False vs. Fraudulent vs. Non Filing Returns | Prescriptive Period for Assessment | Issuance of Formal letter of Demand/Final Assessment Notice | Assessment Process | Tax Remedies | NIRC | TAXATION LAW

The topic on the prescriptive period for tax assessment under the National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No. 10963 (TRAIN Law) and R.A. No. 11976 (Ease of Paying Taxes Act), is essential to understanding the Bureau of Internal Revenue’s (BIR) authority in issuing assessments and the taxpayer’s obligations. Below is a detailed breakdown covering the prescriptive period for the assessment of taxes in cases involving false returns, fraudulent returns, and the non-filing of returns:

---

1. General Rule on Prescriptive Period for Assessment

Under the NIRC, as amended, the general rule for the prescriptive period for tax assessment is that the Bureau of Internal Revenue (BIR) has three (3) years to assess taxes from the date a tax return is filed. If a return is filed before the last day prescribed by law, the three-year period begins from the deadline for filing, not from the actual filing date. This rule presumes that the taxpayer has filed a valid return that is neither false nor fraudulent.

2. Exception: False Returns

A “false return” refers to a tax return where information is inaccurately stated due to the taxpayer's mistake or negligence, not due to an intent to defraud. This means that although incorrect data is provided, there is no malicious intent to deceive the tax authority.

Prescriptive Period for False Returns

• Ten-Year Prescriptive Period: In cases where a taxpayer files a false return, the prescriptive period for assessment extends to ten (10) years from the date of the actual discovery of the falsity. This gives the BIR additional time to examine the discrepancies in the reported information and issue an assessment.

• Requirements for False Returns: For the BIR to classify a return as “false,” it must show there was a significant omission or inaccuracy in reporting income, deductions, or other details due to the taxpayer’s neglect or misunderstanding, without the presence of fraudulent intent.

3. Exception: Fraudulent Returns

A “fraudulent return” involves an intentional misrepresentation or concealment of material information with the intent to evade taxes. Fraud indicates a deliberate action by the taxpayer to mislead the BIR, which could involve falsified deductions, concealed income, or other means of tax evasion.

Prescriptive Period for Fraudulent Returns

• Ten-Year Prescriptive Period: Similar to false returns, fraudulent returns also carry a ten-year prescriptive period. However, this ten-year period commences from the date of discovery of the fraud, giving the BIR the latitude to pursue cases where fraudulent returns are found long after they were filed.

• Proof Requirement: The BIR bears the burden of proving fraud in court. To sustain a finding of fraud, the BIR must demonstrate that the taxpayer acted with a willful intent to deceive. This is a higher threshold than for false returns, as fraud involves deliberate intent rather than mere negligence.

4. Exception: Non-Filing of Returns

When a taxpayer fails to file a return entirely, the BIR has no initial point of reference regarding the taxpayer’s taxable income or business activities. Non-filing essentially means the taxpayer neglected to report their income or other tax liabilities as mandated by law.

Prescriptive Period for Non-Filing of Returns

• Ten-Year Prescriptive Period: In cases of non-filing, the BIR has ten (10) years from the date the return should have been filed to assess the taxpayer. The law presumes that by not filing a return, the taxpayer may be attempting to evade taxes, and thus, the BIR is granted a more extended period to detect, investigate, and assess the liability.

• Commencement of the Ten-Year Period: The ten-year period in non-filing cases begins from the statutory deadline for filing the return. This deadline varies depending on the type of tax (e.g., income tax, VAT, etc.).

5. Recent Legislative Amendments

R.A. No. 11976 (Ease of Paying Taxes Act) and R.A. No. 10963 (TRAIN Law) did not alter the prescriptive periods for the assessment of taxes in cases of false, fraudulent, or non-filed returns. However, they underscore the importance of compliance, with the TRAIN Law introducing simplified tax reporting for specific sectors, which indirectly encourages more accurate and timely filing.

6. BIR’s Authority to Issue a Formal Letter of Demand (FLD) / Final Assessment Notice (FAN)

For any assessment to be valid, the BIR must issue a Formal Letter of Demand (FLD) and a Final Assessment Notice (FAN). These documents formally notify the taxpayer of the deficiency tax and the basis of assessment. In cases involving false or fraudulent returns or non-filing, the issuance of these notices must be within the ten-year prescriptive period.

Importance of Proper Issuance

• If the BIR issues the FLD/FAN beyond the prescribed period, the assessment becomes invalid, and the BIR is barred from collecting the deficiency tax.
• The taxpayer has the right to contest any assessment issued beyond the allowable period as a defense in any collection proceeding.

7. Key Points in Disputing Assessments Based on Prescriptive Periods

Taxpayers can challenge BIR assessments on the ground that the prescriptive period has lapsed, particularly in cases where:

• The BIR fails to provide evidence of fraud or intentional misrepresentation in instances classified as fraudulent returns.
• There is no clear demonstration that the taxpayer’s actions amounted to false reporting rather than negligence.
• The BIR has assessed taxes beyond the allowable period from the filing or statutory deadline.

8. Implications for Taxpayers

Taxpayers must be vigilant about filing accurate and complete returns to avoid the extended prescriptive periods. They should also maintain detailed records and seek professional advice when the BIR challenges their returns, especially in complex cases where the line between false and fraudulent reporting could impact the prescriptive period.

---

In summary, the NIRC provides a ten-year prescriptive period for cases involving false, fraudulent, or non-filed returns, with the period starting upon the discovery of false or fraudulent data or from the deadline of the return for non-filing cases. These extended periods grant the BIR the authority to pursue cases where evasion may have occurred but are balanced by the requirement that the BIR issues assessments within the legally defined timeframe.

Suspension of the Running of Statute of Limitations | Issuance of Formal letter of Demand/Final Assessment Notice | Assessment Process | Tax Remedies | NIRC | TAXATION LAW

Here is a comprehensive discussion on the topic of the suspension of the running of the statute of limitations as it relates to the issuance of a Formal Letter of Demand (FLD) or Final Assessment Notice (FAN) under the National Internal Revenue Code of 1997 (NIRC), as amended by the TRAIN Law (R.A. No. 10963) and the Ease of Paying Taxes Act (R.A. No. 11976).

---

1. Overview of the Assessment Process and Statute of Limitations in Philippine Taxation Law

The statute of limitations, or prescriptive period, in taxation law limits the time during which the Bureau of Internal Revenue (BIR) can assess or collect taxes. Under the NIRC, as amended, the general rule is that the BIR has three (3) years from the last day for filing the return or the actual filing date, whichever is later, to issue an assessment. However, this prescriptive period may be extended or suspended under certain conditions.

The issuance of a Formal Letter of Demand (FLD) and Final Assessment Notice (FAN) represents the culmination of the BIR’s assessment process, where the taxpayer is formally informed of the amount of deficiency taxes due. The proper issuance of these documents is essential as it serves to stop the running of the prescription period and allow the BIR to continue enforcing its assessment within the legal time frame.

2. Grounds for Suspension of the Statute of Limitations (Section 223, NIRC, as amended)

The NIRC provides specific grounds for suspending the running of the statute of limitations on assessment and collection. The suspension prevents the expiration of the period within which the BIR may issue an assessment. The relevant grounds for suspension are:

1. When the taxpayer voluntarily waives the statute of limitations.

   • Taxpayers may waive the statute of limitations by signing a waiver in favor of the BIR, allowing the agency more time to conduct its assessment. Waivers must comply strictly with BIR Revenue Memorandum Order No. 20-90, requiring:
     • A written waiver indicating the specific period of extension.
     • The taxpayer’s and BIR’s representative signatures.
     • Proper acknowledgment and notarization.
   • Any deficiency in form or procedure of the waiver invalidates it, and thus, does not validly suspend the running of the statute.

2. When a request for reinvestigation is made by the taxpayer.

   • A taxpayer's request for reinvestigation, if accepted by the BIR, suspends the statute of limitations until the BIR completes its reinvestigation and notifies the taxpayer in writing of its findings. This suspension applies only if the reinvestigation is expressly requested by the taxpayer in writing.

3. When the taxpayer cannot be located in the address of record.

   • If the BIR cannot locate the taxpayer at the address indicated on the tax return or registration, the prescriptive period is suspended. However, the BIR must document its reasonable efforts to locate the taxpayer to avail of this ground for suspension.

4. When the taxpayer is outside the Philippines.

   • The statute of limitations is suspended while the taxpayer is outside the Philippines, provided that their absence affects the assessment process. This typically applies to individual taxpayers rather than corporations.

5. Filing of a criminal complaint before the DOJ or courts.

   • The filing of a criminal complaint with the Department of Justice (DOJ) or courts for tax evasion suspends the running of the statute of limitations on assessment and collection, pursuant to the NIRC provisions and recent amendments under R.A. No. 11976. This ensures the BIR can pursue criminal prosecution without losing the ability to assess or collect tax deficiencies.

3. Issuance of the Formal Letter of Demand (FLD) and Final Assessment Notice (FAN)

The issuance of an FLD/FAN signifies the BIR’s determination of a taxpayer’s deficiency and demands payment. The date of issuance is critical because it generally stops the running of the statute of limitations, provided it is issued within the prescribed period.

• The FLD details the deficiency taxes and penalties, while the FAN is the official notice requiring the taxpayer to settle the identified liabilities. For these to be effective:
  • They must be served on or before the expiration of the prescriptive period.
  • They must be properly addressed to the taxpayer’s registered address, as errors or omissions can render the assessment void.

The BIR is obliged to follow due process by:

1. Providing the taxpayer with preliminary assessment notices (PAN) and opportunities to respond before the issuance of the FAN.
2. Ensuring the FLD/FAN is clear, specific, and accompanied by a detailed schedule of assessments to avoid questions of validity or nullity.

4. Effects of Suspension on Issuance of the FLD/FAN

If any of the grounds for suspension occur during the period when the BIR is conducting its investigation or issuance process, the three-year prescriptive period will not lapse until the suspension condition ceases.

• For example: If a taxpayer requests a reinvestigation one (1) year after filing the return, and the BIR takes six (6) months to complete it, the statute of limitations will be suspended for those six (6) months. The BIR will then have two (2) years and six (6) months from the end of the reinvestigation to issue the FLD/FAN.

5. Relevant Jurisprudence on Suspension of the Statute of Limitations

The Philippine Supreme Court has ruled extensively on the suspension of the statute of limitations, particularly focusing on compliance with procedural rules for valid waivers and the effects of failure to follow the correct procedures. Key rulings include:

1. CIR v. Philippine Daily Inquirer, Inc. (2018):

   • The Court ruled that an invalid waiver due to failure to conform to procedural requirements would not suspend the statute of limitations, thus barring the BIR from issuing assessments beyond the prescriptive period.

2. CIR v. Kudos Metal Corp. (2009):

   • The Supreme Court ruled that a taxpayer’s voluntary request for reinvestigation suspends the running of the statute, preventing the BIR from losing its right to assess.

3. CIR v. BF Goodrich (2009):

   • The Supreme Court reiterated that waivers must be signed by an authorized official of the BIR and taxpayer and properly notarized, underscoring the procedural necessity for effective suspension.

6. Recent Amendments under R.A. No. 11976 or the Ease of Paying Taxes Act

The Ease of Paying Taxes Act introduced enhancements to the procedural framework, emphasizing taxpayers' rights to fair treatment and efficient resolution processes within the BIR. However, it maintained the previous framework for suspending the statute of limitations and did not substantially alter the fundamental rules regarding FLD/FAN issuance and the statute's suspension.

---

Conclusion

The suspension of the statute of limitations is crucial to both the BIR and taxpayers, balancing the government’s authority to collect taxes with taxpayers’ rights to a clear and timely process. Strict adherence to procedural requirements is essential, as lapses can invalidate waivers and reinvestigation requests, preventing suspension of the prescriptive period. Thus, both the BIR and taxpayers must carefully navigate these rules to ensure compliance and the validity of assessments.

Prescriptive Period for Assessment | Issuance of Formal letter of Demand/Final Assessment Notice | Assessment Process | Tax Remedies | National Internal Revenue Code of 1997 (NIRC) | TAXATION LAW

The prescriptive period for the issuance of an assessment by the Bureau of Internal Revenue (BIR) is a critical component under the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Ease of Paying Taxes Act (R.A. No. 11976). The prescription period protects taxpayers from being indefinitely liable for taxes and ensures the government exercises its right to assess within a reasonable timeframe. Below is a comprehensive overview of the relevant rules, conditions, and exceptions regarding the issuance of a Formal Letter of Demand (FLD) or Final Assessment Notice (FAN) within the prescriptive period.

1. General Rule on Prescriptive Period for Tax Assessment

Under Section 203 of the NIRC, as amended, the BIR generally has three (3) years to assess a taxpayer’s liability. This period begins to run from the date the return was filed, regardless of whether the filing was timely or delayed. If the return was not filed, the prescriptive period does not commence.

• Date of Filing: For timely filed returns, the 3-year period begins from the deadline prescribed by law, not the actual date of filing if filed earlier.
• Exceptions for Delayed Filings: When a return is filed after the prescribed deadline, the 3-year period will count from the date of actual filing.

2. Exceptions to the Three-Year Prescriptive Period

There are several exceptions under the NIRC where the 3-year period is extended. These are as follows:

a. Substantial Understatement of Income (Section 222(A))

If the taxpayer substantially understates their income (by 30% or more of the actual tax due), the BIR is granted an extended period of ten (10) years from the discovery of such under-declaration or omission to assess the tax liability.

b. Failure to File a Return (Section 222(C))

When a taxpayer fails to file a required tax return, the BIR has ten (10) years from the date of discovery of non-filing to issue an assessment. The failure to file effectively extends the BIR’s power to assess until it discovers the omission.

c. False or Fraudulent Return (Section 222(A))

If the taxpayer files a false or fraudulent return with the intent to evade taxes, the BIR also has ten (10) years from the date of discovery to assess the liability. Fraud in this context implies deliberate misrepresentation or intentional submission of misleading information.

d. Waiver of the Prescriptive Period (Section 222(b))

The taxpayer and the BIR may enter into a waiver agreement that extends the prescriptive period. This waiver, however, must comply strictly with procedural requirements:

• The waiver must be in writing, signed by the taxpayer or their authorized representative.
• The waiver must specify the exact period by which the BIR is permitted to issue an assessment.
• It must be executed before the original 3-year period expires.
• The waiver must be duly notarized, accepted by the BIR, and signed by a duly authorized BIR official.
• Failure to comply with these formal requirements renders the waiver invalid.

e. Provisional Assessment (Section 6(D))

A provisional assessment can suspend the running of the prescriptive period, provided the BIR issues a Final Assessment Notice within the statutory timeframe following the conclusion of a tax audit or investigation.

3. Issuance of Formal Letter of Demand (FLD) or Final Assessment Notice (FAN)

Once the BIR has determined a taxpayer’s deficiency tax liability, it issues a Formal Letter of Demand (FLD) together with a Final Assessment Notice (FAN). The FAN is the formal act by the BIR informing the taxpayer of their tax deficiency and demanding payment. The prescriptive period pertains to the time within which the BIR must issue this FAN/FLD after the filing of the return or its discovery of non-filing, fraud, or substantial understatement.

Legal Requirements for FLD/FAN Issuance:

• Timing: The FLD/FAN must be issued within the applicable 3-year or 10-year period.
• Content: The FAN must explicitly state the facts and law upon which the assessment is based, otherwise, it may be considered invalid.
• Service: The FLD/FAN must be served on the taxpayer or their authorized representative. Failure to properly serve the notice may invalidate the assessment.

4. Effects of the Ease of Paying Taxes Act (R.A. No. 11976)

The recently enacted Ease of Paying Taxes Act (R.A. No. 11976) aims to simplify and streamline the tax filing process, with indirect implications on the prescriptive periods for assessments. While this Act does not directly alter prescriptive periods, it emphasizes timely assessments and taxpayer rights, aligning with policies that protect taxpayers from protracted assessments.

5. Judicial Interpretations and Jurisprudence

Several Supreme Court rulings further clarify the application of the prescriptive period for assessments:

• Taxpayer's Right to Due Process: The Supreme Court has consistently held that due process in assessment procedures is critical. Any irregularity in the issuance or service of the FLD/FAN, such as failing to specify the facts and law or improper service, may void the assessment.
• Strict Interpretation: Courts have generally interpreted the prescriptive periods in favor of the taxpayer, recognizing that prescription is intended to shield taxpayers from indefinite liability.
• Suspension of Prescriptive Period: Certain cases, such as those involving mutual agreement for an extension, toll the running of the period. However, the courts mandate that all legal and procedural requirements be strictly followed for any suspension to be valid.

6. Summary of Key Points

Circumstance	Prescriptive Period for Assessment
Filing of a return (regular cases)	3 years from filing date
Substantial understatement	10 years from discovery
Failure to file a return	10 years from discovery
False or fraudulent return	10 years from discovery
Waiver by the taxpayer	Specified in the waiver, with strict compliance

7. Conclusion

The prescriptive period for the issuance of an assessment by the BIR is designed to balance the government’s interest in tax collection with the taxpayer’s right to be free from indefinite tax exposure. Compliance with procedural requirements in the issuance of the FLD/FAN is crucial, and any violation of these procedural safeguards may invalidate the assessment. Through the TRAIN Law and the Ease of Paying Taxes Act, recent reforms underscore the importance of fair and efficient tax administration, reflecting a policy shift towards enhanced taxpayer rights and clearer rules on prescription.

Issuance of Formal letter of Demand/Final Assessment Notice | Assessment Process | Tax Remedies | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

Comprehensive Overview: Issuance of Formal Letter of Demand (FLD)/Final Assessment Notice (FAN) under the NIRC and Related Amendments

Introduction

The Formal Letter of Demand (FLD) and Final Assessment Notice (FAN) are key components in the tax assessment process under the National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (R.A. No. 10963) and further streamlined by the Ease of Paying Taxes Act (R.A. No. 11976). The issuance of these notices is critical as they serve as official communication from the Bureau of Internal Revenue (BIR) regarding tax deficiencies, formally notifying taxpayers of their assessed liabilities and granting them an opportunity to dispute these assessments.

This meticulous guide provides an in-depth analysis of the process, requirements, legal implications, and taxpayer rights associated with the issuance of FLD/FAN, covering both procedural and substantive elements under the prevailing tax laws in the Philippines.

---

I. Legal Framework for Issuance of FLD/FAN

The issuance of an FLD/FAN is governed by several key sections of the NIRC and amendments by R.A. No. 10963 (TRAIN) and R.A. No. 11976 (Ease of Paying Taxes Act). Relevant sections include:

• Section 228 of the NIRC – Governs the issuance of the assessment notice and the rights of the taxpayer to protest.
• R.A. No. 10963 (TRAIN Law) – Emphasizes due process and the necessary documentation in the issuance of FLD/FAN.
• R.A. No. 11976 (Ease of Paying Taxes Act) – Further streamlines processes, reducing the administrative burden on taxpayers and promoting efficiency in BIR procedures.

---

II. Process of Issuance of FLD/FAN

1. Preliminary Assessment Notice (PAN)

Before the issuance of an FLD/FAN, the BIR must first issue a Preliminary Assessment Notice (PAN) to the taxpayer. The PAN serves as a pre-assessment communication notifying the taxpayer of potential deficiencies and allowing them to submit a written explanation or documentary evidence within 15 days from receipt.

The issuance of a PAN is mandatory except in cases of:

• Deficiency in tax payments reflected in the taxpayer’s filed returns.
• Mathematical errors in the tax return.
• Discrepancies in withholding tax returns filed by withholding agents and recipients.

2. Issuance of the FLD/FAN

If the taxpayer’s response to the PAN is insufficient or if the BIR rejects the response, the BIR issues an FLD/FAN, detailing the final assessment amount owed by the taxpayer.

Key features of the FLD/FAN include:

• Formal Notice: The FLD/FAN must clearly state the assessed tax deficiencies, including the nature of the tax, the specific period covered, and the amount due, inclusive of penalties, surcharges, and interest.
• Demand for Payment: It demands immediate payment from the taxpayer, with a clear warning of the consequences for non-compliance.
• Basis for Assessment: The FLD/FAN must include sufficient information on how the assessment was computed, enabling the taxpayer to understand and, if desired, challenge the assessment.

---

III. Requirements for Validity of FLD/FAN

For an FLD/FAN to be valid, it must adhere strictly to procedural due process and legal requirements, as laid out in Revenue Regulations (RR) No. 18-2013 and relevant Supreme Court rulings:

1. Clear Explanation of Findings: The FLD/FAN must specify the facts, applicable laws, and regulations upon which the assessment is based.
2. Compliance with Due Process: Under Section 228 of the NIRC, as amended, the issuance of an FLD/FAN without a prior PAN, where applicable, constitutes a violation of due process, rendering the assessment void.
3. Proper Authorization: The revenue officer who signs the FLD/FAN must be authorized by the Commissioner of Internal Revenue or a duly designated representative. Any lack of proper authorization invalidates the assessment.

---

IV. Taxpayer Rights and Remedies Following Issuance of FLD/FAN

Upon receiving the FLD/FAN, a taxpayer has several options:

1. Administrative Protest: Within 30 days of receipt of the FLD/FAN, the taxpayer may file a protest, either:

   • Request for Reconsideration: Challenging the legal basis or factual findings of the assessment.
   • Request for Reinvestigation: Providing additional documentary evidence or records to dispute the assessment.

2. Filing of Documentary Evidence: In a request for reinvestigation, the taxpayer has 60 days from filing the protest to submit all supporting evidence. Failure to comply results in the finality of the assessment.

3. Appeal to the Court of Tax Appeals (CTA): If the BIR denies the protest, or fails to act within 180 days, the taxpayer may appeal to the CTA within 30 days of receipt of the final decision on the disputed assessment.

---

V. Legal Consequences of Failure to Issue Proper FLD/FAN

Failure by the BIR to comply with procedural requirements during issuance of the FLD/FAN can render the assessment null and void. Courts have consistently held that the violation of due process invalidates tax assessments, as seen in cases like Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc. and Oceanic Wireless Network, Inc. v. CIR.

---

VI. Amendments under the Ease of Paying Taxes Act (R.A. No. 11976)

The Ease of Paying Taxes Act introduced several provisions aimed at improving the efficiency of tax assessments and enhancing taxpayer rights. Notable amendments affecting the FLD/FAN issuance process include:

• Streamlined Documentation Requirements: Simplification of documentary requirements for filing protests and appeals.
• Electronic Issuance and Communication: The BIR is authorized to issue electronic FLDs/FANs, allowing for faster processing and taxpayer access.
• Reduction in Processing Time: The Act mandates specific timelines for BIR actions, reducing unnecessary delays and promoting prompt resolution of assessments.

---

VII. Key Judicial Doctrines on FLD/FAN Issuance

Courts have consistently emphasized strict adherence to due process in the issuance of tax assessments. Key principles include:

• Due Process and Right to Be Heard: Taxpayers must have a reasonable opportunity to respond to assessments. Failure to provide this renders the assessment void.
• Substantial Compliance: Minor errors in the form of the FLD/FAN may be excused if they do not affect the taxpayer's understanding or ability to respond. However, omissions in material facts or statutory requirements are generally deemed fatal to the validity of the assessment.
• Finality of Assessment: If a taxpayer fails to protest within the prescribed period, the assessment becomes final and executory, limiting further remedies.

---

Conclusion

The issuance of a Formal Letter of Demand/Final Assessment Notice (FLD/FAN) is a crucial step in the BIR’s assessment process, bearing significant legal and financial implications for taxpayers. Adherence to due process and strict compliance with the NIRC, TRAIN, and Ease of Paying Taxes Act provisions are mandatory to protect taxpayer rights and maintain the validity of assessments. Understanding these elements empowers taxpayers to effectively address assessments and, when necessary, contest them through administrative and judicial remedies.