What to expect when BIR tax audits resume
At the start of the third quarter, the Bureau of Internal Revenue (BIR) declared a moratorium on the conduct of BIR audits via Revenue Memorandum Circular (RMC) No. 77-2022. The RMC suspended all field audits and other field operations covered by Letters of Authority/Mission Orders relative to examinations and verification of taxpayers’ books of account, records, and other transactions, including suspending any field audits or any form of business visitation. No new orders to audit or investigate taxpayers were issued or served.
The suspension was not without exceptions though. The exception included, among others, the investigation of cases prescribing on or before Oct. 31, which generally covers taxable years 2019 and prior.
Consequently, RMC No. 121-2022 was issued setting the guidelines for the lifting of the suspension on field audits and operations pursuant to RMC No. 77-2022. Accordingly, the lifting will be on a per investigating office basis upon the approval of the Commissioner of Internal Revenue (CIR). Once approved, the investigating office is to immediately resume its field audit and operations on all outstanding LoAs/Audit Notices and Letter Notices. However, no new LoAs are generally be issued/served until further instructions from the CIR.
Thus, in recent weeks we have seen numerous Notices of Discrepancies (NoDs) in connection with prescribing cases being served as the respective Investigating Offices comply with RMC No. 121-2022.
Some taxpayers who have multiple existing LoAs covering prescribing cases have, in fact, received NoDs one after the other. Tax professionals are also frantic after having to deal with multiple, sometimes simultaneous, deadlines for the respective replies to the NoDs due to the numerous cases being handled.
This has raised the eyebrows of some taxpayers who feel that the periods given to respond to audit notices, especially when a NoD is already served, have been abbreviated considering that the nature of the issues usually raised by the BIR require tedious reconciliation procedures, collation of voluminous supporting documents, and the drafting of protest letters.
In one of the breakout sessions in the recently concluded 1st SGV Tax Symposium held on Aug. 19, the author facilitated a discussion on BIR audits in which participants were refreshed on the assessment process. It also focused on taxpayer remedies and periods to file replies or protest letters, as well as a discussion on the latest court decisions relevant to BIR audits.
Receiving a NoD, or any kind of assessment notice for that matter, can be overwhelming. Imagine addressing multiple assessment notices at the same time. In such situations, having a deep understanding of the tax assessment rules, procedures, and remedies, as well as periods and deadlines, will significantly help ease the stress and pressure of managing simultaneous BIR audits.
Consider, for example, how a taxpayer who is not familiar with the deadlines under the rules might react with panic once he or she receives a NoD, particularly upon reading the standard statement in the NoD that the presentation of a response, in a Discussion of Discrepancy (DoD), is needed within five days from receipt. A five-day period to respond is admittedly too short to prepare the necessary reconciliations and supporting documents, which may involve massive piles of paper receipts and invoices.
However, those who understand the rules will know that taxpayers are afforded a 30-day period for the DoD. And while taxpayers can maximize this full 30-day period, they should also coordinate closely with the handling examiner on the proposed schedule of discussions. Generally, it is better to settle as many issues as possible at the NoD level or at the earliest stage of the audit.
Taxpayers may also consider pursuing discussions with the handling examiner and submitting documents, reconciliations, and position papers with factual and legal bases in tranches as they become available. In this way the handling examiner will have a better chance of appreciating the taxpayer’s submissions.
Taxpayers who are subject to audit should understand just how fast-paced the response time for all types of assessment notices can be. Given such a short window of time to prepare response letters and supporting documents, it would greatly benefit taxpayers to proactively prepare for tax audits. They can do this by carrying out advance reconciliation work. Another thing taxpayers can also do is to keep accurate, detailed and easily accessible records of transactions and documents so they can quickly and easily address any questions from the BIR. These and many other areas are where a robust and experienced tax team or the support of trusted tax professionals can make a significant difference in reducing time, costs, and anxiety overall.
Given the BIR’s intent to transform the way it conducts audits with digital transformation, such as with the use of electronic invoicing and receipting systems (EIS), taxpayers will also need to quickly evolve their strategy and approach to handling BIR audits. These are possibilities we generally see in the future of tax audits. For now, taxpayers who have already received NoDs will be under pressure to act quickly to timely respond to the BIR. At the same time, taxpayers who have not received a NoD should not be complacent. As we approach the close of the calendar year and the lifting of audit suspensions, we can expect the BIR to go full throttle very soon.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Thyrza F. Marbas is lawyer and a tax partner of SGV & Co.