GENERAL 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 Taxpayer’s books of accounts and
other accounting records, in order to determine the Taxpayer’s 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
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 taxpayer’s 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 Taxpayer’s
compliance with withholding and other internal revenue taxes as
prescribed in a Revenue Memorandum Order issued by the Commissioner of
When the Taxpayer’s 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
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 RO’s belief that the assessment and collection of a deficiency tax
will be jeopardized by delay caused by the Taxpayer’s 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 taxpayer’s deficiency tax liability shall
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
The formal letter of demand calling for payment of the
taxpayer’s 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.
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TAXPAYER’S 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
(Taxpayer’s) 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
It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of Assessment and formal Letter of Demand.
21. In the event the
Commissioner’s duly authorized representative denies a Taxpayer’s
protest, what alternative course of action is open to the Taxpayer?
If a protest filed by a Taxpayer be denied by the Commissioner’s duly
authorized representative, the Taxpayer may request the Commissioner
for a reconsideration of such denial and that his tax case be referred
to the Bureau’s 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 Taxpayer’s 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 Taxpayer’s receipt of the Commissioner’s 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 CTA’s 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 Taxpayer’s
receipt of the CTA’s 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).
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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 Taxpayer’s 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
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
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.
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