Taxes are the lifeblood of government. In general, “[T]he self-assessing system governs Philippine internal revenue taxes.  [x x x] [S]elf-assessed tax is a tax that the taxpayer himself assesses or computes and pays to the taxing authority.  [x x x] [S]uch system imposes upon the taxpayer the obligation to conduct an assessment of himself so he could determine and declare [through the filing of appropriate return] the amount to be used as tax basis, any deductions therefrom, and finally, the tax due.” (Philippine National Oil Company v. Court of Appeals, G.R. No. 109976 (2005))

After a return has been filed, the Commissioner of Internal Revenue (CIR) or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax. Nonetheless, the failure to file a return shall not prevent the CIR from authorizing the examination of any taxpayer per § 6(A) of the National Internal Revenue Code (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Generally, the BIR’s assessment process may be summarized as follows:

1. Issuance of Letter of Authority (LA);
2. Tax audit or investigation;
3. Issuance of Notice of Discrepancy (formerly Notice of Informal Conference);
4. Issuance of Preliminary Assessment Notice (PAN); and
5. Issuance of Formal Letter of Demand/Final Assessment Notice (FLD/FAN).

It is important to determine whether the exercise of BIR’s power of assessment is within the bounds allowed by law, otherwise, the assessment process may be considered a nullity, and the taxpayer may not be legally compelled to submit itself for investigation or pay for the assessed taxes.

For one, an LA is the “authority given to the appropriate revenue officer to examine the books of account and other accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue liabilities and for the purpose of collecting the correct amount of tax, in accordance with Section 5 of the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take testimony of persons. The LOA commences the audit process and informs the taxpayer that it is under audit for possible deficiency tax assessment.” (Commissioner of Internal Revenue v. De La Salle University, Inc., G.R. No. 196596 (2016))

In cases where the BIR conducts an audit without a valid LA, or in excess of the authority duly provided therefor, the resulting assessment is rendered “void and ineffectual” (AFP General Insurance Corporation v. Commissioner of Internal Revenue, G.R. No. 222133 (2020)). Note however that starting 16 August 2010, only electronic LAs (eLAs) may be issued by the BIR for audit/investigation purposes per Revenue Memorandum Order (RMO) No. 69-2010, except in estate tax cases. The succeeding discussions will focus on the validity of an eLA so taxpayers will know when they can properly contest the same.

RMO No. 44-10 provides for the guidelines to determine whether an eLA is valid, thus:

1. It must be issued by the proper approving official depending on the investigating office—either the:

1. Regional Director (for Revenue District Office (RDO));
2. Assistant CIR (ACIR) – Large Taxpayers Service (LTS) (for LTS and its Divisions);
3. Deputy Commissioner – Legal and Inspection Group (DCIR-LIG) (for Enforcement Service and its Divisions); or
4. CIR, or any other authorized BIR official (for Task Forces and Special Teams).

The designated revenue officers must not go beyond the authority given to them, otherwise, the assessment or examination may be rendered invalid. The same is true in the absence of such authority.

“The practice of reassigning or transferring revenue officers originally named in the  Letter of Authority (LOA) and substituting or replacing them with new revenue officers to continue the audit or investigation without a separate or amended LOA (i) violates the taxpayer’s right to due process in tax audit or investigation; (ii) usurps the statutory power of the Commissioner of Internal Revenue (CIR) or his duly authorized representative to grant the power to examine the books of account of a taxpayer; and (iii) does not comply with existing Bureau of Internal Revenue (BIR) rules and regulations on the requirement of an LOA in the grant of authority by the CIR or his duly authorized representative to examine the taxpayer's books of accounts.” (Commissioner of Internal Revenue v. McDonald's Philippines Realty Corp., G.R. No. 242670 (2021)).

2. It must not contain any manually-written character, notation, or erasure;
3. It must cover only one taxable year, except in tax fraud cases authorized by the CIR or the Deputy Commissioner;

Jurisprudence provides that the practice of issuing an eLA covering the audit of “unverified prior years” is prohibited. For one, in Commissioner of Internal Revenue v. De La Salle University, Inc., G.R. No. 196596 (2016), the LOA covered “Fiscal Year Ending 2003 and Unverified Prior Years,” the Court explained that the LOA is not entirely void and the assessment for taxable year 2003 is valid. Accordingly, if the tax audit includes more than one taxable period, the other periods or years shall be specifically indicated in the eLA.

4. It must contain a notation stating that the taxpayer is requested to verify the validity of the LA with the authorized BIR official at the address and contact information provided therein; and

5. It must be served to the taxpayer within the allowable period for the conduct of audit procedures.

Previously, Revenue Audit Memorandum Order (RAMO) No. 1-00 required that an LA be served within 30 days from the date of its issue. Beyond that period, any assessments are already considered unauthorized, there being no valid LA. This was amended by RAMO No. 1-2020 which deleted the 30-day period within which to serve the LA. Furthermore, Revenue Memorandum Circular (RMC) No. 82-2022 clarifies that:

[T]he deletion of the 30-day period to serve the eLA shall in no case be an excuse for the concerned revenue officer to delay its service nor for a taxpayer to refuse its service or to question its validity, in case the same is served beyond the 30-day period. [x x x] [W]hat is crucial is that the entire audit process shall be completed within a period of 180 days for RDO cases/240 days for [Large Taxpayer] cases from the date of issuance of eLA. Therefore, [any] eLA which remains unserved upon the effectivity of this Circular or [has] been served beyond the 30-day period from the date of its issuance shall still be considered valid and enforceable, provided that the 180-day/240-day period to complete the audit process has not yet expired.

Furthermore, starting 1 June 2010, there is no need for revalidation of the LA if the prescribed audit period (180 days/240 days) has been exceeded. However, the failure of the Revenue Officer to complete the audit shall be subject to applicable administrative sanctions.

For any legal assistance you may need, you may send your inquiries and other legal concerns to info@gqlaw.com.ph.