In the Philippine tax system, the Bureau of Internal Revenue (BIR) is granted broad powers to examine the books of accounts and other accounting records of taxpayers to ensure the correct payment of taxes. This process is governed by strict procedural due process requirements under Revenue Regulations (RR) No. 12-99, as amended by RR No. 18-2013, RR No. 7-2018, and most recently, RR No. 22-2020.
Failure by the BIR to strictly follow these timelines and procedures can result in the nullity of the assessment, making it a critical area of study for taxpayers and practitioners alike.
I. The Genesis of an Audit: The Letter of Authority (LOA)
An audit officially begins with the issuance of a Letter of Authority (LOA). A tax assessment issued without a valid LOA—or by an officer not named in the LOA—is void. Once the LOA is served, the Revenue Officers examine the taxpayer's records. If they find that taxes are underpaid, the "Due Process" phase begins.
II. The Notice of Discrepancy (NOD)
Under RR No. 22-2020, the first formal step after the initial investigation is the issuance of the Notice of Discrepancy (NOD). This replaced the previous "Notice of Informal Conference."
- Purpose: To inform the taxpayer in writing of the initial findings of underpayment and to provide an opportunity to present the taxpayer's side.
- The Discussion of Discrepancy: The taxpayer will be invited to a discussion. This must occur within thirty (30) days from the receipt of the NOD.
- Taxpayer's Submission: The taxpayer has the right to present documents or explanations to refute the findings during this stage.
- Outcome: If the taxpayer fails to reconcile the discrepancies or fails to appear for the discussion, the investigating office will endorse the case for the issuance of a Preliminary Assessment Notice (PAN).
III. The Preliminary Assessment Notice (PAN)
If the taxpayer cannot settle the findings at the NOD stage, the BIR issues a Preliminary Assessment Notice (PAN).
- Content: The PAN must state the factual and legal bases for the assessment. If it lacks these, the assessment is void.
- Response Period: The taxpayer has fifteen (15) days from receipt of the PAN to file a written reply.
- Effect of No Reply: If the taxpayer fails to respond within 15 days, they are considered in default, and the BIR will proceed to issue the Final Assessment Notice.
IV. The Final Assessment Notice (FAN) and Formal Letter of Demand (FLD)
The Final Assessment Notice (FAN) and Formal Letter of Demand (FLD) constitute the BIR’s formal demand to pay the deficiency tax.
- Requirements: Like the PAN, the FAN/FLD must clearly state the law and the facts on which the assessment is made. It must also contain a definite demand for payment within a specific period.
- The 30-Day Rule (Protest): This is the most critical deadline. The taxpayer must file a Formal Administrative Protest within thirty (30) days from the date of receipt of the FAN/FLD.
- Nature of Protest: The taxpayer can choose between two types of protest:
- Request for Reconsideration: A plea for a re-evaluation based on existing records.
- Request for Reinvestigation: A plea for a fresh evaluation of the case based on newly discovered or additional evidence.
V. Submission of Supporting Documents
If the taxpayer filed a Request for Reinvestigation, they have sixty (60) days from the date of filing the protest to submit all relevant supporting documents.
Crucial Note: If the documents are not submitted within this 60-day window, the assessment becomes "final, executory, and demandable." The 60-day period does not apply to requests for reconsideration.
VI. The Decision: Final Decision on Disputed Assessment (FDDA)
Once the protest is filed, the Commissioner of Internal Revenue (CIR) or their duly authorized representative has 180 days to decide on the protest. This 180-day period is counted from:
- The filing of the protest (for Reconsideration); or
- The submission of complete documents (for Reinvestigation).
Taxpayer Options After 180 Days
If the BIR does not act within the 180-day period (Inaction), or if the BIR issues a Final Decision on Disputed Assessment (FDDA) that denies the protest, the taxpayer has thirty (30) days to:
- Appeal to the Court of Tax Appeals (CTA) via a Petition for Review; or
- Request for Reconsideration with the Commissioner (if the FDDA was signed by a subordinate).
VII. Summary Table of Timelines
| Stage | Action | Deadline |
|---|---|---|
| NOD | Discussion of Discrepancy | Within 30 days of receipt of NOD |
| PAN | Filing of Reply | Within 15 days of receipt of PAN |
| FAN/FLD | Filing of Administrative Protest | Within 30 days of receipt of FAN/FLD |
| Protest | Submission of Documents (Reinvestigation) | Within 60 days of filing the protest |
| Inaction | Appeal to CTA (due to BIR inaction) | Within 30 days after the 180-day period expires |
| FDDA | Appeal to CTA (due to Denial) | Within 30 days of receipt of the FDDA |
VIII. Prescription: The Statute of Limitations
The BIR does not have forever to assess. Under Section 203 of the Tax Code:
- General Rule: Taxes must be assessed within three (3) years from the deadline of filing the return or the actual date of filing, whichever is later.
- Exceptions: In cases of a false or fraudulent return with intent to evade tax, or failure to file a return, the BIR may assess within ten (10) years after the discovery of the falsity, fraud, or omission.
An assessment issued after the prescriptive period is void, provided the taxpayer raises the defense of prescription in their protest.