At last, you finally decided to put up that milk tea business you have been dreaming of. You’ve got everything that you need — rented space, diligent employees, trusted suppliers, and government permits. Customers start to come in and slurp those tapioca pearls while your favorite morning pick- me-upper playlist is in full blast.
But while preparing the all-time classic Thai milk tea, you receive mail from the BIR. “Letter of Authority” in bold letters, it says. Being a new business owner, you’re clueless on what to do.
Here’s a guide for business owners out there on how to deal with BIR Audits.
Do not fret. The first three notes just happen to be, Do-Re-Mi.
1. Documents to Prepare and Submit
A Letter of Authority (“LOA”) is a document which authorizes BIR revenue officers to examine one’s books of accounts and other accounting records for a particular taxable year. Under the Tax Code, the Commissioner or his duly authorized representative has the power to authorize the examination of taxpayers and assessment of correct taxes.
When the BIR issues a LOA, it comes with a checklist of documents which a taxpayer will be required to submit and present. These documents may include ledgers, journals, sales and purchase books and schedules, official receipts, sales invoices, and list of payables and receivables, among others. Normally, the BIR would require taxpayers to submit and present these documents within ten (10) days from receipt of the LOA.
Prepare and submit these documents because if you fail to do so, the BIR will issue a First, as well as a Second and Final Notice. If you still fail to provide the requested documents after the Second and Final Notice, this may prompt the BIR to issue a subpoena duces tecum.
In case of non-submission or incomplete presentation of the required books and records despite the receipt of a subpoena, a criminal complaint can be filed against the taxpayer. So, to avoid this predicament, submit your documents to the BIR in the first instance and coordinate with the revenue officers. Kindly take note that the revenue officers may also examine the documents at the taxpayer’s premises.
The BIR will give you several chances to prepare and submit your documents so grab every opportunity you have with the same enthusiasm of a loyal customer grabbing a free milk tea upsize.
2. Reply to the BIR
Afterwards, the revenue officers will examine the documents you have submitted. If the BIR identifies a tax issue or finds any discrepancy on the documents, please expect the following notices.
a. Notice of Discrepancy
According to Revenue Regulations (“RR”) No. 22-2020, if a taxpayer is found to be liable for deficiency tax/es in the course of an audit investigation by the authorized Revenue Officer, a Notice of Discrepancy (“NOD”) informing the taxpayer of the discrepancy/ies in his payment of internal revenue taxes shall be issued. A taxpayer shall be initially given five (5) days from the receipt of the NOD to present his/her side and submit supporting documents.
Should a taxpayer need more time to present the documents, he may submit such documents after the discussion. The taxpayer must submit all necessary documents that support his explanation within thirty (30) days after receipt of the NOD.
b. Preliminary Assessment Notice
lf after the discussion and submission of documents, the taxpayer is still found to be liable for deficiency tax/es and the taxpayer does not agree to settle the deficiency tax findings, a Preliminary Assessment Notice (“PAN”) shall be issued by the BIR subject to certain exceptions. This time, the taxpayer has fifteen (15) days from receipt of the PAN to file a reply and submit supporting documents.
c. Formal Letter of Demand/Final Assessment Notice
Unless the taxpayer settles the deficiency taxes assessed in the PAN, the BIR shall issue a Formal Letter of Demand (“FLD”) and Final Assessment Notice (“FAN”).
If a taxpayer disagrees with the findings of the BIR in the FLD/FAN, he has thirty (30) days from receipt thereof to file a Protest letter with either a Request for Reconsideration or a Request for Reinvestigation. It is important that the Protest should be filed within thirty (30) days from receipt of the FLD/FAN, otherwise, the assessment becomes final and executory.
What’s the difference?
RR No. 18-2013 defines a Request for Reinvestigation as “a plea of re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation” while a Request for Reconsideration “refers to a plea of re-evaluation of an assessment on the basis of existing records without need of additional evidence”. If a taxpayer files for a Request for Reinvestigation, he has sixty (60) days from filing of the request to submit supporting documents.
d. Final Decision on Disputed Assessment
After an evaluation of the submitted protest letter and supporting documents, the BIR shall issue its Final Decision on Disputed Assessment (“FDDA”). If the FDDA was signed by an authorized representative of the Commissioner of Internal Revenue (“CIR”), such as a Regional Director, the taxpayer, within 30 days from receipt of the FDDA, may either appeal the remaining issues to the Court of Tax Appeals (“CTA”); or file a request for reconsideration before the CIR. Again, taxpayers also have the option to settle the deficiency taxes.
However, if the CIR is the one who signed the FDDA, the only recourse is to go to CTA.
The regulations also state that “if the protest or administrative appeal is not acted upon by the Commissioner within one hundred eighty (180) days counted from the date of filing of the protest, the taxpayer may either: (i) appeal to the CTA within thirty (30) days from after the expiration of the one hundred eighty (180)-day period; or (ii) await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within thirty (30) days after the receipt of a copy of such decision.”
Bear in mind all the letters that you will receive from the BIR and the corresponding periods within which to reply in order for you to be able to validly avail of all these legal remedies.
Like your boba pearls and milk, filing of replies has expiration periods.
3. Mindset of Proactiveness
In dealing with BIR audit investigations, it is imperative for taxpayers to cooperate with the revenue officers and to have a proactive mindset. When you receive a LOA, gather all your accounting records and source documents, and try to assess on your own the possible sources of discrepancies. In this way, you will be prepared in defending the issues raised by the BIR.
Again, remember these three things — Documents to Prepare and Submit, Reply to the BIR, and Mindset of Proactiveness so you won’t be out of tune.