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No person shall be deprived of life, liberty, or property without due process of law. This is one of the rights accorded to every Filipino by the Constitution, and this right to due process extends to tax audits or investigations.

The Tax Code empowers the tax authorities to examine a taxpayer’s books of account and financial records and assess the correct amount of tax. However, due process requires that the tax authorities must follow the rules on the issuance of tax assessments.

Revenue Regulations (RR) 12-99, as amended, provides for the rules on assessment of national internal revenue taxes. Under the RR, a Letter of Authority (LOA) must first be validly served to the taxpayer. The LOA is issued by either the Bureau of Internal Revenue (BIR) Revenue District Office or Special Investigative Division (in the case of Revenue Regional Offices) or by the Chief of Division (in the case of National Office), to a taxpayer. Under the LOA, the BIR requires a taxpayer to provide the taxpayers’ documents, books, and records to the authorized revenue examiners indicated therein, and in case of failure to submit the documents or information, the tax authorities can issue a Subpoena Duces Tecum (SDT) to compel compliance.

Once the documents and information are submitted to the revenue officers named in the LOA, the tax authorities may proceed to audit the documents and information submitted.  The tax authorities can then notify the taxpayer of their findings by issuing a Notice of Discrepancy (NOD). The NOD is not yet an assessment, but an informal way of notifying the taxpayer of the result of the tax audit. The NOD will call on the taxpayer for a discussion in order to give the taxpayer a chance to present its side of the case.

If both the revenue officers and the taxpayer do not come to an agreement after the discussion on discrepancies, the tax authorities can issue the Preliminary Assessment Notice (PAN).  Under the rules, the taxpayer is given 15 days to respond to the PAN counted from the time the PAN is received. Nonetheless, notwithstanding a reply filed by the taxpayer, the tax authorities can proceed to issue the Final Assessment Notice (FAN)/Formal Letter of Demand (FLD) after the lapse of the aforementioned 15-day period to respond to the PAN.

Once the taxpayer receives the FAN/FLD, the taxpayer is given 30 days from receipt of the FAN/FLD within which to file a protest in the form of either a request for reconsideration or a request for reinvestigation. In the case of the latter, the taxpayer is given an additional 60 days to submit documents in support of the request for reinvestigation.

In issuing the FAN/FLD, Section 228 of the Tax Code requires the tax authorities to inform the taxpayer in writing of the law and facts on which the assessment is made; otherwise, the assessment shall be void. In the recent Court of Tax Appeals (CTA) Case No. 9779 dated Sept. 23, 2021, the Tax Court nullified a tax assessment because the tax authorities issued only a one-page FLD, which merely enumerated the taxes and the corresponding amounts and computation. The Tax Court pointed out that RR 12-99, which implements Section 228 of the Tax Code, prescribes that, as part of due process in the issuance of tax assessments, the FAN/FLD must state the facts, the law, rules and regulations, or jurisprudence on which the assessments are based. The Annex “B” referred to in RR 12-99 shows not only an FLD/FAN, but likewise prescribes the issuance therewith of “Details of Discrepancies,” wherein the facts, the law, rules and regulations, or jurisprudence, are to be stated as bases for the assessments made in the same FLD/FAN. Hence, both the FLD/FAN and the “Details of Discrepancies” must be issued by the tax authorities to the taxpayer as part of due process in the issuance of tax assessments.

The importance of sufficiently informing the taxpayers of the bases of the tax assessment cannot be undermined because otherwise, taxpayers will be left at the mercy of revenue officers issuing the tax assessment. For how a taxpayer can sufficiently protest an assessment if the taxpayer does not know or understand how the assessment came about, or how the assessment was arrived at. A decision of the Supreme Court, which was also cited in the aforementioned CTA case, sums it all: “While the government has an interest in the swift collection of taxes, the Bureau of Internal Revenue and its officers and agents cannot be overreaching in their efforts, but must perform their duties in accordance with law, with their own rules of procedure, and always with regard to the basic tenets of due process.”

Carlon M. Ticzon is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG RGM&Co.

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