Cracking the Code: Decoding BIR Assessments

Author: Atty. Angeli Alyssa S. Andan

Have you ever received an assessment from the Bureau of Internal Revenue (BIR)? It’s crucial to understand what this assessment entails, why it’s issued, and what steps can be taken in response. Welcome to our blog series, where we explore the intricate processes and powers of assessment by the BIR. Delving into these details is essential for taxpayers to effectively navigate their rights and obligations within the tax system.

In this series, we’ll unravel the complexities of BIR assessments, shedding light on:

1. The Nature of BIR Assessments: What exactly is a BIR assessment? Learn about the different types of assessments issued by the BIR and the reasons behind their issuance.
2. Understanding the Assessment Process: Dive into the step-by-step assessment process—from the initial filing of tax returns to the issuance of final assessment notices. Gain insights into how assessments are conducted and what taxpayers should expect.
3. Rights and Responsibilities of Taxpayers: Explore the rights and obligations of taxpayers during the assessment process. Learn how to effectively respond to assessments and protect your interests.
4. Appeals and Dispute Resolution: Discover the avenues available for challenging or disputing BIR assessments. From administrative appeals to judicial proceedings, we’ll cover the various options taxpayers have to seek redress.

By understanding these intricacies, taxpayers can navigate the assessment process with confidence, ensuring that their rights are upheld and obligations are fulfilled in accordance with the law.

Whether you’re a business owner, individual taxpayer, or tax professional, this article is designed to provide valuable insights and practical guidance.

Power of the BIR

Under Section 4 of the National Internal Revenue Code of 1997 as amended, the Commissioner of Internal Revenue (CIR) has the following powers: 

1. To interpret the provisions of the Tax Code and other tax laws, subject to review by the Secretary of Finance
2. To decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals

The first power of the CIR involves the exercise of quasi-legislative power, while the second power involves the exercise of quasi-judicial powers. 

Under Section 7 of the NIRC, the general rule is that the CIR may delegate certain powers which are vested in him under the Tax Code to any other subordinate officials with the rank equivalent to a division chief or higher. The following powers, however, shall NOT be delegated:

1. To recommend the promulgation of rules and regulations by the Secretary of Finance
2. To issue rulings of first impression 
3. To reverse, revoke or modify any existing ruling of the Bureau
4. To compromise or abate any tax liability
5. To assign or reason internal revenue officers to establishments where articles subject to excise tax are produced or kept. 

Due Process in Taxation

The power of the government to tax should be aligned with the due process rights of the taxpayer, in accordance with the Constitution. Due Process provides that no person shall be deprived of property without due process of law. Such principle ensures that the BIR respects the due process rights of the taxpayers when the same issues a tax assessment. Otherwise, the assessment is considered void. 

Overview of Assessment Process 

To start the assessment process, the taxpayer must file his/her tax return. After which, the Bureau of Internal Revenue (BIR) determines if the taxpayer made the correct declaration in his return and paid the correct amount of taxes. 

STEP 1: Issuance of Letter of Authority (LOA) 

In the case of the Republic v. Robiegie Corporation, the LOA is considered as the source of BIR revenue officers’ investigatory powers. Without which, the Revenue Officer (RO) cannot validly conduct an assessment. Thus,  in Medicard Philippines, Inc. v. Commissioner of Internal Revenue, Justice Reyes held that the LOA empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax. An LOA is premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized representatives. 

However, the power of the RO to examine the books of account and other accounting records of a taxpayer is subject to reasonable limitations. Under Section C(5) of RMO NO. 43-90, any re­assignment/transfer of cases to another RO shall require the issuance of a new LOA. This is reiterated by Justice Gaerlan in Republic v. Robiegie Corporation wherein it was upheld that the CIR’s reassignment powers cannot be invoked to defeat the statutory LOA requirement. 

STEP 2: Examination of Books of Accounts

As mentioned, the RO will be able to validate the income tax return of the taxpayer by examining the books of account and other accounting records of the taxpayer. In that case, the BIR will look into the gross income items declared by the taxpayer and the allowable deductions including the supporting documents. 

STEP 3: Issuance of Notice of Discrepancy

The Notice of Discrepancy (NOD) provides the preliminary findings of the BIR based on the examination of books of accounts of the taxpayer. After that, the taxpayer is given the opportunity to explain himself to dispute the discrepancies noted by the BIR. 

STEP 4: Issuance of Preliminary Assessment Notice

If the BIR still finds that the taxpayer is liable, BIR will issue a Preliminary Assessment Notice (PAN). The PAN shall show in detail the facts, the law, and the rules on which the proposed assessment is made. 

In the recent case of Mannasoft Technology Corporation v. CIR,  the Court, speaking through Justice Dimaampao, ruled that when CIR finds that proper taxes should be assessed, the taxpayer must be properly notified of its findings. Under Section 3.1.4 of Revenue Regulations No. 12-99,68 personal delivery must be acknowledged by the taxpayer or his duly authorized representative. This is in accordance with the due process requirement in the issuance of a deficiency tax assessment that the BIR must strictly comply with. Failure to properly serve the PAN to the taxpayer or his duly authorized representative renders the succeeding FAN void and without effect.

STEP 5: Reply to PAN

RESPONDS: If the taxpayer does not agree with the findings of the BIR, the taxpayer must respond within fifteen (15) days from the date of receipt of the PAN. 

FAILS TO RESPOND: If the taxpayer fails to respond within  fifteen (15) days from the date of receipt of the PAN, the taxpayer shall be considered in default. 

STEP 6: Issuance of Formal/Final Assessment Notice 

RESPONDS: FLD/FAN shall be issued within 15 days from filing/submission of the taxpayer’s notice.  

FAILS TO RESPOND: FLD/FAN shall be issued calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. 

The following are the requisites of a valid tax assessment: (1) Contains a computation of the tax liabilities, including interest, surcharge and other charges, (2), Contains the factual and legal basis of the deficiency tax assessment, (3) Contains a demand to pay within a stated time, (4) Sent to the taxpayer within the prescribed period

STEP 7: Protest of the FAN

Again, if the taxpayer does not agree with the findings of the BIR, the taxpayer has 2 options:

1. Request for Reconsideration
2. Request for Reinvestigation

In case of Request for Reconsideration, no additional documents will be submitted. In case of Request for Reinvestigation, additional documents will be submitted. 

AFTER REQ FOR RECONSIDERATION: If 180 days from filing of Request for Reconsideration has elapsed, taxpayer has 2 options:

1. Consider that inaction as deemed denial and file an appeal to the Court of Tax Appeals (CTA) within 30 days. 
2. Wait for the final decision of the CIR. 

AFTER REQ FOR REINVESTIGATION: If 180 days from submission of supporting documents has not elapsed, taxpayer has 2 options:

1. Consider that inaction as deemed denial and file an appeal to the Court of Tax Appeals (CTA) within 30 days. 
2. Wait for the final decision of the CIR.

If the taxpayer fails to file a valid protest against the FLD/FAN within 30 days from date of receipt thereof, the assessment shall become final, executory and demandable. 

STEP 8: Final Decision on Disputed Assessments

The BIR now decides on whether there is basis to cancel the assessment. If there is basis, the final decision on disputed assessments is issued which shall state:

1. That the decision of the CIR on the disputed assessment is already final
2. The facts and the law on which the assessment is based

It is important to note that in the case of CIR v. Liquigas Philippines Corporation, the Court ruled that a void FDDA does not ipso facto render the assessment void. 

STEP 9: Appeal 

The appeal depends on who issued the FDDA. If issued by a subordinate official properly delegated by CIR, the appeal should be an administrative appeal. Once appealed to CIR, CIR would issue a decision and serve on the taxpayer; in which case, the taxpayer can now proceed to the judicial appeal. 

In Philippine Amusement and Gaming Corporation v. BIR, the Court explained the three options of the taxpayer in case of administrative appeal which are:

1. If the protest is denied by the CIR, the taxpayer may appeal to the CTA within 30 days from receipt of the whole or partial denial of the protest
2. If the protest is denied by CIR’s authorized representative, the taxpayer may appeal to the CIR within 30 days from receipt of the whole or partial denial of the protest
3. In case of inaction of the CIR or his authorized representative, the taxpayer may appeal to the CTA within 30 days from the lapse of the 180-day period. 

STEP 10: Judicial Appeal

Section 7 of the NIRC as amended provides that the Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, 

1. CIR decisions in cases involving disputed assessment, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto
2. Other matters arising under the National Internal Revenue, or other law or part of law administered by the BIR. 

In Philippine Journalists Inc. v. CIR, the Court ruled that the provision “other matters arising under the National Internal Revenue, or other law or part of law administered by the BIR” gives the CTA the jurisdiction to determine:

1. if the warrant of distraint and levy issued by the BIR is valid
2. if the waiver of statute of limitations was validly effected.

Conclusion

It is important for the taxpayer to know the assessment process so as to ensure that his/her due process rights are not violated. Any violation of the assessment process is considered as violation of the due process rights of the taxpayer. Thus, rendering the tax assessment void. Overall, the power of taxation must be exercised with caution to minimize any possible injury to the rights of a taxpayer. 

At Bais Andan Law Offices, you can ensure that your proprietary rights as a taxpayer are protected. Reach out to us today via email at info@baisandanlaw.com or by phone at +63915 968 2503 or (045) 281 0164.