Final verdict on tax audit reassignments and LOAs

Pragmatism assesses the effectiveness of a certain method through its practicality. It holds action at a higher stature over theory. To illustrate, the mantra of getting things done will resonate with pragmatists. There is nothing wrong with being goal-oriented, and in fact, putting words and theories into action to achieve a certain end is laudable.

However, there are instances where aggressive action, when taken out of bounds, could put ends aspired for in jeopardy. In due process rights in taxation law, taxation is an essential attribute of our country’s sovereignty. Time is of the essence in the collection of taxes, as a great deal of our existence as a country depends on the amount of funds we have. While the lifeblood doctrine teaches us that taxes should be collected without unnecessary delay, the desire to collect does not give tax authorities pardon or reprieve from strictly observing a taxpayer’s due process rights.

Due process in taxation requires that the person conducting any tax audit and investigation has the authority to do so. Under Section 6(A) of the Tax Code as amended, only the commissioner of internal revenue (CIR) or his duly authorized representative has the power to authorize the examination and assessment of a taxpayer. Thus, before a revenue officer can conduct an examination, a valid grant of authority is required. This authority comes in the form of a Letter of Authority (LOA), as provided in Section 13 of the Tax Code, as amended. Such LOA contains the period covered by the assessment, the scope of taxes subject to the examination, and the revenue officers (RO) and group supervisors (GS) assigned to conduct the investigation. The LOA is usually signed by employees of the Bureau of Internal Revenue (BIR) who have been given permission to do so by the CIR.

An important question that comes to mind is what happens if the investigation is conducted by BIR officers not named in the LOA if the originally named BIR officer/s have been reassigned or have already resigned.

The Supreme Court, in a recent case (G.R. 242670 dated May 10, 2021), observed a disturbing trend in audits and investigations where the BIR officers named in the LOA are substituted by another BIR officer. What is alarming is that the authority of the new BIR officers comes from a mere memorandum of assignment, referral memorandum or such equivalent document and not by virtue of a new or amended LOA.

In the said case, the taxpayer received an LOA authorizing certain BIR officers to examine its books of accounts for a specified calendar year. Afterwards, a referral memorandum was issued transferring the assignment of one of the RO in the LOA and designating another RO to continue the audit investigation. Despite the substitution, no new LOA was issued.

The Supreme Court rendered the entire assessment void on the grounds that allowing the substitute RO, not named in the LOA and without a new or amended LOA, to continue the investigation breached the taxpayer’s right to due process.

Names of ROs must be indicated in the LOA to comply with due process requirements

Apparently, the existing LOA was not enough. To comply with due process in an investigation, the taxpayer needs to be informed that the BIR officers have the proper authority to examine his/her books of accounts. The only way to satisfy this requirement, according to the court, is that the names of the BIR officers who will conduct the assessment must appear in the LOA.

Other documents, besides an LOA, which direct the continuation of audit by an unauthorized RO usurps the functions of the LOA

The Supreme Court named the use of a referral memorandum memorandum of assignment, or equivalent documents to designate another BIR officer to continue the audit or investigation as a usurpation of the functions of the CIR or his duly authorized representatives.

Under Sections 6, 10(c), and 13 of the Tax Code, as amended, only the following persons are allowed to issue LOA: the CIR, Deputy CIRs, RDs, and other officials authorized by the CIR. In contrast, a memorandum of assignment, referral memorandum or other similar documents where the BIR directs the reassignment or transfer of an RO, are signed by a revenue district officer (RDO) or another subordinate official. Therefore, the issuance of other documents to allow another RO to continue the investigation displaces the functions of the LOA and seeks to exercise powers that exclusively belong to the CIR or its duly authorized representatives.

Revenue Memorandum Order (RMO) 43-90 dated Sept. 20, 1990 requires a new LOA if the RO is reassigned or transferred

Section D(5) of RMO 43-90 requires the issuance of a new LOA if the ROs named in the LOA are reassigned or transferred to another case.

In the case cited above; the CIR argued that RMO 43-90 is no longer valid because it was issued prior to the 1997 Tax Code. The CIR stated that, even assuming RMO 43-90 is applicable, there is nothing in RMO 43-90 that says the lack of LOA results in the nullity of the assessment.

The court disagreed and held that under Section 291 of the Tax Code, only laws, rules, and regulations that are contrary to the Tax Code were repealed or amended by the passing of the Tax Code in 1997. Since Section D(5) of RMO 43-90 is not contrary to the provisions of the Tax Code, in fact it even codifies the LOA requirement, then it remains an effective and applicable issuance.

Thus, practicality cannot undermine the taxpayer’s inviolable right to due process. Without a valid LOA authorizing the assigned BIR officers to handle a tax audit, there can be no valid assessment. The significance of the timely collection of taxes is undeniable. But in a democratic nation like ours, the collection of taxes is as important as the observance of taxpayer’s due process.

Clarine Joyce U. Aquino is a supervisor from the tax group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax 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 KPMG International or KPMG RGM&Co.

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