Know your law: Surviving tax audits


Posted at Feb 21 2009 09:14 PM | Updated as of Feb 22 2009 05:14 AM

Tax audit is the process of investigating taxpayers for irregularities in their tax return. It does not automatically mean, however, that a person is guilty of evading his tax obligations.

Atty. Rosa Bagtas, partner of the CVC law firm, said conducting tax audits is a regular procedure of the Bureau of Internal Revenue (BIR), adding that taxpayers are given enough opportunities to prove that they have paid the right amount of taxes.

"The burden is on the BIR to prove the deficiency," Bagtas told "Mornings at ANC" in a recent episode. 

Contrary to what most people think, Bagtas said the process of tax audit is not something that happens immediately. Rather, it is a tedious and lengthy process which may even take years, including extensions and appeals to courts.

"There is a process to it. It's not like you get a notice from the BIR and then you get convicted or prosecuted for tax evasion," Bagtas said.

However, Bagtas said that taxpayers can go through the audit process faster and more easily with knowledge of the tax audit procedure as well as proper coordination with the BIR.

Letter of Authority

To start the audit, the BIR selects a taxpayer and requests documents from him through a the letter of authority (LOA) or a tax verification notice (TVN). The LOA or the TVN is sent to the taxpayer to inform him of the audit process. As a general rule, a taxpayer can only be audited once for a taxable year.

"BIR would like to know whether the taxpayer has filed or paid a certain amount of taxes for a given year. For 2009, the focus of the BIR is to check taxes paid in 2007," Bagtas said.

For Metro Manila, Bagtas said the BIR usually sends LOAs to taxpayers earning P10 million per annum. For those who earn below P10 million, they are commonly sent TVNs to verify if they pay the right taxes for a given year.

The BIR conducts benchmarking and other studies in selecting taxpayers to be sent LOAs or TVNs, which are determined based on profession or industry. However, Bagtas said there are times when there is mandatory issuance of LOA.

"It's not a small thing, they really look into it. If it's a small taxpayer, earns small income, and they don't think he's evading taxes, BIR won't waste their time on that. If based on the documents there is sufficient belief the taxpayer may have failed to pay the right amount of taxes, then they send the TVN or LOA," she said.

Instead of neglecting the LOA or the TVN, Bagtas said it would be better for taxpayers to cooperate with the BIR by submitting all the needed documents, which are usually books of accounts, official receipts to support deductions, and tax returns to show proof of payment.

"BIR will give you a lot of opportunity to contest or inform them that you paid right amount of taxes. When you receive the LOA, look through your documents," she said.

"It's important to keep records for at least 3 years. The 3-year period is when the BIR is supposed to make an assessment if there are deficiency taxes on the part of the taxpayer," she added.


After getting all the needed documents, the revenue officer will then conduct the audit and submit an investigation report to the BIR. The tax bureau, in turn, will inform the taxpayer of the audit findings through a notice for informal conference.

The conference aims to provide an avenue for discussion between the BIR and the taxpayer regarding the latter's deficiency taxes as a result of the audit.

"BIR will explain to the taxpayer what his deficiency taxes are, where it's based on, what documents, what law or regulation is supportive of that finding," Bagtas said.

At this stage, the taxpayer can provide a written reply should he contest the findings of the tax bureau. Bagtas recommended that the taxpayer bring an accounting or legal consultant due to the technicalities involved in the conference.

"If you file your counter-arguments you're going to need a lawyer already," she said.


The BIR will be conducting a review of the audit, and will issue a pre-assessment notice to the taxpayer should it refuse to accept the latter's explanations for the deficiency taxes. The pre-assessment notice will make room for another discussion between the taxpayer and the BIR.

Despite this, the BIR will still give the taxpayer enough time to contest the pre-assessment notice.

Should the taxpayer fail to respond properly to the pre-assessment notice, a formal letter of demand will be sent to him by the BIR. The letter will state which deficiency taxes are supposed to be paid, including supporting documents and court cases related to the BIR's findings, if any.

The taxpayer will be given 30 days to file a written protest against the demand letter, which should include the legal bases for his arguments, and 120 days to submit all the needed documents. The BIR, in turn, has 180 days to respond to the protest.

If the BIR does not act on the protest, the taxpayer can elevate it to the court of tax appeals, the Court of Appeals, or even the Supreme Court, if there is enough legal basis for such.

"There are enough opportunities for the taxpayer to contest the findings of the BIR," Bagtas said.

However, the assessment notice will be deemed final if no protest is filed, and the BIR will move for the collection of deficiency taxes.

Remedies, jeopardy assessment

The BIR can come up with a compromise agreement with the taxpayer regarding payment terms should the latter be unable to settle the amount in full.

However, Bagtas said it is better to settle deficiency taxes as quickly as possible to avoid the 20-percent interest rate imposed by BIR per annum.

"Taxes can be paid in installment, but there's interest, around 20 percent interest per annum," she said.

Should the taxpayer refuse to pay his deficiency taxes and is uncooperative throughout the audit process, the BIR can make a jeopardy assessment.

The jeopardy assessment, Bagtas said, is issued when the tax bureau's allowed 3-year assessment period is about to end with the taxpayer continuing to neglect notices sent by the BIR. In a jeopardy assessment, the burden will be placed on the taxpayer to prove that there is no deficiency.

"You are better off with the direct method (determining your tax payment through the documents you give the BIR) so you know what the BIR is doing," Bagtas said.

Because of the taxpayer's refusal to cooperate, the BIR will then have no option to resort to other measures of audit such as checking one's net worth and expenditures. Should he continue to be uncooperative, Bagtas said a tax evasion case may be filed against him.

"However, it's difficult to have that tax evasion case because the BIR has to have a finding of a deliberate attempt on your end to evade tax. That there's really bad faith on the part of the taxpayer to evade taxes," she said. -- by KAREN FLORES,