E. TAX REMEDIES
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Note: I want to start by saying that the bar syllabus creates an impression that the remedies of the taxpayer are assessment, collection and refund.
That is wrong. Assessment and collection are the powers of the taxing authority/government. Under the power of collection, different remedies are available to the government namely: (1) tax lien, (2) compromise, (2) distraint of personal property or levy of real property or garnishment of bank deposits (3) sale of property, (4) forfeiture, (5) compromise and abatement, (6) penalties and fines, (7) suspension of business operations, (8) civil action and (9) criminal action. (1) to (7) are the administrative remedies while (8) to (9) are the judicial remedies. Taxpayers have two remedies: (1) administrative protest (you protest the assessment) and (2) claim for refund.
In this chapter, I won’t discuss the topics under the Syllabus in the order provided because if I do, I don’t think we will have a good understanding of tax remedies. Here’s what I’ll do. I’ll follow the outline up to Protest. And then I’ll rearrange the topics under b) Collection and 2. Government Remedies and integrate the discussion. After that, I’ll discuss Refunds.
--- a) Assessment
(i) Concept of assessment
(a) Requisites for valid assessment (b) Constructive method for income determination
(c) Inventory method for income determination
(d) Jeopardy assessment
(e) Tax delinquency and tax deficiency (ii) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement
(a) Power of the Commissioner to obtain information and to summon/examine and take testimony of persons
(iii) When assessment is made
(a) Prescriptive period for assessment (1) False, fraudulent, and non-filing
of returns
(b) Suspension of running of statute of limitations
(iv) General provisions on additions to the tax
(a) Civil penalties or Surcharges (b) Interest
(c) Compromise penalties (v) Assessment process
(a) Tax audit
(b) Notice of informal conference (c) Issuance of preliminary
assessment notice
(d) Exceptions to issuance of preliminary assessment notice (e) Reply to preliminary assessment
notice
(f) Issuance of formal letter of demand and assessment notice/final assessment notice
(g) Disputed assessment
(h) Administrative decision on a disputed assessment
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--- a) Assessment
(i) Concept of assessment
(a) Requisites for valid assessment (b) Constructive method for income determination
(c) Inventory method for income determination
(d) Jeopardy assessment
(e) Tax delinquency and tax deficiency ---
Read Sections 56 and 71, Tax CodeQ: Define assessment
The term assessment may refer to:
1. The official action of an administrative officer in determining the amount of tax due from a taxpayer
2. A notice to the effect that the amount therein stated is due from the taxpayer as a tax with a demand for payment of the tax or deficiency stated therein.
Q: May the CIR be compelled by mandamus to make an assessment?
No. In MERALCO SECURITIES CORP V. SAVELLANO [ OCTOBER 23, 1982], the Supreme Court held that mandamus cannot lie to compel the CIR to impose a deficiency tax assessment. The CIR’s power to assess is a discretionary one.
Q: How are taxes assessed?
1. Self-assessment – Taxpayers are required to file tax returns for various kinds of income earned which may be subject to tax. When a taxpayer files the tax return, he is actually making a self-assessment.
2. Deficiency assessment – is an assessment made by the BIR after the conduct of an investigation or audit when it finds that the tax return filed by the taxpayer contains an under-declaration of income or when the taxpayer does not at all file a tax return 3. Jeopardy assessment – a tax assessment
which was assessed without the benefit of a complete or partial audit by an authorized revenue officer who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with audit and investigation requirements to present his books of accounts and/or pertinent records or substantiate all or any of the deductions, exemptions, or credits claimed in his return. (see Section 3(1)(a), RR No. 30-2002)
Note: (1) Section 56, Tax Code provides that, as a general rule, the total amount of the tax shall be paid at the time the return is filed. This is otherwise known as the pay-as-you-file system. The pay-as-you-file system is a self-assessing tax return. Note that internal revenue taxes are self-assessing. The tax becomes due and payable without need of any prior assessment by the BIR. The taxpayer himself computes and pays without intervention from the BIR. Thus, the term self-assessment. However, if the taxing authority is first required to investigate or audit and after such investigation or audit to issue the assessment that creates the tax liability, then the tax is not self-assessed and is most likely a deficiency assessment. If despite not having done a complete or partial audit, the BIR issues an assessment believing that the assessment and collection of the deficiency tax will be jeopardized by delay, the assessment is called a jeopardy assessment.
(2) A jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject to a compromise.
--- (a) Requisites for valid assessment ---
Q: What are the requisites of a valid assessment?
1. A formal letter of demand and assessment notice shall be issued by the CIR or his duly authorized representative
2. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations or jurisprudence on which the assessment is based.
Otherwise, the formal letter of demand and assessment notice shall be void
3. The same shall be sent to the taxpayer only be registered mail or by personal delivery
4. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in duplicate copy of the letter of demand, showing the following:
i. His name ii. Signature
iii. Designation and authority to act for and in behalf of the taxpayer, if acknowledge received by a person other than the taxpayer himself; and
iv. Date of receipt thereof (see Section 3.1.4, RR No. 12-99)
Note: (1) Previously, it is sufficient that the taxpayer be
“notified” of the findings of the CIR. The rule now is that the taxpayer must be “informed” of not only the law but also of the facts on which an assessment would be made.
(see CIR V.REYES [JANUARY 27,2006].
(2) An assessment must be based on actual facts and not on mere presumptions (see CIR V.BENIPAYO [JANUARY 31, 1962])
(3)In CIR V.PASCOR REALTY [JUNE 29,1999], the Supreme court held that an assessment must not only contain a computation of tax liabilities but also a demand for payment within the prescribed period.
(4) An assessment is deemed made only when he BIR releases, mails or sends such notice to the taxpayer. (Ibid) (5) In ADAMSON V. CA [MAY 21, 2009], at issue was whether the CIR’s recommendation letter for the filing of a
criminal complaint against the taxpayer for fraudulent returns and tax evasion can be considered a formal assessment. The Supreme Court held that such was not equivalent to a formal assessment. An assessment is a written notice and demand may by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation and giving him an opportunity to contest or disprove the findings is not an assessment since it is yet indefinite.
(6) As held in CIR V.GONZALEZ [OCTOBER 12,2010],the formality of a control number in the assessment notice is not a requirement for its validity but rather the contents thereof which should inform the taxpayer of the declaration of deficiency tax against the said taxpayer.
(7) In BONIFACIO SY PO V. CTA [AUGUST 18, 1988], the Supreme Court held that tax assessments by tax examiners are presumed correct and made in good faith.
The taxpayer has the duty to provide otherwise.
(8) Reasons for presumption of correctness of assessments: (a) lifeblood theory (b) presumption of regularity in the performance of public functions (c) likelihood that the taxpayer will have access to relevant information (d) the desirability of bolstering the record-keeping requirements of the Tax Code
(9) When prima facie correctness of a tax assessment does not apply – In CIR V.HANTEX TRADING [MARCH 31, 2005], the Supreme Court held that the rule does not apply when the CIR comes out with a naked assessment (an assessment that is without any foundation and hence, arbitrary and capricious).
In UNITED DISTRIBUTION MANAGEMENT, INC. VS. CIR, CTA CASE NO.7885, SEPTEMBER 24,2012, the CTA held that the BIR has neither legal nor factual basis to presume that payments made to the stockholder and the interest paid are dividends. It is true that as a general rule, tax assessments by tax examiners are presumed correct and made in good faith. However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a “naked assessment” i.e., without any foundation character, the determination of the tax due is without rational basis.
An assessment that does not state the factual and legal bases is void and cannot give rise to an obligation to pay deficiency taxes. LIQUIGAZ PHILIPPINES CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE,CTACASE NO.8141, NOVEMBER 22,2012;COMMISSIONER OF INTERNAL REVENUE VS.TOLEDO POWER COMPANY,CTAEBNO.833, OCTOBER
1,2012
--- (b) Constructive method for income determination
(c) Inventory method for income determination
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Q: What are the constructive methods of income determination?
The following are the general methods developed by the BIR for reconstructing a taxpayer’s income where the records do not show the true income or where no return was filed or what was filed was a false or fraudulent return.
a. Percentage method b. Net worth method c. Bank deposit method d. Cash expenditure method e. Unit and value method
f. Third party information or access to records method
g. Surveillance and assessment method Note: As to the third party information or access to records method, see Section 5(b) of the Tax Code. If the revenue officers were not given the opportunity to examine the taxpayer’s documents, they are authorized under Section 5 of the Tax Code to gather information from third parties (CIR V.HON.RAUL M.GONZALES [OCTOBER 15,2010])
Q: What is the inventory method for income determination? (Net worth method)
The general theory underlying this method is that the taxpayer’s money and other assets in excess of the liabilities after accurate and proper adjustment of non-deductible and non-taxable items not accounted for in his tax return is deemed to be unreported income. In other words, the theory is that the unexplained increase in net worth of the taxpayer is presumed to be derived from taxable sources.
Q: What are the conditions for the use of the net worth method?
1. That the taxpayer’s books of accounts do not reflect his income or the taxpayer has no books or if he has books, he refuses to produce them, or that the few records that he had were destroyed
2. That there is evidence of possible source or sources of income to account for the increases of net worth or expenditures
3. That here is a fixed starting point or opening net worth
4. That the circumstances are such that the method does reflect the taxpayer’s income with reasonable accuracy and certainty, and proper and just additions of personal expenses and other non-deductible expenditures were made, and correct, fair, and equitable credit adjustments were given by way of eliminating non-taxable items (see RMC No. 43-74)
--- (d) Jeopardy assessment
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Note: I already discussed this.
--- (e) Tax delinquency and tax deficiency ---
Q: When is the taxpayer considered delinquent?
1. Self-assessed tax per return filed by the taxpayer on the prescribed date was not paid at all or only partially paid or
2. Deficiency tax assessed by the BIR became final and executory
Q: What is a tax deficiency?
The term “deficiency” means:
1. The amount by which the tax imposed exceeds the amount shown as the tax by the taxpayer upon his return
2. If no amount is shown as the tax by the taxpayer upon his return, then the amount by which the tax exceeds the amount previously assessed (or collected without assessment)
Note: If the taxpayer is considered delinquent or there is a tax deficiency, he taxpayer is subjected to a civil penalty or surcharge and, if applicable, interests. We will discuss this later.