I can only imagine the worry that taxpayers feel when they receive a Letter of Authority (LoA) from the Bureau of Internal Revenue (BIR). “Should we accept this?” “Is this valid?” “Does this mean we are not paying our taxes right?” These are just some of the usual questions we receive from taxpayers when a BIR revenue officer comes knocking on their door with an LoA.
An LoA represents the authority given to the named BIR revenue officers to perform assessment functions to ensure the collection of the correct amount of tax. It is a required document before any audit and assessment takes place.
Recently, the BIR issued Revenue Memorandum Circular (RMC) No. 82-2022, which removed the requirement for the BIR to serve the LoA to the taxpayer within 30 days from issuance.
In effect, a taxpayer can no longer refuse the service of an LoA or question its validity, in case the document is served beyond 30 days. However, the RMC also clarified that the deletion of the 30-day requirement from the BIR’s Updated Handbook on Audit Procedures and Techniques should not be an excuse for the concerned revenue officer to delay its service.
According to the circular, an LoA that remains unserved, or has been served beyond 30 days from the date of issuance, remains valid and enforceable, provided that the prescribed period to complete the audit process has not yet expired.
Previously, Revenue Audit Memorandum Order (RAMO) No. 1-2000 required that the LoA be served within 30 days; otherwise, it becomes null and void. Service or presentation may be performed via 1) personal service, 2) substituted service, or 3) service via mail.
An exception to the 30-day requirement is when the LoA has been revalidated by the BIR, which effectively extends the period within which the revenue officer must submit the report of investigation. In several cases, the Court of Tax Appeals has ruled in favor of taxpayers by declaring the assessments as invalid when the LoA was served beyond the 30-day period, since the revenue officers, in the first place, did not have the authority to conduct the tax audit. The principle is thus well-established that, in the absence of a valid LoA, the resulting assessment against the taxpayer is null and void.
Tax audits are heavily bound by a set of rules, with some cases ultimately decided one way or another by technicalities. What happens then, when the other party can set and change the regulations?
With the recent circular, the period for LoA service to the taxpayer appears to matter no longer. With the 30-day requirement provided in a previous RAMO by the BIR, the new rule (or lack thereof) seems anchored on RAMO No. 1-2020, except without the 30-day service period.
Generally, the entire audit process must be completed within 180 days from the issuance of the LoA for cases at Revenue District Offices or 240 days for those handled by the Large Taxpayer Service. This process covers the examination of the taxpayer’s books and records by the revenue officer until a report of investigation is submitted to the higher authorities to issue a deficiency tax assessment. Non-observance of the 180/240-day period by the revenue officers would constitute gross neglect of duty, subject to appropriate administrative sanctions.
One cannot help but question the purpose of the deletion of the 30-day requirement, even though the circular points out that the LoA’s immediate service is in the government’s best interest.
Perhaps the circular was issued by the BIR in light of the recent suspension of the service of any written orders to audit taxpayers as of May 30 until further notice, which may have resulted in LoAs not being served by revenue officers. Notably, RMC No. 82-2022 was dated June 28, a day before the lapse of the 30-day service period for LoAs issued on May 30.
However, the suspension of tax audits in May could soon be lifted with the BIR’s new leadership in place. Such policy shifts from the tax authorities are not unusual. Remember when the BIR relaxed its requirements for a valid waiver of the Statute of Limitations for issuing tax assessments, leaving the taxpayers little to no room to challenge the validity of waivers and resulting assessments?
Whatever may be the reason for the circular, it is clear that timelines are put in place to observe due process, which is a crucial factor in BIR tax audits. The Supreme Court has held that in exercising power to assess and collect taxes, the BIR has the commensurate duty to uphold a taxpayer’s fundamental right to due process. The BIR’s authority must be understood to take effect only after it issues and serves an LoA to the taxpayer.
Tax audits by the BIR are, as they say, inevitable. And like in most things, there is no point in delaying them.
If the revenue officer is given a strict timeframe to complete his audit, the taxpayer should be notified as soon as possible, through the service of the LoA. With or without the 30-day requirement, it is in the best interest of both the taxpayer and the BIR that the LoA is served immediately, in order to commence and complete the tax audit in a timely manner and avoid the additional stress of unnecessary rush during an investigation.
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.
Denned Miguel Pinza is a senior associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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