Final is not the end; Not yet

By Brando C. Cabalsi, 24 April 2009

We are always reminded not to say "final" if we do not really mean it, as we might end up eating our pride or word. Remember the saying "Never say never?"

But sometimes the word "final," or the like is used loosely. In movies for example, there is this movie entitled Final Destination but with several series. In the "Bourne" series of Robert Ludlum, the third book is entitled Bourne Ultimatum but surprisingly, there came Bourne Legacy and Bourne Betrayal thereafter.

This unrestricting use of the word "final" has no exception in taxation parlance. Filing of final adjustment return is one scenario.

Expectedly, taxpayers (except those qualified for substituted filing) reporting under a calendar year basis have filed their Final Adjustment Returns (BIR Form No. 1702 for corporations and BIR form 1701 for individuals) for the taxable year 2008 on or before the April 15, 2009 deadline to avoid the penalties, i.e. 25% surcharge, 20% interest per annum, and compromise penalty.

Preparation of final adjustment return is not a mere mathematical exercise. For taxpayers with gross sales or receipts exceeding P150,000 in any quarter, particularly the big and multinational companies, this may be a long and tedious process. Before these taxpayers can properly calculate their tax liabilities, their books and statutory accounts should be properly kept and audited. Interim or pre-closing activities are performed before their books are closed at year-end (December 31). This is why, most of the time the :advent" of the tax busy season coincides with the "advent" for the Christmas season. In fact, there are companies that start their pre-closing activities as early as September. But no matter how long or short the preparation period is, at the end of the day, the final adjustment returns must be filed on or before April 15 of every year.

After the final adjustment return has been filed, can the taxpayer now heave a sigh of relief because his tax obligation is finally over? Apparently, under our present tax system that does not seem to be the case.

It will be noted that tax collection in the Philippines follows the self-assessment and voluntary payment system. Under this system, taxpayers are generally allowed to calculate the amount of tax due from them and said tax is paid at the same time that the corresponding return is filed. However, the process does not strictly end here since the filing of the return and payment of the tax may later entail a tax audit. In this context therefore, the filing of the final tax return is not really the final act that ends the tax collection process, but rather the final act that begins the collection process.

In other words, if the return is filed and no audit is conducted within the three-year prescriptive period, technically, the collection process is generally deemed ended. On the other hand, if an audit is conducted, the collection process ends only after the audit has been terminated, and the case has been resolved.

Because of the mounting pressure put on the BIR to meet their revenue goals, the BIR’s audit of taxpayers’ books has never been as zealous, serious and frequent as it is now. Thus, taxpayers are now receiving Letters of Authority (LOA) for all their open years, and even recently filed returns are already subjected to audit less than one year from filing. With tax audits becoming a regular occurrence or almost a certainty, we provide the following pointers for taxpayers who may be faced with a tax audit in the near future.

• Do a self-post tax audit.

Taxpayers may conduct a self-post tax audit to determine any possible tax risk or lapses and identify ways to manage or remedy said risks or lapses. This approach gives the taxpayers the opportunity to identify possible areas of tax exposure ahead of an actual BIR tax audit.

In case there was inadvertence in the tax return filed, one available remedy is to amend the return in accordance with Section 6 of the Tax Code provided this is done within three years from filing, and no notice for audit or investigation has been served upon the taxpayer. However, modification or amendments of previously filed tax return is not without consequences. If the amended return computes additional tax, payment of the deficiency tax plus increments shall be required. Further, filing of amended returns may also push forward the prescriptive period for the tax authorities to audit or examine the subject tax returns.

• Anticipate and prepare.

As a pro-active approach, taxpayers may familiarize themselves with the audit procedures and requirements of the BIR as contained in the relevant Revenue Audit Memorandum Order 1-2000. This approach would give the taxpayers enough time to properly prepare the documentary requirements before the actual audit and thus, avoiding unnecessary delays in completing the process.

• Know the fundamentals of the tax assessment process.

Foremost, taxpayers must be reminded of the basic principle that they are entitled to due process in the assessment of their tax liabilities. Due process means strict observance of the audit procedures as provided under the Tax Code and pertinent rules and regulations, e.g., Revenue Regulations No. 12-99, as amended. Thus, taxpayers must see to it that the following basic procedures are complied with:

1. Examination of the books must be conducted within the three-year prescription period provided by law, and covered by a validly issued LOA stating the taxes and period covered and the names of the investigating team.
2. After the books are examined, a Notice of Informal Conference (NIC) shall be issued inviting the taxpayer to discuss the initial tax findings. Attendance in the NIC is important as this will give the taxpayer the opportunity to clarify the initial findings, and submit the necessary documents in relation thereto.
3. Issuance of the Preliminary Assessment Notice (PAN) to cover the tax issues that were not resolved in the NIC stage. The taxpayer may protest the PAN, and submit additional supporting documents within the period stated in the PAN, which is normally15 days. If additional time is required, an extension may be requested before the lapse of the original 15 days given.
4. Issuance of the Final Assessment Notice (FAN) if no resolution is arrived at the PAN stage. The FAN must be protested within 30 days from receipt, and all required supporting documents must be submitted within 60 days from the submission of the protest letter. Failure to comply with these requirements shall render the FAN final and executory.
5. Lastly, if deficiency taxes are paid and all issues have been resolved at the administrative level, be sure to secure a termination letter from the BIR to document the final closure of the tax case.

Although the filing of the final tax return does not necessarily give the taxpayers immediate peace of mind, proper awareness of the rudimentary procedures of a tax audit, however, assures them help in seeking early resolution of their tax cases.