Brief on the tax and customs audit processes

First in a series

Recently, the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) respectively issued Letters of Authorization (LOA) and Audit Notification Letters (ANL) to certain taxpayers and importers. It is therefore perhaps the best time to review the BIR and BOC audit processes and procedures in light of the aggressiveness of income-generating agencies.

LOAs and LNAs essentially empower tax officials to investigate and scrutinize and scrutinize details reflected in previous taxpayer and importer declarations and / or customs entry declarations. The end goal is to uncover short payments or shortfalls that could lead to increased government revenue.

Based on case law, BIR and BOC assessments are generally granted the presumption of correctness and good faith (Marcos II v. Court of Appeal, GR. N ° 120880). The presumption proceeds from the principle of the presumption of administrative regularity in the exercise of public functions. Any reasonable intention will be made to support the presumption and considerable deference will be accorded, subject to a de novo review by the tax court, in determining whether the findings of insufficiency are in fact supported by substantial evidence. .

When conducting an audit, due process requirements should be strictly observed.

Coverage assessment and audit period

The evaluation period for BIR and BOC is generally three years. In the event of fraud, the evaluation period is 10 years from its discovery.

The three-year deadline for the BIR to contribute a taxpayer is calculated from the date of filing the income tax return or from the last day provided by law for filing such a return, whichever is later. For the BOC audit, it is counted from the date of the final payment of duties and taxes or customs clearance as the case may be.

The coverage of a BIR audit by LOA is for a single taxable year (Revenue Memorandum Order 57-2016). The practice of issuing letters of authorization covering the audit of “prior unaudited years” is prohibited. (CIR v. Sony Philippines, Inc. GR n ° 178697)

In contrast, the default coverage for a BOC audit is three years back from the date of the ANL. The audit is carried out by the agency’s Post-Clearance Audit Group (PCAG).

Audit process

In a BIR tax audit, the process begins with the issuance of an LOA. The letter of authorization must be served (i.e. personal service, registered mail or substitute service) within 30 days of the date of issue (subject to revalidation) and must also be received by the taxpayer. Failure to comply with these requirements will result in the total nullity of the contributions issued subsequently.

The next step is the issuance of a Notice of Discrepancy (NOD) required under Revenue Regulation (RR) 22-2020. The purpose of the NOD is to inform the taxpayer of the first findings observed by the BIR during its investigation. Taxpayers are allowed to present and explain alleged discrepancies with the relevant schedules and documents within 30 days of receiving the notice of non-compliance.

If the BIR maintains its position despite the documents and arguments presented by the taxpayer, the investigation office will approve the file with the revision office of the National Office (or Regional Revenue Office) for the issuance of the Notice of Preliminary Assessment (PAN). Subject to certain exceptions, the issuance of a PAN is a substantive requirement in order to inform the taxpayer, through due process, of the facts and the law on the basis of which the assessment is established (Commissioner of Internal Revenue v. Metro Star Superama, GR n ° 185371).

A formal assessment notice (FAN) and a formal notice will then be issued if the BIR finds no basis to reverse the conclusions or if the taxpayer does not respond to the PAN.

In comparison, a post-clearance BOC verification is triggered by the issuance of an LNA served within the same 30-day period on the importer by personal service, registered mail or electronic notice. Along with the ANL, an attached list of requested documents and a customs questionnaire (which must be completed) are sent to the audited importer for compliance.

The PCAG (after having prepared an audit plan) will then set a date for the field audit where PCAG officers will verify and validate the accounting, financial and other import data. By virtue of the rules, the audit must be scheduled no later than 60 calendar days from service of the ANL. This period may, however, be extended by an additional 30 days if the audited importer manifests their intention to avail themselves of the Advance Disclosure Program (PDP), files the PDP request and offers payment (of the disclosed exposure) within 90 days. (see also TMT article “Highlights of the new BOC audit rules” of January 25, 2019).

Filing a PDP will not necessarily prevent the PCAG from continuing the audit investigation. Under Customs Administrative Order 1-2019, the audit must be completed within 120 calendar days (subject to a maximum extension of 30 days) per year from the date the importer receives the ‘ANL.

If there are additional discoveries of duties and taxes in the event of insufficiency during the field audit, the BOC will serve, by registered mail or personal service, a final audit report (FAR) accompanied a letter of formal notice (signed by the commissioner of the BOC). The FAR and the letter of formal notice will notify the audited importer to pay for the deficiencies within 15 calendar days of receipt. It is also during this period that audit findings may be challenged by filing a request for review or request for review.

In next week’s article, the author will discuss the timeframe within which to conduct an audit, the penalties that can be imposed, as well as remedies from taxpayers and importers. On behalf of MTF, we wish everyone a season of great joy and countless blessings.

Mark Anthony P. Tamayo is a CPA lawyer and partner of Mata-Perez, Tamayo & Francisco (MTF) Counsel. He is the recipient of the “2016 Asia Tax Practice Leader” award and is regularly elected as one of the recognized leaders in indirect taxation in the Philippines by the International Tax Review. The content of this article is not a substitute for professional advice when specific circumstances warrant. If you have any questions or comments, you can email the author at [email protected] or visit the MTF website at