Tax evasion and its consequences

The Bureau of Internal Revenue (BIR) appears to have stepped up its filing of tax evasion charges. Just this month, the BIR filed with the Department of Justice five tax evasion cases, an offshoot of its intensified tax assessment and collection efforts. If found guilty, tax evaders are subject to imprisonment and fine.

What is tax evasion?

Generally, the offense is criminal in nature, involving willful attempts to evade or defeat any tax imposed under the Tax Code.

The essential element in a tax evasion case is the willful act of the perpetrator.

In the Court of Tax Appeals (CTA) EB Crim. No. 031 dated May 26, 2015, the CTA has defined the term “willful” in tax crime statutes as a voluntary, intentional violation of a known legal duty. This willful act must be established beyond reasonable doubt.

In the case of Commissioner of Internal Revenue vs. The Estate of Benigno P. Toda, Jr., et al., the Supreme Court described tax evasion as being “evil,” in “bad faith,” “willful,” or “deliberate and not accidental.” In another tax case, it was explained that the deception for purposes of evading payment of correct taxes must be intentional, “consisting of deception willfully and deliberately done.”

Who then should be prosecuted in a tax evasion case? Individual taxpayers face prosecution for their own acts, but in the case of associations, partnerships, or corporations, the following are liable: partners, presidents, general managers, branch managers, treasurers, officers-in-charge, and employees responsible for the violation.

In a 2012 CTA case, the Court convicted a sole proprietor, engaged in the salon and spa business, on two counts of violation of Section 255 of the Tax Code, as amended. The conviction was for willful, unlawful and felonious failure to file an income tax return (ITR) with the Bureau of Internal Revenue for the taxable year 2002 and for willful, unlawful and felonious failure to supply correct and accurate information in the ITR for taxable year 2003. The conviction meted penalties of one to two years’ imprisonment and fine, both for the 2002 and 2003 violations.

In another CTA case just this year, involving a corporation, the Court convicted the accused in his capacity as president of the corporation for violating Section 255, in relation to Sections 253 (d) and 256 of the 1997 (National Internal Revenue Code) NIRC, as amended. It found willful failure to pay the documentary stamp tax on pawn tickets at the time mandated by law. The CTA imposed on the president the penalty of imprisonment of one to two years plus a fine.

Also, late last year, the CTA convicted a company president and general manager on two counts of violating Section 255, in relation to Sections 253 (d) and 256 of the 1997 NIRC, as amended, by way of willfully and feloniously failing to supply correct and accurate information in the corporation’s ITRs for taxable year 2003 and 2004. In this case, there were under-declarations of gross profit/income. The penalties imposed by the CTA were also imprisonment and fine.

It should also be noted that, for corporate taxpayers, the tax evasion liability does not merely lie with employees. In a very recent case this year, the CTA also added that the Directors or Trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

What measures can a taxpayer, knowing the consequences of imprisonment and fine, take to avoid the risk of a criminal charge?

The risk cannot be taken lightly. Taxpayers should have a sufficient knowledge of the tax laws and keep up to date on the relevant rules and regulations in order to be properly guided on the tax consequences of transactions. Taxpayers may also consider seeking assistance from a tax specialist or tax consultant as there have been a number of shifts in the interpretation of tax law in certain circumstances.

Certainly, no one wants to be involved in a tax evasion case, particularly these days when the BIR has been very active in filing charges. There is no need to mention that imprisonment and fine are serious penalties. That is why we should always be prudent in our transactions.

Iderlyn P. Magsambol-Demain is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

source:  Businessworld