ENERAL AUDIT PROCEDURES AND DOCUMENTATION

1. When does the audit process begin?The audit process commences with the issuance
of a Letter of Authority to a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that

empowers a Revenue Officer to examine and scrutinize a Taxpayers books of accounts
and other accounting records, in order to determine the Taxpayers correct internal
revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of

taxpayers under the jurisdiction of National Office, shall be issued and approved by the
Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional
Offices, it shall be issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the
concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall
become null and void. The Taxpayer shall then have the right to refuse the service of this
LA, unless the LA is revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated

through the issuance of a new LA. However, a Letter of Authority can be revalidated

Only once, for LAs issued in the Revenue Regional Offices or the Revenue District
Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit?A Revenue Officer
is allowed only one hundred twenty (120) days from the date of receipt of a Letter of
Authority by the Taxpayer to conduct the audit and submit the required report of
investigation. If the Revenue Officer is unable to submit his final report of investigation
within the 120-day period, he must then submit a Progress Report to his Head of Office,
and surrender the Letter of Authority for revalidation.

7. How is a particular taxpayer selected for audit?Officers of the Bureau (Revenue District
Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations
Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of
audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria
prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines
for the audit program of a particular year. The list of taxpayers shall then be submitted to
their respective Assistant Commissioner for pre-approval and to the Commissioner of
Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by
the Regional Director and finally approved by Assistant Commissioner, Assessment
Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the
same taxable year? A taxpayers books of accounts shall be subjected to examination
and inspection only once for a taxable year, except in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes were committed
by Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of his books of

accounts;

When there is a need to verify the Taxpayers compliance with withholding and other
internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the
Commissioner of Internal Revenue.

When the Taxpayers capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to
the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process?In
addition to the authority of the Commissioner to examine and inspect the books of
accounts of a Taxpayer who is being audited, the Commissioner may also:

Obtain data and information from private parties other than the Taxpayer himself (Sec.5,
NIRC); and

Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts
(Sec. 6, NIRC).

10. What is a Notice for Informal Conference ?A Notice for Informal Conference is a
written notice informing a Taxpayer that the findings of the audit conducted on his books
of accounts and accounting records indicate that additional taxes or deficiency
assessments have to be paid.
If, after the culmination of an audit, a Revenue Officer recommends the imposition of
deficiency assessments, this recommendation is communicated by the Bureau to the
Taxpayer concerned during an informal conference called for this purpose. The Taxpayer
shall then have fifteen (15) days from the date of his receipt of the Notice for Informal
Conference to explain his side.

11. Within what time period must an assessment be made?An assessment must be made
within three (3) years from the last day prescribed by law for the filing of the tax return for
the tax that is being subjected to assessment or from the day the return was filed if filed
late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date
of discovery of such fraud within which to make the assessment.
Any assessments issued after the applicable period are deemed to have prescribed, and
can no longer be collected from the Taxpayer, unless the Taxpayer has previously
executed a Waiver of Statute of Limitations.

12. What is "Jeopardy Assessment"? A Jeopardy Assessment is a tax assessment made

by an authorized Revenue Officer without the benefit of complete or partial audit, in light
of the ROs belief that the assessment and collection of a deficiency tax will be
jeopardized by delay caused by the Taxpayers failure to:

Comply with audit and investigation requirements to present his books of accounts and/or
pertinent records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his return.

13. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a

communication issued by the Regional Assessment Division, or any other concerned BIR
Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer,
following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen
(15) days from his receipt of the PAN to file a written reply contesting the proposed
assessment.

14. Under what instances is PAN no longer required? A Preliminary Assessment Notice
shall not be required in any of the following cases, in which case, issuance of the formal
assessment notice for the payment of the taxpayers deficiency tax liability shall be
sufficient:

When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax appearing on the face of the tax return filed by the taxpayer; or

When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied
the same amount claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.
15. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who

fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose
reply to the PAN was found to be without merit. The Notice of Assessment shall inform
the Taxpayer of this fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes
shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and the notice of
assessment shall be void.

TAXPAYERS OBLIGATIONS AND PRIVILEGES

16. What is required of a taxpayer who is being audited?A Taxpayer who is being audited
is obliged to:

Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation
by the Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority
the name of the recipient and the date of receipt.

Present within a reasonable period of time, his books of accounts and other related
accounting records that may be required by the Revenue Officer; and

Submit the necessary schedules as may be requested by the Revenue Officer within a
reasonable amount of time from his (Taxpayers) receipt of the Letter of Authority.

17. What is the recourse of a Taxpayer who cannot submit the documents being required
of him within the prescribed period of time? If a Taxpayer, believing that he cannot present
his books of accounts and/or other accounting records, intends to request for more time
to present these documents in order to avoid the issuance of a Jeopardy Assessment,
the Taxpayer may execute what is referred to as a Waiver of the Statute of Limitations.

18. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations
is a signed statement whereby the Taxpayer conveys his agreement to extend the period
within which the Bureau may validly issue an assessment for deficiency taxes. If a
Taxpayer opts to execute a Waiver of the Statute of Limitations, he shall likewise be, in
effect, waiving his right to invoke the defense of prescription for assessments issued after
the reglementary period.

No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by

a duly authorized Bureau official.

19. If a Taxpayer does not agree with the assessment made following an audit, can he
protest this Assessment?Yes, he can. A Taxpayer has the right to contest an assessment,
and may do so by filing a letter of protest stating in detail his reasons for contesting the
assessment.

20. What are the characteristics of a valid protest? A protest is considered valid if it
satisfies the following conditions:

It is made in writing, and addressed to the Commissioner of Internal Revenue;

It contains the information, and complies with the conditions required by Sec. 6 of
Revenue Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the immediate past three (3) taxable year.

b.) Nature of request whether reinvestigation or reconsideration specifying newly

discovered evidence he intends to present if it is a request for investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or letter of demand.

f.) Itemized statement of the findings to which the taxpayer agrees as a basis for
computing the tax due, which amount should be paid immediately upon the filing of the
protest. For this purpose, the protest shall not be deemed validly filed unless payment of
the agreed portion of the tax is paid first.

g.) The itemized schedule of the adjustments with which the taxpayer does not agree.

h.) A statement of facts and/or law in support of the protest.

The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence
on which his protest is based, otherwise, his protest shall be considered void and without
force and effect on the event the letter of protest submitted by the taxpayer is accepted,
the taxpayer shall submit the required documents in support of his protest within sixty (60)
days from date of filing of his letter of protest, otherwise, the assessment shall become
final, executory and demandable.

It is filed within thirty (30) days from the Taxpayers receipt of the Notice of Assessment
and formal Letter of Demand.

21. In the event the Commissioners duly authorized representative denies a Taxpayers
protest, what alternative course of action is open to the Taxpayer? If a protest filed by a
Taxpayer be denied by the Commissioners duly authorized representative, the Taxpayer
may request the Commissioner for a reconsideration of such denial and that his tax case
be referred to the Bureaus Appellate Division. The Appellate Division serves as a "Court",
where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer on the other,
can present testimony and evidence before a Hearing Officer, to support their respective
claims.

22. What recourse is open to a Taxpayer if his request for reconsideration is denied or
his protest is not acted?

Should the Taxpayers request for reconsideration be denied or his protest is not acted
upon within 180 days from submission of documents by the Commissioner, the Taxpayer
has the right to appeal with the Court of Tax Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the Taxpayers receipt
of the Commissioners decision denying the request for reconsideration or from the lapse
of the 180 day period counted from the submission of the documents. (Sec. 228 of the
Tax Code, as amended).

23. If the Taxpayer is not satisfied with the CTAs decision, can he appeal the decision to
a higher Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed
with the Court of Appeals within fifteen (15) days from the Taxpayers receipt of the CTAs
decision. In the event that the Taxpayer is likewise unsatisfied with the decision of the
Court of Appeals, he may appeal this decision with the Supreme Court.

24. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes?
Yes, he can. The Taxpayer may file such a claim with the Commissioner of Internal
Revenue (Sec.229, NIRC), within two (2) years from the payment of the tax or penalty
sought to be refunded. Failure of the Taxpayer to file such a claim within this prescribed
period shall result in the forfeiture of his right to the refund or tax credit.

25. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision
on this claim, can the Taxpayer elevate his claim to the CTA?

Yes, he can, if the two (2) year period stated above is about to end, and the Commissioner
has yet to render a decision on the claim. (Gibbs v. Collector, L-13453, February 29,
1960).
REMEDIES OF THE BUREAU IN THE AUDIT PROCESS AND COLLECTION OF DELINQUENT ACCOUNTS

26. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts and
other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to produce his
books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayers receipt
of the second written request, he still fails to comply with the requirements of the notice, the Bureau
shall then issue him a Subpoena Duces Tecum.

27. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena Duces
Tecum?
If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena Duces
Tecum, the Bureau may:

File a criminal case against the Taxpayer for violation of Section 5 as it relates to Sections 14 and 266, of
the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules
of Court.

28. What alternatives are open to Government for the collection of delinquent accounts?

Once an assessment becomes final and demandable, the Government may employ any, or all, of the
following remedies for the collection of delinquent accounts:

Distraint of personal property;

Levy of real property belonging to the Taxpayer;

Civil Action; and

Criminal Action.

29. What is "Distraint of Personal Property"? Distraint of personal property involves the seizure by the
Government of personal property - tangible or intangible - to enforce the payment of taxes, followed by
the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily.

30. What is "Levy of Real Property"? Levy of real property refers to the same act of seizure, but in this
case of real property, and interest in or rights to such property in order to enforce the payment of taxes.
As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the
taxes involved are not voluntarily paid following such levy.
31. In what time period must collection be made? Any internal revenue tax, which has been assessed
within the period prescribed shall be collected within three (3) years from date of assessment. However,
tax fraud cases may be collected by distraint or levy or by a court proceeding within five (5) years from
assessment of the tax or from the last waiver.

PENALTIES FOR LATE FILING OF TAX RETURNS

A. For late filing of Tax Returns with Tax Due to be paid, the following penalties will be imposed upon filing, in
addition to the tax due:

1. Surcharge

NIRC SEC. 248. - Civil Penalties.

(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%)
of the amount due, in the following cases:

(1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and
regulations on the date prescribed; or

(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those
with whom the return is required to be filed; or

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or

(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of
this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before
the date prescribed for its payment.

2. Interest

NIRC SEC. 249. Interest. -

(A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty
percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed
for payment until the amount is fully paid.

3. Compromise

NIRC SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and Remit
Tax and Refund Excess Taxes Withheld on Compensation. - Any person required under this Code or by rules and
regulations promulgated thereunder to pay any tax make a return, keep any record, or supply correct the accurate
information, who willfully fails to pay such tax, make such return, keep such record, or supply correct and accurate
information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times
required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof,
be punished by a fine of not less than Ten Thousand Pesos (P 10,000) and suffer imprisonment of not less than one
(1) year but not more than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or
actually files a return or statement and subsequently withdraws the same return or statement after securing the official
receiving seal or stamp of receipt of internal revenue office wherein the same was actually filed shall, upon conviction
therefor, be punished by a fine of not less than Ten Thousand Pesos (P10,000) but not more than Twenty Thousand
Pesos (P 20,000) and suffer imprisonment of not less than one (1) year but not more than three (3) years.
In addition, Annex A of Revenue Memorandum Order (RMO) No. 7-2015 provides for the Revised Consolidated
Schedule of Compromise Penalties for Violations of the National Internal Revenue Code (NIRC), which can be
accessed via this link: Annex

From page 5 of Annex A of RMO No. 7-2015

TAX
CRIMINAL PENALTY
CODE NATURE OF VIOLATION AMOUNT OF COMPROMISE
IMPOSED
SEC

255 Failure to file and/or pay
any internal revenue tax at
the time or times required by
law or regulation
Fine of not less than If the amount of tax unpaid
P10,000 and imprisonment
But does Compromise
of not less than one (1) year Exceeds
not exceed is
but not more than 10 years
P xxx P 5,000 P 1,000

5,000 10,000 3,000

10,000 20,000 5,000

20,000 50,000 10,000

50,000 100,000 15,000

100,000 500,000 20,000

500,000 1,000,000 30,000

1,000,000 5,000,000 40,000

5,000,000 xxx 50,000

B. For late filing of Tax Returns with NO Tax Due to be paid, the compromise penalty will be imposed upon filing of
the Tax Return based on the following:

1. For violations of the NIRC provisions which are subject to compromise, the reference is found in page 4 of Annex A
of RMO No. 7-2015.

TAX
NATURE OF CRIMINAL PENALTY
CODE AMOUNT OF COMPROMISE
VIOLATION IMPOSED
SEC

255 Failure to make/file/submit
any return or supply
correct information at the
time or times required by
law or regulation
Fine of not less than If gross sales, earnings or receipts;
P10,000 and imprisonment or gross estate or gift (based on the
of not less than one (1) year subject returns/information for
but not more than ten (10) filing/submission)
years
But does not
Exceeds Compromise is
exceed

P xxx P 50,000 P 1,000

50,000 100,000 3,000

100,000 500,000 5,000

500,000 5,000,000 10,000

5,000,000 10,000,000 15,000

10,000,000 25,000,000 20,000
 25,000,000 xxx 25,000

2. For violations of the NIRC provisions which may be the subject of criminal actions, Section 250 of the NIRC will apply
as follows:

NIRC SEC. 250. Failure to File Certain Information Returns. - In the case of each failure to file an information return,
statement or list, or keep any record, or supply any information required by this Code or by the Commissioner on the
date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there
shall, upon notice and demand by the Commissioner, be paid by the person failing to file, keep or supply the same,
One Thousand Pesos (P 1,000) for each failure: Provided, however, That the aggregate amount to be imposed for all
such failures during a calendar year shall not exceed Twenty-Five Thousand Pesos (P 25,000).

C. For late filing of Statements/Reports required to be filed with NO Tax Due to be paid, the compromise penalty
will be imposed upon filing of the Tax Return based on the following:

NIRC SEC. 275. Violation of Other Provisions of this Code or Rules and Regulations in General.- Any person
who violates any provision of this Code or any rule or regulation promulgated by the Department of Finance, for which
no specific penalty is provided by law, shall, upon conviction for each act or omission, be punished by a fine of not more
than One Thousand Pesos (P 1,000) or suffer imprisonment of not more than six (6) months, or both.