Professional Documents
Culture Documents
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SECRET No. 1
BE PREPARED
Most taxpayers are not prepared for the Audit of BIR. Once the taxpayers
or the taxpayers accountants have filed the tax returns, the same are filed
in the cabinets or storage boxes hoping that BIR will not knock on their
doors to examine their books.
Sadly, some taxpayers may resort to areglo with BIR officers because of
the very high tax assessments and their companies could not afford. Some
may even resort to no opening of books and just negotiate the amount to
be paid.
However, Taxpayers may no longer be able to negotiate or make areglo
as in the past.
Why? Because it is apparent that the
BIR is gearing towards computerized
audit. BIR issued Revenue Audit
Memorandum Order (RAMO) 1-
2008, which provides guidelines to
the BIR revenue officers or
examiners on the use of computer-
assisted audit tools and techniques
(CAATTS).
In conducting an audit through
CAATTS, BIR examiners use audit
tools to analyze and evaluate the
financial transactions of the taxpayers. Even if the Examiner will not visit
the taxpayers office to request for various documents and returns he can
generate already the tax assessment. Welcome to the no-contact audit
approach by the BIR.
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Years ago, some of the operations of the BIR were already done
electronically, such as the filing of receipts of tax returns and payments
through the Electronic Filing and Payment System (eFPS).
Revenue Regulation (RR) 1-2014 requires all companies to submit
electronically their December 31, 2013 BIR Form 1604CFAlphabetical
List of Employees/Payees of Income Payments. Also, RR 2-2014 requires
individuals and corporate taxpayers to use new tax forms effective year
ended December 31, 2013. The new tax forms are Optical Character
Recognition (OCR), therefore, both are convertible into electronic format.
Again, the taxpayers data will be stored in BIRs database regardless if
the said taxpayers are filing electronically or manually.
However, there is a good news! There is actually no need to worry
about BIR audit if a taxpayer is prepared for it.
Areglo or compromised payment could be avoided if the taxpayers
accounting records and tax returns could stand the audit of the BIR. If a
taxpayer is thoroughly prepared, there is a high probability that he will
not be even audited by the BIR since tax returns with less errors and
exposures are less prioritized in the audit. In case a taxpayer will be
audited, zero or minimal tax assessments will be uncovered by the BIR.
To be PREPARED a taxpayer needs to do or know the following:
a.) Assign or Hire Tax Accountant
b.) BIRs Directions and Issuances
c.) Assessment Rules and Stages
d.) BIRs Rights and Remedies
e.) Taxpayers Rights and Remedies
f.) BIRs Common Audit techniques
g.) BIRs Common Audit Findings
h.) Taxpayers Pre-audit Techniques and Preparations
i.) Tax Planning and Tax Compliance
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Assign or Hire Tax Accountant
Several companies particularly small to medium size ones do not assign or
hire tax accountant who will focus on its tax concerns. Large corporations
normally maintain a tax department composed of lawyers and CPAs who
are expert in taxation.
Companies try to save on the cost of assigning or hiring tax accountants
only to be slapped later on with high tax assessments which is higher than
the cost of 20 or even 100 tax accountants.
A tax accountants task includes but not limited to the following:
conduct tax planning and compliance review to ensure that the
company avoids high taxes and tax exposures legally. By the way,
tax avoidance is legal while tax evasion is illegal. Tax planning and
compliance procedures are tax avoidance.
review all tax returns and reports before filing with the BIR to
ensure that the same are accurate, properly presented and reconciled
against records and documents.
ensure that tax reports are filed and paid on time
review the tax implications of the Companys transactions
study tax laws, rules and regulations applicable to the company and
ensure companys compliance thereto
update every now and then with the new tax issuances.
The General Accountants main focus are normally to record all
transactions in the books, generate financial statements on time and be
able to explain the figures to the bosses, prepare and release payments to
creditors and collect receivables from customers (if there is no finance
department). With the volume of tasks assigned to General Accounting,
tax functions discussed above would just be an add-on. This set-up
usually results to high tax asssessments.
So is it beneficial to have a tax accountant on board? Always!
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What are the 2014 Directions of BIR?
What is the Collection Target of BIR?
The Bureau of Internal Revenue has set
its collection target at P1.46 trillion for
year 2014 which is 16.16% higher than
its 2013 collection goal of P1.25
trillion. The collection target for year
2015 is P1.6 trillion. These targets
keep on increasing every year.
With these high collection goals and
aggressive audit programs of BIR,
Taxpayers are always under extreme
pressures. However, while the BIR is
pressured to intensify its assessment and collection efforts to meet its
revenue target, the taxpayers, on the other hand, should be well prepared
for BIR examination anytime.
What are the Possible Audit Related Notices that I will Receive?
1. Letter of Authority (eLA)
2. Letter Notice (LN) issued for taxpayers with discrepancies on their
income, sales and purchases, including third-party matching (see
RMO 28-2007, 4-2008, 30-2003).
3. Tax Verification Notice (TVN) (replaced with eLA through RMOs
62-2010, 69-2010) issued for specific tax examination such as
verification and processing of capital gains tax, withholding tax
returns, estate and donors tax returns, claims for tax credit, protested
cases under re-investigations. (see RMOs 33-99, 36-99,66-99, 19-
2000, 24-2000, 30-2000, 13-01, 62-2010, 69-2010)
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4. Quarterly VAT Audit specific audit for VAT (see RMO 20-2012)
5. LA from Special Investigation Division (SID) LA for Run After
tax Evaders (RATE) and possible fraud case audit issued by the
Special Investigation Division (SID or Fraud Division). This can be
issued even after the 3 years prescription period.
6. Mission Order for possible violation of bookkeeping rules and
regulations, particularly on non-issuance of sales or receipts and
governing use of Point-of-sale machines (RMO-3-2009);
7. Memorandum of Assignment with a system generated number shall
be issued through the LAMS under the following instances (RMO-
62-2010):
a. Reassignment for the continuation of the audit/investigation to
another revenue officer (RO).
b. Assignment to the original RO of returned cases by the reviewing
office and reassignment to another RO.
c. Reassingment to another RO due to referral of the case to anohter
investigating office (e.g., cases referred to SID by the RDO)
d. Protested cases/cases for reinvestigation.
Is it possible that a Taxpayer will still receive LA after he has
received/completed the LN, VAT Quarterly Audit and other audits?
YES. The LA is the most comprehensive audit of all.
Will All Taxpayers Receive LA every year?
Not all as of now. This is due to shortage of tax examiners (currently at
only 2,500 nationwide) and the related cost of conducting the audit.
However, with the IT Audit Programs of the BIR, 100% LA issuance and
audit of ALL taxpayers will happen sooner than taxpayers expected.
Related discussion of this topic is covered by Ebook titled: How to
Prevent BIR Audit by Being Ahead of BIR IT Audit Programs. Please
visit www.taxpirin.com or www.philtaxwindow.com to get a FREE copy.
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Who are the Priority in the Audit of BIR?
The BIR under Revenue Memorandum Order No. 4-2013 dated March 8,
2013 issued policies and guidelines that shall be observed in the
continuing audit of tax returns by the Revenue District Offices:
1. All taxpayers are considered as possible candidates for audit.
2. Priority shall be given to the following taxpayers:
a. Professionals and sole proprietorships whose
income tax due is less than two hundred thousand pesos
(P200,000.00) per annum;
gross revenue is less than forty percent (40%) compared to the
previous years reported gross revenue;
tax payment for each tax type is less than thirty-five percent
(35%) as compared to the previous years tax payment;
b. Those engaged in but not limited to the industries as follows:
Importers/manufacturers/wholesalers/retailers of wrist watches
and jewelry
Petroleum/gasoline dealers
Hotels, motels, pension houses/lodging houses/inns,
dormitories/boarding houses
Real estate industry
Schools, particularly for foreigners (e.g. English School for
Koreans), review centers
Contractors of NGAs, LGUs and government owned and
controlled corporations
Retailers/wholesalers
Restaurants, fast food chains, catering services, bars, coffee shops
Hospitals, clinics, medical/dental laboratories
Establishments/clinics for beauty enhancements
Manufacturers/dealers of beauty and health supplement
Amusement/entertainment/event centers
Advertising agencies
Business processing outsourcing companies
E-commerce industry
Manpower and other recruitment services agencies
Other industries peculiar to the area of jurisdiction of the district
office;
c. Those who fall below the established benchmarks of tax compliance;
and
d. Those who maintained an ending inventory with value of 100% or
more of its gross sales.
It appears in the above priority list that all Taxpayers whether big or small,
corporate or individuals, are effectively targets of BIR audit.
What are the Other Criteria for
Selecting a Taxpayer for Audit?
Other than the priority list mentioned in
RMO 4-2013 (above), the BIR conducts
benchmarking, matching against third-
party declarations, whistleblower or
third party information, results of
surveillance and verification drives, and
other studies in selecting taxpayers to be
sent with LAs.
Benchmarking is the process of determining and comparing the
performance level of taxpayers in a given line of industry as far as Net
VAT Due and Net Income Tax Due are concerned in relation to gross
sales/receipts vis-a-vis profit margin rate for the purpose of setting an
industry standard of taxpayers performance/compliance. (RMO 4-2006).
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What is the Purpose of Audit?
The purpose of auditing a tax return is to determine the taxpayer's
substantially correct tax liability. A quality audit is the examination of the
taxpayer's books and records in sufficient depth for the purpose of
ascertaining the correctness and validity of entries and the propriety of
application of tax laws.
To ensure quality audit of tax returns, revenue officers are enjoined to
utilize their technical skills, trainings and experiences, and follow the
minimum audit procedures prescribed in the Handbook on Audit
Procedures and Techniques (Revenue Audit Memorandum Order No. 1-
00)
Taxpayers are given enough time to prove that they have paid the right
amount of taxes. Tax audit is a long process and it does not mean that a
taxpayer is presumed guilty of evading his tax obligation once he is
audited.
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What are the Tax Assessment Stages and Related Rules?
ASSESSMENT RULES & STAGES
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1st
Notice
(10days)
DeptofJustice
FLD/FAN
(30days Protest;
60days docs)
2nd
Notice
(10days)
3rd
Notice
(10days)
LA
(30days)
Audit/
Deficiency
Subpoena
Duces
Tecum
RDO
SupremeCourt
No
In al
Con ce
15days
ticefor
form
feren
X
CourtofTax
Appeals
30days
PAN
15days
Commissio
ner
180days
The audit process commences with the issuance of a Letter of Authority
(LA) or Tax Verification Notice (TVN) to a taxpayer who has been
selected for audit.
A taxpayer is given 30 days to reply. If there is no reply to the LA, the
first notice which is effectively a follow-up letter is issued. If there is no
reply to the 1st notice within 10 days, the second notice will be issued. If
again there is no reply to the 2nd notice within 10 days, the final notice
will be issued. A subpoena duces tecum is issued by the Legal Division of
the Regional or National Office of BIR if there is no reply to the final
notice within 10 days.
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If the protest is denied, in whole or in part, by the Commissioners duly
authorized representative, the taxpayer may either: (i) appeal to the Court
of Tax Appeals (CTA) within thirty (30) days from date of receipt of the
said decision; or (ii) elevate his protest through request for reconsideration
to the Commissioner within thirty (30) days from date of receipt of the
said decision.
No request for reinvestigation shall be allowed in administrative appeal
and only issues raised in the decision of the Commissioners duly
authorized representative shall be entertained by the Commissioner.
If the protest is not acted upon by the Commissioners duly authorized
representative within one hundred eighty (180) days counted from the date
of filing of the protest in case of a request reconsideration; or from date of
submission by the taxpayer of the required documents within sixty (60)
days from the date of filing of the protest in case of a request for
reinvestigation, the taxpayer may either: (i) appeal to the CTA within
thirty (30) days after the expiration of the one hundred eighty (180)-day
period; or (ii) await the final decision of the Commissioners duly
authorized representative on the disputed assessment.
If the protest or administrative appeal, as the case may be, is denied, in
whole or in part, by the Commissioner, the taxpayer may appeal to the
CTA within thirty (30) days from date of receipt of the said decision.
Otherwise, the assessment shall become final, executory and demandable.
A motion for reconsideration of the Commissioners denial of the protest
or administrative appeal, as the case may be, shall not toll the thirty (30)-
day period to appeal to the CTA.
If the protest or administrative appeal is not acted upon by the
Commissioner within one hundred eighty (180) days counted from the
date of filing of the protest, the taxpayer may either: (i) appeal to the CTA
within thirty (30) days from after the expiration of the one hundred eighty
(180)-day period; or (ii) await the final decision of the Commissioner on
the disputed assessment and appeal such final decision to the CTA within
thirty (30) days after the receipt of a copy of such decision.
It must be emphasized, however, that in case of inaction on protested
assessment within the 180-day period, the option of the taxpayer to either:
(1) file a petition for review with the CTA within 30 days after the
expiration of the 180-day period; or (2) await the final decision of the
Commissioner or his duly authorized representative on the disputed
assessment and appeal such final decision to the CTA within 30 days after
the receipt of a copy of such decision, are mutually exclusive and the
resort to one bars the application of the other.
What should be Stated in the Final Decision on a Disputed Assessment
(FDDA)?
The decision of the Commissioner or his duly authorized representative
shall state the (i) facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based, otherwise, the decision
shall be void, and (ii) that the same is his final decision.
What are the characteristics of a v
protest?
alid
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The server shall accomplish the bottom portion of the notice. He shall also
make a written report under oath before a Notary Public or any person
authorized to administer oath under Section 14 of the NIRC, as amended,
setting forth the manner, place and date of service, the name of the
person/barangay official/professional courier service company who
received the same and such other relevant information. The registry receipt
issued by the post office or the official receipt issued by the professional
courier company containing sufficiently identifiable details of the
transaction shall constitute sufficient proof of mailing and shall be
attached to the case docket.
Service to the tax agent/practitioner, who is appointed by the taxpayer
under circumstances prescribed in the pertinent regulations on
accreditation of tax agents, shall be deemed service to the taxpayer.
What is a Constructive Service?
If the notice to the taxpayer herein required is served by registered mail,
and no response is received from the taxpayer within the prescribed period
from the date of the posting therof in the mail, the same shall be
considered actually or constructively received by the taxpayer.
If the same is personally served on the taxpayer or his duly authorized
representative who, however, refused to acknowledge receipt thereof, the
same shall be constructively served on the taxpayer.
Constructive service thereof shall be effected by leaving the same in the
premises of the taxpayer and this fact of constructive service is attested to,
witnessed and signed by at least 2 revenue officers other than the revenue
officer who constructively served the same. The revenue officer who
constructively served the same shall make a written report of this matter
which shall form part of the docket of this case.
What are the Interest, Civil and Criminal Penalties for Tax
Violations? (RR 12-99)
Taxpayer shall be subjected to the following:
1. Twenty percent (20%) interest. Assessment shall be subject to 20%
interest per annum computed from the last day prescribed by law for
the filing of the tax return
2. Twenty five percent (25%) surcharge. There shall be imposed, in
addition to the basic tax required to be paid, a penalty equivalent to
twenty-five percent (25%) thereof, in any of the following cases:
Failure to file any return and pay the tax due thereon as required
under the provisions of this Code or rules and regulations on the date
prescribed; or
Unless otherwise authorized by the Commissioner, filing a return
with an internal revenue officer other thn those with whom the return
is required to be filed; or
Failure to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment; or
Failure to pay in full or part of the
amount of tax shown on any return
required to be filed under the
provisions of this Code or rules and
regulations, or the full amount of tax
due for which no return is required to
be filed, on or before the date
prescribed for its payment.
3. Fifty percent (50%) surcharge
In case of willful neglect to file the
return within the priod prescribed by the Code, or in the case a false or
fraudulent return is willfully made, the penalty to be imposed shall be
50% of the tax or deficiency tax.
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4. Criminal Liability
Section 254 of the Tax Code provides that any person who willfully
attemps in any manner to evade or defeat any tax imposed under this
Code or the payment thereof shall, in addition to other penalties
provided by law, upon conviction thereof, be punished by a fine of not
less than Thirty thousand pesos (P30,000) but not more than One
hundred thousand pesos (P100,000) and suffer imprisonment of not
less than two (2) years but not more than four (4) years.
Can tax returns be amended after receipt of LA? (RR 12-99)
No. Section 6 (A) of the Code provides that any tax return filed by a
taxpayer maybe modified, changed or amended by the taxpayer within 3
years from the date of such filing provided, however, that no notice for
audit or investigation of such return, statement or declaration has in the
meantime, been actually served upon the taxpayer.
Within what time period must an assessment be made?
An assessment must be made within three (3) years from the last day
prescribed by law for the filing of the tax return for the tax that is being
subjected to assessment or from the day the return was filed if filed late.
However, in cases involving tax fraud, the Bureau has ten (10) years from
the date of discovery of such fraud within which to make the assessment.
What is the Effect if assessment is issued after the Prescription
Period?
Any assessments issued after the applicable period are deemed to have
prescribed, and can no longer be collected from the Taxpayer, unless the
Taxpayer has previously executed a Waiver of Statute of Limitations.
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What course of action shall the Bureau take if the Taxpayer fails to
comply with the Subpoena Duces Tecum?
If, after the Taxpayer fails, refuses, or neglects to comply with the
requirements of the Subpoena Duces Tecum, the Bureau may:
a.) File a criminal case against the Taxpayer for violation of Section 5
as it relates to Sections 14 and 266, of the NIRC, as amended;
and/or
b.) Initiate proceedings to cite the Taxpayer for contempt, under
Section 3(f), Rule 71 of the Revised Rules of Court.
What alternatives are open to Government for the collection of
delinquent accounts?
Once an assessment becomes final and demandable, the Government may
employ any, or all, of the following remedies for the collection of
delinquent accounts:
a. Distraint of personal property;
b. Levy of real property belonging to the Taxpayer;
c. Civil Action; and
d. Criminal Action.
What is Distraint of Personal Property?
Distraint of personal property involves the seizure by the Government of
personal property tangible or intangible to enforce the payment of
taxes, followed by the public sale of such property, if the Taxpayer fails to
pay the taxes voluntarily.
What is Levy of Real Property?
Levy of real property refers to the same act of seizure, but in this case of
real property, and interest in or rights to such property in order to enforce
the payment of taxes. As in the distraint of personal property, the real
property under levy shall be sold in a public sale, if the taxes involved are
not voluntarily paid following such levy.
In what time period must collection
be made?
Any internal revenue tax, which has
been assessed within the period
prescribed shall be collected within
three (3) years from date of assessment.
However, tax fraud cases may be
collected by distraint or levy or by a
court proceeding within five (5) years
from assessment of the tax or from the
last waiver.
What is the safekeeping Period for Books of Accounts and other
Accounting Records?
RR 17-2013 requires all taxpayers to preserve their books of accounts,
including subsidiary books and other accounting records for a period of ten
(10) years reckoned from the day following the deadline in filing a return
or if filed after the deadline, from the date of filing of the return, for the
taxable year when the last entry was made in the books of accounts.
If the taxpayer has any pending protest or claim for tax credit/refund of
taxes, and the books and records concerned are material to the case, the
taxpayer is required to preserve his/its books of accounts and other
accounting records until the case is finally resolved.
BIRs Common Audit Procedures
BIR has standard audit procedures for each account. Discussed below are
common audit procedures/techniques of BIR:
1. Check registrations
BIR usually requests the Companys registration documents with
Securities and Exchange Commission (SEC) to determine the
Companys nature of business. Registration papers with the BIR would
show the Companys business activity and tax type; VAT or Non-VAT
registration; branches, if any; and, type of tax returns required to be
filed with the Bureau.
Taxpayer should be able to provide updated and correct registration
papers otherwise penalties will be imposed.
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6. BIR will also check the taxes on:
transactions with nonresident foreign corporation/s or citizens, if
any
salaries, wages and benefits of key officers
related party transactions
7. On a case to case basis BIR personnel may conduct these:
Check completeness of books, OR and invoices
Check compliance with the invoicing requirements. This is to
ensure that ORs and Invoices supporting revenues, costs and
expenses are registered with BIR and conform with the other
requirements.
Check if there are fraudulent transactions.
Conduct inventory and surveillance, and prescribe presumptive
gross sales and receipts (Sec. 6, NIRC).
Fieldwork. In some cases, BIR officers will visit the Company a
few times but do will not vouch or check the hard copy of
vouchers, ORs or invoices. However, Taxpayer should be ready
anytime these are required to be presented.
BIRs Common Audit Findings
Below are the most common audit findings:
1. Un-reconciled variances, errors and inconsistent balances between the
documents, books, schedules, tax returns and financial statements.
Significant tax assessments of most companies results from these
findings.
2. Un-reconciled variances, errors and inconsistent balances with third
parties such as customers and suppliers. Significant tax assessments of
most companies results from these findings.
3. Incorrect application of tax laws and rates
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SECRET NO. 2
BUILD GOOD RELATIOSHIPS
The audit of the BIR is also all about relationships. There are hundreds of
ways to build good relationships with tax officers. However, only two
main points will be given emphasis here as follows:
Communicate. If required, taxpayer should communicate with BIR
either verbally or in writing otherwise legal consequences (such as
issuance of subpoena duces tecum, garnishment of bank accounts)
may be imposed to him. Take note of the legal deadlines to submit
reply, request and protest.
Cooperate. BIR requires so many returns, reports, documents and
schedules during examination. Taxpayer should cooperate and
submit such requirements. However, every requirement for
submission to BIR should have gone thorough tax compliance
review and procedures.
Show respect in case the BIR officers will visit your office.
Consider treating them to lunch or dinner or serving coffee.
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SECRET NO. 3
AUTOMATE
The volume of work involved in reconciling all figures from
documents, books of accounts, financial statements, schedules and tax
returns is tremendous. This is time-consuming and prone to error if done
manually. Manual accounting and reconciliations even when using excel
program is not advised.
1. Automate your Accounting System. Pls refer to page 38,
paragraph 2. Maintain good accounting records. If you want to ask
for a demo, please visit www.taxpirin.com and fill-up the contact
us page.
2. Automate your review and pre-audit of tax returns. Most
taxpayers do not pre-audit their tax returns, thus BIR tax assessments
are inevitable. Shown below is the normal Taxpayers and BIRs
processes with suggested use of Taxpirin (online tax audit solution)
to ensure error-free tax returns:
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Taxpayer Process:
1. Taxpayer process starts when he sells or buys goods or services.
2. As required by BIR regulations, the taxpayer issues BIR registered
invoices and official receipt for the collections.
3. These documents will be summarized in financial reports which are
usually done by bookkeepers or accountants.
4. From the summarized financial records, accountants and
bookkeepers will prepare the tax returns for submission and filing
with the BIR.
5. When the tax returns are ready, these will be filed with the BIR or
submitted to accredited banks for payment.
BIRs Audit Process
6. The BIR performs matching audit and other pre-audit electronic
procedures of taxpayers returns by matching all information within
and with other tax returns/reports and financial statements submitted.
When there are errors, variances or findings, a letter of authority
(LA/LN) is created and issued to the taxpayer. Based on the
experience of our resource tax consultants, 99% of taxpayers
audited by BIR have tax findings. So, the probability that you have
tax exposures is high.
7. If there are no errors, variances or findings, the probability for BIR
audit is very slim.
8. Upon completion of the examination, a pre-assessment notice is
issued to the taxpayer. Then after 15 days, a Final Assessment
Notice (FAN) or Final Demand follows. Subsequent procedures are
discussed already in the previous parts of this Ebook.
When does Taxpirin play a role in the process?
Errors, variances, inconsistencies and findings on the tax returns and
reports and financial statements will trigger the issuance of LA. Thus, the
taxpayer should ensure that all amounts and figures of related accounts in
various tax returns and reports and financial statements submitted to the
BIR are consistent, error-free and reconciled.
Therefore, Taxpirin should be used before the tax returns are filed with
the BIR as shown in the illustration above. Taxpirin will pre-empt or
uncover errors and inconsistencies supposedly detected by the BIR, had
the taxpayer not used Taxpirin. The new process with the use of Taxpirin
will substantially change as the error, inconsistencies or variances are
identified and corrected. Thus, no LA or LN is issued to the taxpayer.
The taxpayer is classified as low priority in the audit, thus, practically
preventing BIR audit. The revised process is shown below:
NewProcesswiththeUseofTaxpirin
Financial
Reports
TaxReturns
(Income,
VAT,EWT,
FBT,WHTC,
FT)
Taxpirin
Setup
Generate
Reconcile
(SGR)
Filing&
Payment
with
BIR
BIR
Matching
PreAudit
ARCHIVE
(NoLOA/
LN)
No/Low
Findings
PreAudit/
Matching
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