One of the principles behind tax assessments is that they are presumed correct. “[T]ax authorities enjoy the presumption of regularity in the performance of their duties in relation to tax investigation and assessment. Thus, in denying deficiency tax liability, it is incumbent upon a taxpayer to show clearly that the assessment is void or erroneous, or that the tax authorities had been remiss in issuing the same.” (Citations omitted.) (AFP General Insurance Corporation v. Commissioner of Internal Revenue, G.R. No. 222133 (2020))

To balance such presumption in favor of the taxing authorities, the latter is mandated to comply with the taxpayers’ rights to both procedural and substantive due process in the issuance of a deficiency assessment, otherwise, the assessment is considered void.

For one, the representative of the Commissioner of Internal Revenue (CIR) must hold a Notice of Discrepancy (NoD) (formerly Notice of Informal Conference) per Revenue Regulation (RR) No. 22-2020, to fully afford the taxpayers an opportunity to present and explain their side on the discrepancies found. If after being afforded the opportunity to present their side through the Discussion of Discrepancy, it is still found that they are still liable for deficiency tax or taxes—and they do not address the discrepancy through payment of the deficiency taxes, or they do not agree with the findings—the investigating office will endorse the case to the reviewing office and approving official for the issuance of a deficiency tax assessment in the form of a Preliminary Assessment Notice (PAN) within 10 days from the conclusion of the Discussion.

Furthermore, to afford the taxpayers their right to due process, the PAN must be validly issued. “The PAN is a part of due process. It gives both the taxpayer and the Commissioner of Internal Revenue the opportunity to settle the case at the earliest possible time without the need for the issuance of a FAN.” (Commissioner of Internal Revenue v. Unioil Corporation, G.R. No. 204405 (2021))

 The following are the requisites of a valid PAN per § 228 of the National Internal Revenue Code (NIRC), as amended and § 3 of RR No. 12-99:

1. It must be served to the taxpayer personally and if not practicable, by substituted service or by mail;
2. The assessment must be made within the scope of authority given by a valid letter of authority;
3. It must be in writing and must contain the facts and the law on which the proposed assessment is based; and
4. It must be issued by the CIR or his duly authorized representative.

Upon receipt of the PAN, the taxpayer may either: (1) pay the assessment; (2) file a reply within 15 days from the date of the receipt of the PAN; or (3) ignore the PAN—in which case, he will be considered in default and a Final Letter of Demand (FLD)/Final Assessment Notice (FAN) will be issued within 15 days from date of the receipt by the taxpayer of the PAN.

If the PAN is not issued before the FAN and the taxpayer only received the latter, it is tantamount to denial of due process (Commissioner of Internal Revenue v. Metro Star Superama, G.R. No. 185371 (2010)) and the assessment shall be void. Furthermore, it is important to note that the FLD/FAN may only be issued after the taxpayer responds or fails to file a reply within the 15-day period (Commissioner of Internal Revenue v. Yumex Philippines Corporation, G.R. No. 222476 (2021)). In the same case, the Court held that it is of no moment that the taxpayer was able to file a protest to the FLD/FAN, nor does the payment by the taxpayer of the other items in the FLD/FAN preclude it from questioning the validity of the issuance of the assessment notices.

Note, however, that under the following instances, the issuance of a PAN is no longer necessary, and thus an FLD/FAN may be issued immediately:

1. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return;
2. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent;
3. When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year;
4. When the excise tax due on excisable articles has not been paid; or
5. When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machinery, and spare parts has been sold, traded, or transferred to non-exempt persons. (NIRC, § 228)

In Commissioner of Internal Revenue v. Unioil Corporation, the Court explained the significance of a FAN, thus:

A FAN contains not only a computation of tax liabilities but also a demand for payment within a prescribed period. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. It also signals the time when penalties and interests begin to accrue against the taxpayer. Thus, the National Internal Revenue Code imposes a 25% penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20% per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for payment until the amount is fully paid. Failure to file an administrative protest within 30 days from receipt of the FAN will render the assessment final, executory, and demandable. (Citation omitted.)

Thus, to be valid, the FLD/FAN must comply with the following requisites:

1. It must be issued after the issuance of a valid PAN, subject to exceptions as enumerated above;
2. It must be issued by the CIR or his duly authorized representative and must be conducted within the scope of authority given by a valid letter of authority;
3. It must be served to the taxpayer personally and if not practicable, by substituted service or by mail;
4. It must be served to the taxpayer before the lapse of the prescriptive period for making an assessment, i.e., within three years after the last day prescribed by law for the filing of the return, or from the day when the return was filed, whichever is later. However, in fraudulent cases, the prescriptive period is 10 years after the discovery of the falsity, fraud, or omission;
5. It must be in writing and must contain the facts and the law on which the assessment is based;

Note that in Samar-I Electric Cooperative v. Commissioner of Internal Revenue, G.R. No. 193100 (2014), the Court held that the exchange of correspondence and documents between the CIR and the taxpayer may establish legal and factual bases of deficiency tax even if not contained in the FLD/FAN.

6. It must contain a definite amount of tax liability and an actual demand to pay (Commissioner of Internal Revenue v. Fitness by Design, Inc., G.R. No. 215957 (2016)); and
7. It must indicate the specific period or date when the assessment should be paid. (Republic v. First Gas Power Corporation, G.R. No. 214933 (2022))

Upon receipt of the FLD/FAN, the taxpayer may file a protest by filing either a request for reconsideration or reinvestigation within 30 days from the receipt of the FLD/FAN per § 228, par. 4 of the NIRC. In case of a request for reinvestigation, all relevant supporting documents must be filed within 60 days from the filing of the protest. The 30-day and 60-day periods (if applicable) must be complied with, otherwise, the assessment will become final, executory, and demandable.

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