Business typhoon
TOP OF MIND - Marino P. Lizaso V (The Philippine Star) - January 21, 2020 - 12:00am

In business, issuance of an electronic Letter of Authority (eLA) and its concomitant tax audit investigation (audit) by the Bureau of Internal Revenue (BIR) may be considered as the start of a typhoon by business stakeholders. An audit, if not handled well, may cost millions or billions of pesos to an entity being audited.

What is the process of a tax audit investigation?

A tax audit investigation usually starts with the issuance of an eLA. An eLA, which is usually accompanied by a checklist of documents required by the BIR to conduct on the tax audit, gives power to the BIR officers to conduct an examination on the taxpayer’s books of accounts and other records. In several Court of Tax Appeals (CTA) and SAupreme Court (SC) decisions, absence or invalidity of eLAs resulted to cancellation of the tax assessments as this is tantamount to unauthorized examination of entities’ books and records, in violation of taxpayer’s right to due process.

Upon the gathering of documents, the BIR would then issue a Notice for Informal Conference (NIC). The NIC basically contains all issues noted by the examiner for his presentation to the taxpayer in order for the latter to present his side before the BIR issues a Preliminary Assessment Notice (PAN). Per existing regulations, the NIC shall not extend beyond 30 days. If upon the conclusion of the conference and issues remain unresolved, the examiner is then required to endorse the case to the assessment division of the Revenue Regional Office or to the Commissioner of Internal Revenue or his duly authorized representative within seven days for issuance of an assessment.      

If after review and evaluation it is determined that there is sufficient basis to assess the taxpayer for deficiency tax, a PAN which contains the computation of deficiency taxes, interest and penalties reflecting in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based would be issued.

Under the rules, the taxpayer has a non-extendable period of 15 days from the receipt of PAN to submit a reply containing its arguments against the issues raised therein.

Within 15 days from the BIR’s receipt of the above mentioned reply, or if no reply has been filed by the taxpayer, the BIR will then issue a Final Assessment Notice (FAN)/Formal Letter of Demand (FLD). The letter contains a demand for payment of the taxpayer’s deficiency taxes and, similar to the PAN, the FAN/FLD shall state the facts, the law, rules and regulations, or jurisprudence wherein which the assessment is based or else it may be considered as void.

In some cases, decided by the CTA and SC, it was held that the FAN/FLD must contain a specific date within which to pay the tax, otherwise, the same may be considered as void and thus the assessment may be cancelled.

Within 30 days upon receipt of the FAN/FLD, the taxpayer may file an administrative protest and failure to file the same may be considered the assessment as final and demandable. Under the regulations, the taxpayer may either file a request for reconsideration or a request for reinvestigation. A request for reconsideration refers to a plea for reevaluation of the assessment based on existing documents without the need of additional evidence. On the other hand, a request for reinvestigation refers to a plea of re-evaluation of the assessment based on newly discovered or additional evidences. Upon filing of an administrative protest, the taxpayer is required to state therein whether a request for reinvestigation or reconsideration is being filed. Also, for request for reinvestigation, the taxpayer will be given only 60 days to submit additional supporting documents.

Similarly, failure of the taxpayer to state the facts, the applicable law, rules and regulations, or jurisprudence wherein which his protest is based would render the protest void and without force and effect. Further, under existing rules, if the taxpayer disputes only some of the issues raised, the BIR may issue a collection letter calling for payment of the undisputed items.

Thereafter, the BIR will issue a Final Decision on Disputed Assessment (FDDA) embodying its decision on the taxpayer’s administrative protest to the FAN. If the protest to the FAN is denied within 180 days, the taxpayer has the option to either (1) Appeal the denial by the BIR to the CTA by filing a Petition for review within 30 days from receipt of the denial by the taxpayer. Or (2) File a request for reconsideration to the Commissioner of Internal Revenue (CIR).  In filing a request for reconsideration to the CIR, no submission of documents is allowed and only the position paper will be permitted to be filed.

However, if the protest to the FAN is not acted or no decision by the BIR has been issued yet by the end of 180 days, the taxpayer has mutually exclusive option to either (1) Appeal to the CTA within 30 days from the expiry of the 180-day period. Or (2) Still wait for the decision of the BIR.

Similar to a typhoon and other natural calamities where damage and casualties may be mitigated through proactive and preventive measures, the damage and stress that may be caused by a BIR audit may also be lessened through preparation and proper knowledge of existing laws, rules and regulations, issuances and jurisprudence related to tax. Periodic reconciliation of tax vis-à-vis financial reports, regular tax health checks and other similar activities in preparation to or in anticipation of a possible audit will greatly help taxpayers protect themselves in case of a business typhoon.

Marino P. Lizaso V is an assistant manager from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email or

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