The BIR audit: Preparing for the inevitable

The Bureau of Internal Revenue (BIR) recently suspended all field audits by issuing Revenue Memorandum Circular (RMCs) Nos. 76-2022 and 77-2022. The suspension has come as a relief for taxpayers, especially those undergoing rigorous (and in some cases, successive) tax audits, both through the regular audit and those conducted by special task forces created by the Commissioner of Internal Revenue (CIR). The RMCs also require BIR offices to submit an inventory of their outstanding Letters of Authority/Audit Notices and Letter Notices as of May 30.

According to news reports, the suspension was ordered by Finance Secretary Carlos G. Dominguez III to dispel rumors that the tax audits were meant to provide him with a going-away gift, or pabaon. Another possible explanation is that the suspension leaves the incoming CIR with a free hand.

However, the suspension is limited. Taxpayers may need to keep holding their breath as the suspension excludes the issuance of assessment notices as well as:  

1. lnvestigation of prescribing cases on or before Oct. 31, 2022;
2. Processing and verification of estate tax returns, donor’s tax returns, capital gains tax returns, and withholding tax returns on the sale of real property or shares of stock and the related documentary stamp tax returns;
3. Examination and/or verification of internal revenue tax liabilities of taxpayers retiring from business; Audit of National Government Agencies (NGAs), Local Government Units (LGUs), and Government-Owned and -Controlled Corporations (GOCCs) including subsidiaries and affiliates; and;
4. Other matters/concerns where deadlines have been imposed under the orders of the CIR.

Investigations will eventually resume, perhaps as early as next month, under the new BIR leadership. It bears mentioning that tax audits are necessary for the BIR to meet its collection targets to ensure the government can spend its way into reviving the economy. For instance, the incoming administration needs to fund ongoing infrastructure works, fulfil election promises (including reducing the price of rice to P20 per kilo), and managing the national debt (now at P13 trillion from P6 trillion six years ago). The incoming Finance Secretary has also declared that he prefers improving tax administration and collection for the moment over introducing new taxes.

As a tax practitioner handling tax assessment cases of various multinational and local conglomerates for over 20 years, let me humbly share some basics for managing tax audits well: 

• Maintain proper accounting records.

It pains me to see taxpayers unnecessarily paying deficiency taxes simply because they could not find the documents to address the alleged discrepancies and other BIR findings. The difficulty in retrieving documents is also due to the lack of proper record turnover by some company personnel. Thus, it is imperative for a taxpayer to properly maintain its accounting records so it can produce and present in a timely manner the required documents during a tax investigation.

• Know the tax rules.

Tax assessments arise because of the taxpayer’s noncompliance with applicable tax rules. For instance, taxpayers are assessed deficiency income tax and deficiency withholding taxes for failure to properly withhold tax in a timely manner on income payments to suppliers and employees. Deficiency VAT on disallowed input VAT credits may also arise if the suppliers’ official receipts (OR)/invoices do not comply with invoicing requirements. To properly claim input VAT, the OR/invoice should be registered and contain the name, address, TIN, and business style of the customer, with the VAT separately shown. Thus, the taxpayer’s accounting team must be aware of the basic tax rules to ensure compliance.

• Hire professionals when possible.

Even with proper documents, a taxpayer may still lose its case if it fails to raise appropriate technical defenses and/or comply with obligatory procedural requirements. For instance, the failure to file a protest letter in a timely manner will render the BIR’s deficiency tax assessment final and executory. Although this will entail additional costs, hiring a competent, honest, and experienced tax professional will help the taxpayer navigate the tax assessment process and increase the tax knowledge quotient of its staff. 

The BIR has the overwhelming task of collecting much-needed taxes. Thus, it is understandable that tax examiners are aggressively conducting tax investigations to generate substantial assessments. However, we sincerely pray that tax investigations be conducted fairly and professionally so as not to leave the taxpayers apprehensive or exasperated. Otherwise, the unreasonable tax investigations/assessments may discourage new investment and dampen business expansion, thus holding back employment and the restoration of economic health.