessment of the BIR. Like the PAN, it contains the details of the factual and legal basis on which the assessment is based; otherwise, the assessment is null and void. Further, it calls for the payment of your deficiency tax assessments. But you have the option to dispute this FAN without payment.
Under RR 12-1999, as amended, you have two options to protest or dispute this assessment: namely, a Request for reconsideration and a Request for reinvestigation. The difference between the two lies in the submission of supporting documents. In Reconsideration, the supporting documents already exist and are in the hands of the BIR, and you do not need to submit new documents to support your protest. Examples are tax returns, books of accounts, and receipts and invoices evidencing sales and expenses which are already submitted during the stage of LOA and notices. However, in Reinvestigation, newly discovered evidence or supporting documents will be submitted to the BIR to support your protest. Take note that the filing of the protest must be filed within thirty (30) days from the date of receipt of the FAN.
Words of caution: failure to submit or file a valid protest on time shall make the FAN final, executory, and demandable, which means subject to administrative collection remedies of the BIR, including the issuance of Warrant of Garnishment and Warrant of Distraint and/or Levy. Do not ignore the limited time in the filing of the protest should you choose to dispute the assessment to BIR. Also, do not forget the mandatory modes of filing the protest. Please refer to the above discussion of the PAN.
Watch related ATC Video
9. Final Decision on Disputed Assessment (FDDA)
This FDDA is a decision of the BIR to your protest or dispute to FAN. It must contain the facts and legal basis on which the decision is based; otherwise, null and void. The decision is either favorable or not to you as a taxpayer. If not favorable, in whole or in part, let’s say the assessments remain unchanged, you have two options again: Pay and protest.
If you choose to protest, there are two options: Administrative protest at the Office of the Commissioner of Internal Revenue (CIR) or Judicial protest at the Court of Tax Appeals (CTA). In CIR, you shall address your protest to CIR himself at his BIR National Office. And this protest must be in Request for Reconsideration only, meaning you are not allowed to submit any additional newly discovered supporting documents. The supporting documents are limited to existing supporting documents you have submitted or already those in the hands of the BIR in the protest to FAN stage. In the CTA, you will need a competent tax lawyer to help you file and process judicial protest. This option is very costly on your part because you will have to pay legal fees, filing fees, and other fees which are necessary for your judicial protest. Depending on your case, we recommend filing your protest to the office of the CIR as this option is cost-effective. However, this administrative protest takes a long period for the CIR to decide in your case. Take note that the filing of the protest, either CIR or CTA, must be filed within thirty (30) days from the date of receipt of the FDDA.
Words of caution: choosing the venue of protest, either at the CIR or CTA, is irrevocable and exclusive. This means that if you choose to file your protest at the office of the CIR, you cannot resort to judicial protest at the CTA at the same time or later unless there is already a decision from the office of the CIR in response to your administrative protest. Likewise, if you choose and file a judicial protest at the CTA, you are not allowed to resort to the CIR for administrative protest. Also, failure to submit or file a valid protest on time shall make the FDDA final, executory, and demandable, which means subject to administrative collection remedies of the BIR, including the issuance of Warrant of Garnishment and Warrant of Distraint and/or Levy.
Watch related ATC Video
10. Letter of Protest
A letter of protest to dispute the assessments of the BIR, whether at the NOD, PAN, FAN, or FDDA stage of the BIR, is an effective tool to minimize or reduce your assessments to a satisfactory level. But the protest must be valid to be effective. A valid protest must contain factual and legal basis as well as relevant supporting documents.
If you want to learn more about handling your own BIR tax audit investigations, we would like to offer you our RWB Book BIR Tax Audit for MSMEs. It has actual BIR assessments from LOA to FDDA and protest letters. Kindly click the link below to learn more about this RWB Book.
