Significant changes to the BIR assessment process

(First of two parts)

WITH the Bureau of Internal Revenue (BIR) ’s intensified focus on enforcement and audits, taxpayers need to understand the investigation and assessment process and the available remedies under the law, particularly now that the recently issued Revenue Regulations (RR) No. 18-2013, dated Nov. 28, 2013 and which took effect on Dec. 15, 2013, introduced major changes to the BIR’s assessment processes.

One amendment that stands out is the removal of what used to be called “Informal Conference” between the BIR and the taxpayer, prior to the issuance of a deficiency tax assessment. Prior to the amendment, the BIR would send the taxpayer a Notice for Informal Conference (NIC), inviting the taxpayer to a conference or meeting with the examiners to give him a chance to present his side and explanations regarding the BIR’s preliminary findings. At this stage, the BIR would not have issued any formal assessment yet and would allow the taxpayer an opportunity to present his arguments and supporting documents.

After the informal conference, the BIR and the taxpayer could go through a series of discussions and document submissions, where the taxpayer would try to convince the BIR of the merits of his arguments. In the end, the taxpayer could opt to pay whatever remains of the proposed deficiency taxes.

Whether the taxpayer agreed or refused to pay the proposed deficiency taxes, the docket of the case would be endorsed for review to the Assessment Division of the Regional Office (in the case of findings on taxpayers registered with the BIR district offices), or to the BIR Commissioner or her duly authorized representative (in the case of large taxpayers and those investigated by the BIR National Office), as the case may be, for possible issuance of a Preliminary Assessment Notice (PAN). It was only when the taxpayer failed to respond to the BIR’s request for a conference that the docket was immediately endorsed to these offices for review and possible issuance of a deficiency tax assessment.

Under the new Regulations, the BIR will no longer issue NICs. This means that the BIR can already issue the PAN showing the proposed deficiency tax assessment, as well the detailed facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based. This shows the BIR’s aim to expedite the investigation process, and what the taxpayer does during the audit investigation stage will largely influence how the case will progress.

Now more than ever, it is important for the taxpayer to respond promptly to the investigating office’s requests for documents and/or explanations. The taxpayer should regularly coordinate with the handling revenue officer to keep abreast of the audit’s progress. He should constantly monitor the progress of the review to address the BIR’s questions in order to limit the issues, before the docket is presented to the reviewing office and being served with a PAN.

PREPARING FOR THE BIR AUDIT
Even before the BIR issues the PAN, or better yet, even before the taxpayer receives a Letter of Authority for a BIR audit, the taxpayer will do well to review his records to ensure that the declarations in his tax returns are reconciled with those disclosed in his financial statements. The taxpayer should also ensure that taxes on relevant expenses and asset acquisitions have been withheld and remitted to the BIR. This exercise will reduce the burden of the BIR audit as it is almost certain that a similar reconciliation will have to be done once the taxpayer receives an assessment from the BIR.

With the informal conference gone, a question that arises is whether the taxpayer will still have the ability to pay the deficiency taxes assessed at the level of the examining office, or whether he should wait until the reviewing office evaluates the docket and issues the PAN.

In the absence of an informal conference, the Revenue District Office, for instance (in the case of a non-large taxpayer), would immediately endorse its report to the regional office with a recommendation for the issuance of a PAN. Hence, it would seem that the taxpayer may now pay the deficiency taxes only after the PAN is issued.

ISSUANCE OF A FINAL ASSESSMENT NOTICE / FORMAL LETTER OF DEMAND
When a PAN is issued, the taxpayer has 15 days to submit his response. If he fails to do so, he is considered in default. The BIR shall then issue a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) calling for the payment of the deficiency tax assessed, inclusive of the applicable penalties.

If the taxpayer submits his response but disagrees with the findings in the PAN, the new rules require the BIR to issue the FLD/FAN within 15 days from the filing of the taxpayer’s response. While the 15-day period clearly indicates the BIR’s goal of moving the process forward, it nevertheless raises the question of whether the taxpayer’s response to the PAN will be given sufficient consideration.

Once the FLD/FAN is issued, it becomes even more critical for the taxpayer to strictly adhere to the new rules prescribed in RR 18-2013, since a misstep may have dire consequences.

As mandated in the Tax Code, the FLD/FAN should state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based; otherwise, the assessment shall be void. Within 30 days from receipt of the FLD/FAN, the taxpayer may file his protest, either by way of a request for reconsideration or reinvestigation.

In the second part of this article next week, we will discuss in more detail the filing of protests and other important procedural information.

Rubina P. Bundoc-Aquino is a tax senior director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.