When BIR tax assessments have gone wrong
In the Philippines, the Bureau of Internal Revenue (BIR) has the power and authority to conduct tax audit investigations of taxpayers’ books of accounts and other accounting records. This is to determine whether taxpayers paid the correct taxes to the government. After conducting a tax audit, the BIR will issue tax assessments to taxpayers. These tax assessments contain audit findings resulting in tax dues still to be paid by the taxpayers. Below are the most tax audit findings and how to protest each of them:
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1. Unsubstantiated Expenses
The 1997 Tax Code, as amended, allows taxpayers to claim deductions from gross income before applying the applicable tax rates to compute the tax due to be paid to the BIR. However, one of the strict requirements for claiming deductions is substantiation or supporting documents as proof of valid deductible business expenses. If the taxpayers subject to tax audit investigation failed to substantiate these deductions, the BIR will disallow these expenses. Accordingly, taxable income increases resulting in deficiency income tax assessment.
These alleged unsubstantiated expenses can be easily protested by presenting corresponding receipts and/or invoices to support the claimed deductions. During initial compliance with the submission of books of accounts and other accounting records, we recommend not submitting original receipts, invoices, and documents to the BIR but only certified true copies. This will allow your company to substantiate your protest against unsubstantiated expenses in the event the BIR Revenue Officers refused to return your books and records or overlooked your submitted receipts and invoices to support your claimed expenses.
2. Failure to withhold and/or remit withholding tax
Another requirement of tax deductions is that the applicable withholding tax from purchases and expenses was withheld and remitted to the BIR. Failure to do so will disallow the corresponding expenses from your gross income. One example is the obligation of each employer to deduct, withhold, and remit the withholding tax on employees’ salaries and wages.
There are two ways to address this disallowance due to failure to withhold and/or remit.
First, carefully check the tax audit finding if the alleged disallowance is correct. Why? Because not all purchases and expenses, including salaries and wages of employees, are subject to withholding tax. For example, when you are not one of the Top Withholding Agents (TWA) but the BIR disallowed your claimed tax deductions because of your failure to withhold 1% and 2% from purchases of goods and services, respectively.
Second, if the disallowance is correct, you may apply the provisions of RR 6-2018. In the said BIR regulations, taxpayers are allowed to pay the under-withheld or non-withheld withholding tax, including penalties, during tax audit investigations, reinvestigation, or reconsideration. And the disallowed expenses shall become allowed tax deductions following the express provisions of RR 6-2018. Make sure to cite this BIR revenue regulation as your legal basis in your protest.
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3. Disallowed Creditable VAT Input Tax for No Valid Reason
Section 228 of the 1997 National Internal Revenue Code, as amended (“Tax Code” for brevity) mandates that a taxpayer should be informed in writing of the law and the fact upon which the assessment is based, otherwise such assessment shall be invalid. The second paragraph of Section 228 of the Tax Code is clear and mandatory. It provides as follows:
Sec. 228. Protesting of Assessment. —
x x x
The taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise, the assessment shall be void. (Emphasis and underscoring supplied)
Based on the foregoing provisions of Sec. 228 of the Tax Code, as amended, the tax assessment must be supported by the law and facts on which it was based. Applying these legal provisions, you must be vigilant to the details of each tax audit finding.
Take for example the photo above for Creditable Input Tax amounted to P16,738,927.05. The assigned BIR Revenue Officer in this tax audit investigation miserably failed to state the facts and the law of the assessment. More importantly, it did not offer any explanations or reasons on how the Revenue Officer arrived at those amounts. Further, the details of the discrepancy referring to the Creditable Input Tax are incomplete in thought. In this case, you may invoke the above-quoted provisions of Sec. 228 as your legal basis to invalidate this tax audit finding and the corresponding tax assessment arising from it.
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4. Undeclared Income/Sales from Undeclared Expenses/Purchases
This BIR tax audit finding surprises me whenever I see this in the taxpayers’ tax assessment. And this is NON-SENSE!
The Supreme Court in Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 108576, January 20, 1999 said it best in the following manner:
“The three (3) elements for the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. Income tax is assessed on income received from any property, activity or service.
Such being the case, in the imposition or assessment of income tax, it is not when there is an undeclared purchase, but only when there was an income, and such income was received or realized by the taxpayer.
In this case, said elements are not present. The BIR merely imposed income tax on respondent simply because there was under-declaration on purchases, nothing more.”
Relative thereto, as once held by the Supreme Court in the case of Commissioner of Internal Revenue vs. Phoenix Assurance Co. Ltd., G.R. No. L-19727, May 20, 1965:
“Furthermore, it must be emphasized that for income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount, or not claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein. Hence, even granting that there is an undeclared purchase, the same is not prohibited by law.” (Emphasis and italic supplied)
As clearly worded, applying the foregoing jurisprudence, the undeclared income/sales arising from undeclared or under-declaration of expenses/purchases have no legal basis to stand on. Also worth noting, this under-declaration of expenses and purchases in the tax returns is not against the law. Thus, it should be cancelled and set aside following the mandatory and statutory requirement of Sec. 228 of the Tax Code, as amended.
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5. Compromise Penalties
Compromise penalties are imposed on taxpayers for criminal violations of the Tax Code, as amended. However, these penalties are not always right because the alleged violations have no legal basis to support these impositions.
For example, based on the above photo, Failure to submit Depreciation Schedule and Schedule of Taxes and Licenses are not supported by the Tax Code, as amended. Under RMO 53-1998, as amended, the preparation of these schedules is the obligation of Revenue Officers assigned to the tax audit investigations, not taxpayers. Hence, the corresponding compromise penalties from failure to submit these schedules are not valid.
On the other hand, if it is true and correct, the penalties for Late filing and/or payment of VAT and Expanded Withholding Tax or any applicable tax returns should be paid. We recommend paying these penalties to avoid future criminal case trouble.
Other examples are Failure to file Monthly Alphalist of Payees (MAP) amounting to P12,000 and Failure to file Monthly Alphalist of Employees (MAE) for P9,000.
The submission of MAP was already amended in 2018 because of the passage of the TRAIN Law (R.A. no. 10963). Under implementing rules and regulations of RR 11-2018, the submission of alphalist of payees is now quarterly and annually. Therefore, effective 2018, the imposition of a P12,000 penalty for the alleged failure to submit MAP has no legal basis to stand. Hence, this penalty shall be cancelled and set aside.
Similarly, the submission of MAE is not provided by the Tax Code, as amended, and its implementing rules and regulations. The RR 1-2014 invoked by the Revenue Officer refers to the submission of Annual Alphalist of Employees as part of the submission of Annual Information Returns, and not to Monthly Payees. Moreover, it was already expressly provided in the RR 11-2018 that the submission of alphalist of employees is on an annual basis, not monthly. Thus, the imposition of a P9,000 penalty for the alleged failure to submit MAE has no legal basis to stand. Hence, this penalty shall be cancelled and set aside.
As to the other penalties, we recommend paying these amounts if the violations are true and correct.
In conclusion, to verify the correctness and legality of these tax audit findings, you, as a taxpayer, must be knowledgeable and educated on how to handle your company’s BIR tax audit investigation. Otherwise, you will pay unreasonable tax assessments even if not correctly due to you.
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Learn more about BIR Tax Audit for MSMEs
If you want to learn more about handling your own BIR Letter of Authority (LOA), including how to appeal or protest against the BIR tax assessments, we invite you to invest in your education through our RWB Book.
Our RWB Book BIR Tax Audit for MSMEs has exclusive ATC online tutorial videos to discuss and explain its contents. And it has actual BIR assessments from LOA to FDDA and protest letters. Please click the photo below to learn more about the details of this RWB Book.
