BIR Ruling

June 2, 1997 MEMORANDUM FOR: The Commissioner Submitted before us for final evaluation and approval is the compromise offer of Mr. AUGUSTO A. LACSON relative to Assessment Notices both numbered 31-01-4B1-038547-88 issued on March 13, 1992, for deficiency expanded withholding and deficiency income taxes in the amounts of P13,614.02 and P73,817.71 respectively, for calendar year ending December 31, 1988. cdta To show the sincerity of his offer, Mr. Lacson paid the amount of P21,922.64 which represents 100% of the basic tax due on the deficiency withholding tax and 50% of the basic tax due on the deficiency income tax. Said payment was initially accepted by the Revenue District Officer of the Revenue District Office No. 42, San Juan, but the same is subject to approval by higher authorities. Hence, this review. Records disclosed that subject taxpayer is an architect by profession and is engaged in the business of rendering architectural services and related works to various clients. His income tax return was subjected to a routine examination pursuant to the Letter of Authority No. 182509 dated July 15, 1991. The examiner who conducted the investigation disallowed some of the expense items enumerated on the income tax return declared as deductions. Some were purportedly due to non-submission of supporting documents. As a consequence, it was ascertained by the Revenue Officer that Mr. Lacson is still liable to the government. The deficiency, assessments were not settled as no reply was ever made. On August 7, 1996, a Notice of Tax Lien was sent to the Register of Deeds of the Municipality of San Juan to establish a lien or encumbrance in favor of the government on all of the properties or rights to properties belonging to Mr. Lacson. It was only thru this Notice of Tax Lien that Mr. Lacson knew about his tax liabilities. To effect the immediate termination of the case as well as the lifting of the lien against his property, Mr. Lacson offered and actually paid the amount of P21,922.64 with the hope of availing the authority of the Commissioner of Internal Revenue to compromise the payment of any internal revenue tax as warranted under Section 204 of the Tax Code. After a careful review of the records of the case, the law and jurisprudence applicable thereto, this Division believes that the offer of compromise can be partly accepted. cdti Deficiency Income Tax From the records it can be gleaned that Mr. Lacson was never informed about the investigation. The Letter of Authority, which is supposed to be the weapon of authority of the revenue officer to examine the books of accounts and other accounting records of the taxpayer, was not served and there was no explanation made about the fact. A Letter of Authority which is not served within 30 days from the date of issuance thereof must be revalidated by requiring the examiner to submit, thru channels, to the Division Chief or Revenue District Officer, as the case may be, a Memorandum stating the reason for or causes of his failure to serve said authority (par. 2, RMO 33-84). In short then, the herein taxpayer was not given the opportunity to dispute the result of the investigation. While we respect the findings of our examiner, we are not bound to believe in its entirety that the expense items were all unsupported. Had the taxpayer been given the occasion to present documentary evidence, he may have reason to show that said expenses were all reasonable and necessary. The compromise offer is acceptable considering that a reasonable doubt as to the validity of the assessment against the taxpayer exists (Sec. 204, NIRC). This is one of the grounds wherein an assessment can be compromised by the Commissioner. Deficiency Expanded Withholding Tax The herein taxpayer did not question the validity of the assessment. His offer to settle through compromise and subsequent payment of the compromise amount is an open admission that our examiner's finding on this aspect is correct. Moreover, it has to be emphasized that the Appellate Division never recommends the settlement by compromise of assessments involving withholding taxes as the same involve breach of trust on the part of the withholding agent. Withholding agents should be reminded that they merely hold in trust the amount of tax they deducted from income recipients and as trustee, they are duty bound to remit the tax withheld without any delay as they are needed to finance daily governmental needs. The Appellate Division therefore, recommends that Mr. Lacson should be required to pay the amount of P14,520.00 as surcharge, interest and compromise penalty, in addition to what he has already paid for deficiency expanded withholding tax, computed as follows: Basic Tax Due P5,425.00 Surcharge 25% 1,356.25 P6,781.15 Add: Interest 172% 11,663.75 Compromise 1,500.00 Tax Due P19,945.00 Less: Payment made on 11/16/96 5,425.00 Due and Collectible P14,520.00 CONCLUSION AND RECOMMENDATION In view of all the foregoing, it is respectfully recommended: 1. That the compromise offer in relation to the deficiency income tax be accepted; 2. That in connection with the deficiency expanded withholding tax, the offer to compromise should be denied and the taxpayer should instead be required to pay the additional amount of P14,520.00 as surcharge, interest and compromise penalty; 3. That after payment of the aforementioned amount, this case should be considered closed and terminated. cdt Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ESTHER R. IBAEZ Head Revenue Executive Assistant Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Assistant Commissioner (Legal Service)