For 2023, the Bureau of Internal Revenue (BIR) is tasked to collect a staggering P2.6 trillion in revenue. Given this high collection target, it is no surprise that revenue examiners have taken an aggressive approach in their investigations of taxpayers receiving Letters of Authority (LoA) and Assessment Notices for deficiency taxes one after another.
This is a sad reality most taxpayers currently face. But there is no need to despair — the courts have time and again emphasized the requirement for the BIR to properly comply with rules and regulations put in place for tax assessments.
A MEMORANDUM OF ASSIGNMENT IS NOT AN LOA
Let’s start off with the issuance of the LoA, which serves to notify the taxpayer of the tax audit that will be conducted. It is the concrete manifestation of the grant of authority by the Commissioner of Internal Revenue (CIR) or his authorized representatives to the revenue officers assigned to do the audit. The Court of Tax Appeals (CTA) and the Supreme Court have consistently ruled on the mandatory nature of the LoA; without it, the audit of the BIR would be null and void.
In practice, however, the BIR issues other documents to give revenue officers the authority to examine the taxpayer’s books. Among the notable ‘other documents’ is the Memorandum of Assignment (MoA) which could be issued in case of re-assignment of the case to a new set of examiners.
It must be mentioned, though, that in a recent decision of the CTA sitting En Banc (CTA EB No. 2536 dated July 4, 2023), the Court again distinguished the MoA from the LoA. In the case, the BIR argued that the MoA issued by the Revenue District Officer (RDO) authorizing another revenue officer to continue the tax examination is allowed in case of reassignment of the revenue officer originally named in the LoA.
The CTA EB disagreed with the BIR’s position. It restated that reassigning cases to new revenue officers by a mere MoA, Referral Memorandum or other similar documents which are typically signed only by the RDO and not by the CIR or his duly authorized representative (e.g., Regional Director, Deputy Commissioners, Assistant Commissioner), and not through a separate LoA is, in effect, a usurpation of the statutory power of the CIR or his duly authorized representative. Thus, the issuance of the MoA and its subsequent use as authority for revenue officers to continue the tax examination is not proper.
The CTA EB reiterated that the absence of an LoA granting named revenue officials proper authority to conduct the examination renders the assessment invalid.
ASSESSMENT NOTICES SHOULD BE PROPERLY SERVED
Also in a recent case (CTA EB No. 2564, dated July 3, 2023), the CTA EB reiterated that proper service of Assessment Notices by the BIR is critical. For guidance, the deficiency tax findings of the BIR are contained in formal documents such as the Notice of Discrepancy (NoD), Preliminary Assessment Notice (PAN), Final Assessment Notice (FAN) and Formal Decision on Disputed Assessment (FDDA). These are normally served via personal delivery. In cases where personal delivery is not practicable, the Notices may be delivered via substituted service or by mail.
If the taxpayer or its authorized representative is not found at the registered address, the rules require the revenue officer to bring a barangay official and two disinterested witnesses to such address so that they may personally attest to the absence of the taxpayer or his authorized representative. The Notice shall then be given to the barangay official.
In that case, the court agreed that there was no valid substituted service of the FAN when it was simply left with the building security personnel. The CTA also articulated that when a taxpayer denies receipt of the Assessment Notice, it is incumbent upon the BIR to prove by competent evidence that the taxpayer actually received the same.
The CTA EB deemed the deficiency taxes per FAN void considering the invalidly issued FAN.
FAN REQUIREMENTS
In that same case, the court further invalidated the FAN, noting that the BIR failed to demand payment of the taxes due within a specific period.
The CTA EB stressed that the FAN must not only indicate the legal and factual bases of the assessment but must also state a clear and categorical demand for payment of the computed tax liabilities within a specific period. Absent such demand, the FAN is fatally infirm and being a void assessment, the FAN bears no fruit.
SUBMITTING THE APPEAL AGAINST THE FDDA
An important note to taxpayers is that the BIR recently issued Revenue Memorandum Circular No. 43–2023 which requires that within five days from the filing of the appeal to the FDDA (either to the Office of the CIR or to the CTA), taxpayers shall furnish a copy of the appeal to the:
a. Chief of the Assessment Division for tax cases under the jurisdiction of the regional office; and
b. Head Revenue Executive Assistant (HREA) for tax cases under the jurisdiction of the Large Taxpayers Service or those investigated by the National Investigation Division under the Enforcement and Advocacy Service.
While the failure to provide a copy of the appeal to the Assessment Chief or HREA should not be a grounds for denying the appeal, it is essential to comply in order to avoid the improper issuance by the BIR of a Warrant of Distraint or Levy.
As taxpayers, we know that it is imperative that we strictly observe the rules or else risk the deficiency tax assessment becoming final and executory. So, it gives us a sense of calm and satisfaction knowing that the Courts impose equal responsibility upon the BIR to adhere to the rules. Otherwise, it puts the validity of the assessment on the line.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Maria Jonas Yap is a director at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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