Procedure of Assignment, Distribution and Investigation of Tax Cases

July 1, 1967 REVENUE ADMINISTRATIVE ORDER NO. 06-67 SUBJECT : Procedure of Assignment, Distribution and Investigation of Tax Cases TO : All Revenue Operations Heads, Regional Directors, Division Chiefs, Revenue District Officers, Fieldman and Others Concerned I. Background and Purpose A. This Revenue Administrative Order is being prescribed in order to further improve the over-all system of investigation of taxpayers for their tax liabilities by the fieldmen of the bureau in line with effective and progressive tax administration. There have been reports regarding multiple, overlapping and unreasonably frequent investigations of taxpayers. These practices destroy the cordial bureau-taxpayer relationship which is of paramount importance if the bureau expects to succeed in its mission of increased revenue collections. This relationship based on respect, understanding and cooperation is essential to effective tax administration. Hence, all efforts should be exerted to maintain and enhance it. B. This order is, therefore, aimed to insure the realization of the following objectives: 1. To provide and insure a fair, equitable and adequate method of assignment of tax returns, cases and dockets for purposes of investigation; 2. To prevent or minimize multiple and/or repeated tax investigations; 3. To consolidate pertinent provisions of orders, circulars, and memoranda into one order to facilitate implementation and to provide a reference manual on the matter; 4. To update and improve outmoded provisions of orders, circulars, and memoranda regarding the assignment and distribution of tax returns, cases and dockets to the fieldmen; 5. To provide a more effective supervision and control over the conduct of investigations and the reporting of the results thereof; 6. To fix responsibilities; and 7. To provide a complete recording system. II. Schedule of Investigations . A. The ordinary investigation or examination of the taxpayer's books of accounts shall be conducted only in accordance with the following: 1. Income Tax Once a year after the lapse of the due date for the payment of the second installment. It includes the investigation of the withholding tax on wages as well as the withholding tax provided for in Sections 53 and 54 of the National Internal Revenue Code, as amended. Employers who are delinquent in filing their W-1, W-3 and alphabetical list shall also be investigated only once a year. 2. Transfer Taxes Once only after the return has been filed or after the lapse of the due date for filing. 3. Specific Taxes Once every six months including the ordinary stock-taking. Requests or applications for permits to engage in the business of manufacturing or dealing in articles subject to specific taxes may be investigated if necessary, prior to the issuance of the permit. 4. Privilege Taxes on Business and Occupation Once a year only in the case of privilege taxes, C-13 graduated fixed tax and percentage taxes. 5. Documentary Stamp Tax Simultaneously with the investigation of percentage tax, bank tax and insurance premium tax. 6. Mining Taxes Once a year. 7. Tax on Banks Once a year at the same time the income tax case is investigated. 8. Tax on Receipts of Insurance Companies Once a year at the time the income tax case is investigated. 9. Franchise Taxes Once a year after the return has been filed. 10. Amusement Taxes Once every semester or as often as may be necessary in case of special shows. 11. Forest Charges Once every semester. 12. Fees for Sealing of weights and measures Investigation is conducted by Deputy Provincial Treasurers. 13. Firearms Tax Once a year. 14. Tobacco Inspection Fees For every inspection made. 15. Water Rentals Once a year. 16. Bookkeeping Simultaneously with the investigation of any of the above-mentioned taxes. 17. Narcotic Drugs Once a year in the case of occupation taxes of doctors, dentists, pharmacists and nurses. For narcotic drugs, as often as warranted by circumstances of each individual case. aisadc 18. Residence Tax Simultaneously with the investigation of income tax. 19. Sugar tax Once a year. B. To avoid duplication of and repetitions and unreasonably frequent investigations of taxpayers, all chiefs of investigating units, offices or divisions in the Bureau of Internal Revenue at national, regional or district level shall systematically plan an audit program of investigation for any particular period or year and devise a system of control and internal check for the successful execution of the said program. Accordingly, tax investigations shall be scheduled in advance. Assignments and workloads of fieldmen shall be equitably distributed and all investigations and examinations shall be continuously conducted, terminated and reported within the time limit allotted for the purpose. The guideposts in programming such investigations shall be the quality and quantity of work that should be accomplished and the respective capabilities of fieldmen conducting the investigations, in order to meet predetermined goals. The investigation and examination of the books shall be scheduled and conducted as can be possible at a time most convenient to the taxpayer. III. Delineation of Investigations To avoid jurisdictional conflicts and in conformity with the provisions of Revenue Administrative Order No. 1-67, dated January 3, 1967, the subject matter of which is the reorganization and functions of the Bureau of Internal Revenue, the following are the cases to be investigated by the fieldmen assigned to the various investigating units. A. Special Operations Department 1. Anti-Smuggling Division a. To avoid conflicts in the issuance of authorities to investigate, the Anti-Smuggling Division shall issue authorities to investigate only on direct apprehensions by its fieldmen or those apprehensions by other agencies such as the Philippine Constabulary, Philippine Navy, Bureau of Customs and City and Municipal Policemen. It also includes those suspected or denounced for smuggling, if after the evaluation of the evidence gathered in the preliminary investigation previously approved by the Commissioner, there is substantial ground to warrant the investigation. b. The issuance of authority to investigate should be on a case to case basis instead of on a periodical or yearly basis, in order that the taxpayer cannot complain of harassment when an ordinary investigation is conducted by other units which are on a periodical or yearly basis. c. If in the course of the investigation no proof of smuggling has been established, the investigation of the same shall be discontinued. If authorities have been issued both by the Anti-Smuggling Division and the Revenue District Office, and the service of the latter is ahead of the former, a joint investigation should be conducted. In case smuggling has been proven, the investigation shall include all kinds of taxes for all the years involved. d. Nature of Cases (1) Cases involving real, technical and pure smuggling such as non-declaration, misclassification, misdeclaration, undervaluations of imported merchandise. (2) Violations of Republic Act 3137, otherwise known as the Embroidery Law. (3) Violations of Section 2.01 of the Customs and Tariff Code insofar as smuggling is concerned. (4) Taxpayers engaged in basic industries or in the manufacture of textiles insofar as the importations thereof involve smuggling. (5) Smuggling into the Philippines of "blue-seal" cigarettes and untaxpaid distilled spirits. (6) Violations of tax-exempt importations. 2. Special Investigation Division a. All cases wherein prima-facie fraud is established. But before an authority to investigate is issued for fraud purposes, a comprehensive preliminary investigation must be conducted. An intelligent evaluation of the data and evidence gathered should be made and only when there are very strong grounds to believe that fraud has been committed can the authority be issued. For this purpose the Deputy Commissioner of Internal Revenue as Chief Evaluating Officer and the Revenue Operations Head (Legal) and the Revenue Operations Head (Management Planning) as members shall evaluate the evidence, whether or not there is a prima facie case of fraud. If prima facie case of fraud is established they shall certify to the effect to the Commissioner of Internal Revenue to warrant and justify the issuance of the letter of authority to investigate. The criminal aspect of the case should be handled by the division. The assessment of the tax, if the case was initiated in the division, shall also be investigated by this division. Referrals from regional offices shall be investigated by this division insofar as the criminal aspect is concerned, but the assessment phase shall be left with the regional offices concerned. LLphil b. Investigation of taxpayers engaged in integrated or non-integrated industries (Republic Act 3029 and 4122) in connection with their applications under the said laws; follow-up investigations to determine whether the conditions of the permit granted are being followed by the taxpayer shall also be made by the division. c. Investigation of tax-exempt industries for purposes of granting the tax exemption or as a follow-up of the tax exemption granted. d. Investigation of interrelated industries where the industries interrelated are located in more than one region. e. Claims for refunds under Republic Acts Nos. 3127 and 4186, otherwise known as the Basic Industries Law and Textile Assistance Act, respectively. f. Investigation of transfer taxes wherever filed, where properties are located in Regional Offices 6, 7, 8 and other regions outside of the three preceding regional offices, where not less than 30% of the gross estate is located in other regions. However, if the gross estate exceeds P500,000.00, wherever the properties are located, the jurisdiction shall be with the division. g. For purposes of criminal prosecution, all cases coming from the International Operations Division, Anti-Smuggling Division, Assessment Department, Specific Tax Department and Regional Offices shall be under the jurisdiction of the National Tax Fraud Unit of the Special Investigation Division. 3. International Operations Division a. All tax investigations involving foreign airline companies and foreign steamship companies. b. Domestic corporations and Filipino citizens or residents deriving income from sources abroad where such income is more than 30% of the total gross income. c. All domestic corporations engaged in foreign shipping. d. Non-resident taxpayers deriving income from Philippine sources which are not fixed or determinable as contemplated under Sections 53 and 54 of the Tax Code. e. Corporations engaged in business in the Philippines whose transactions are interrelated with foreign parent corporations who have controlling stocks in the domestic corporations. f. All taxpayers paying management and/or technical services fees to foreign persons or corporations. g. Estate and inheritance tax cases where the value of property outside the country is 30% or more of the gross estate per return filed, irrespective of the location of the property within the Philippines. B. Assessment Department 1. Narcotics Drugs Division a. The authority to be issued to the fieldman of the Narcotic Drugs Division shall be limited to taxpayers who are located in Regional Offices 6, 7, and 8. For those Drug Inspectors Assigned to the other regional offices other than the above-mentioned regions, the authority shall be issued by the Revenue Regional Director concerned who shall have administrative jurisdiction over such Drug Inspectors, upon recommendations of the Revenue District Officer concerned. b. Nature of Cases (1) Stock taking of inventories of drugs. (2) Assessment of tax on narcotics. (3) Verification of permits and applications to register as importer, compounder, exporter and/or dealer in narcotic drugs. (4) Other cases involving traffic in narcotic drugs. 2. Withholding Tax Division a. Investigation of all employers for purposes of withholding tax on wages whose addresses are in Manila, the province of Rizal, Quezon City, Caloocan City and Pasay City. b. Investigation of income tax returns with tax credits irrespective of the amount of refund or the amount of tax due whose addresses are in Manila, the province of Rizal, Pasay City, Caloocan City and Quezon City. c. Verification of government offices located in Regional Offices Nos. 6, 7, and 8, who withheld taxes under Republic Act No. 1051. C. Specific Tax Department 1. Tobacco & Miscellaneous Tax Division a. All routinary and ordinary investigations of taxpayers manufacturing or dealing in tobacco products and miscellaneous specific tax cases (except the specific tax on alcoholic products) not tainted with fraud. b. Verification of taxpayer's official registers, books and/or accounting records relating to tobacco products, cinematographic films, fuel oils regulations and such other pertinent regulations covering the operations of tobacco factories; importers, manufacturers and dealers of cigarette papers and bobbins, cigarette filter and/or tipping paper; and importers and manufacturers of cigarette-making machines and other accessories used. c. All periodic or semi-annual stock taking of establishments under the jurisdiction and supervision of the Tobacco and Miscellaneous Tax Division. d. Investigation of claims for refund of specific taxes within the jurisdiction of the said division. 2. Alcohol Tax Division a. All routinary investigation of tax cases involving alcoholic products not tainted with fraud. b. Verification of taxpayer's official registers, books and other accounting records which are kept in accordance with existing regulations on alcoholic products. c. Periodic or semi-annual stock taking of establishments under the jurisdiction and supervision of the Alcohol Tax Division. 3. Tobacco Inspection Service a. All routinary investigation of cases, not tainted with fraud, relating to the proper classification of leaf tobacco and the payment of tobacco and inspection fees thereon. b. Verification of taxpayer's official registers, books and other accounting records, required by tobacco inspection regulations and such other pertinent regulations covering the operations of establishments engaged in the business of leaf tobacco either for domestic sale or for export. c. All periodic or semi-annual stock taking of establishments under the jurisdiction and supervision of the Tobacco Inspection Service. 4. Specific Tax Enforcement Division a. All preliminary investigation, surveillance, detection and apprehension of persons or firms engaged or allegedly engaged in the illegal manufacture or trafficking in untaxpaid articles subject to specific taxes or raw materials used in the manufacture thereof; as well as printers, distributors, users or possessors of fake, spurious, altered or re-used internal revenue strip stamps for tobacco, and other products subject to specific tax; and official labels for distilled spirits and other alcoholic products. No authority to investigate is required for preliminary investigation and it is only after a finding of a fraud that authority shall be requested. b. All investigations of specific tax cases involving fraud or unlawful practices to evade the payment of specific taxes as well as illegal use or possession of unauthorized cigarette paper in bobbins or any apparatus or mechanical contrivance used in the manufacture of articles subject to specific taxes. c. All investigations of specific taxes involving fraud, or unlawful practices to evade payment of specific taxes on alcoholic products as well as illegal use or possession of untaxed paid distilled spirits or any apparatus or mechanical contrivance. d. All investigations of specific tax cases involving fraud or unlawful practices to evade payment of tobacco inspection fees and the ultimate evasion of specific taxes on tobacco products through connivance with unscrupulous tobacco manufacturers. e. Stock-taking, other than the periodic or semi-annual physical count conducted by the other three (3) divisions of the Specific Tax Department. The stock-taking should be undertaken only in conjunction with an authority to investigate as a result of discovery of fraud. f. Investigation of smuggled blue-seal cigarettes and other imported products subject to specific tax. g. In all cases involving fraud, the determination of the specific tax shall be done by this division, but the criminal prosecution shall be handled by the National Tax Fraud Unit of the Special Investigation Division. 5. Procedure of Processing Cases a. The review and processing of reports of deficiency specific taxes; preparation of letters of demand, statistics, Form 40.00 and authority to change assessment (ATCA) shall be undertaken by the Alcohol Tax Division, Tobacco & Miscellaneous Tax Division or the Tobacco Inspection Service, depending on the nature or deficiency specific tax reported. b. All reports from the Specific Tax Enforcement Division shall be forwarded to the above-mentioned divisions, as the case may be, for processing, demand and preparation of statistics and reports. c. Orders of court compromising cases on specific tax should first be coursed to the Prosecution Division for its notation or comment. Thereafter, the case shall be forwarded to the division which has jurisdiction over the kind of specific tax, for preparation of the letter of demand or order of payment, as the case may be. D. Revenue District Offices 1. All ordinary investigation or verification which is not covered in the above enumerations shall be conducted by fieldman in revenue districts where the taxpayer has his principal place of business and his books of accounts are kept. If the books of accounts are kept in a place other than the principal place of business, then the jurisdiction shall be in the district where the books of accounts are kept. 2. Transfer taxes returns filed in Regions 6, 7 and 8 and where the properties are exclusively located therein, shall be under the jurisdiction of the region where the return is filed. If the return is filed in the National Office, then the National Office shall forward the return to the region where the residence of the decedent is at the time of death. If properties are located in different regions other than 6, 7 and 8, the jurisdiction for the investigation will be with the revenue district where the return is filed, except that when the gross estate per return exceeds P500,000.00, then it shall be forwarded to the Special Investigation Division where the investigation will be conducted. 3. No authority shall be issued to an examiner unless it is thru the Revenue District Officer. The Regional Director is enjoined not to form special groups or authorize anybody in the region to conduct an investigation by issuing the authority direct to the fieldmen. No investigation group shall be formed or organized other than those provided in the organizational set-up. VI. Processing, Assignment and Distribution of Returns A. Processing and Numbering of Returns 1. After receipt of the income tax returns filed in collection agents offices or in revenue district offices, they shall be segregated, sorted, listed, batched and numbered. 2. The originals shall be separated from the duplicates and the former shall immediately be transmitted to the National Office for machine processing and listing in accordance with the Memorandum of the Commissioner of Internal Revenue dated February 27, 1967. The processing and numbering of percentage tax returns shall be in accordance with the provisions of Revenue Memorandum Circular No. 21-65 dated March 30, 1965. B. Classification of Returns and of Examiners 1. The duplicate copies of income tax returns shall be classified into classes "A", "B", "C" "Office Audit" and "Reviewed" in accordance with the provisions of Field Circular No. V-136 dated September 10, 1959 as amended by Revenue Memorandum Order No. 19-65 dated June 29, 1965. All duplicates of returns as classified shall batched by class and kept in the Assessment Branch until they are requisitioned for investigation purposes. 2. Returns which are under the exclusive jurisdiction of the National Office as detailed in paragraph III of this Revenue Administrative Order shall be segregated and transmitted immediately to the National Office. 3. The classification of examiners shall be updated and shall be utilized for purposes of assignment of tax returns, cases and/or dockets. C. Distribution of Returns 1. No distribution of returns shall be made until release thereof is authorized by the National Office. The National Office shall issue the written notice of release only upon receipt from the region of a report of the number of returns classified and the submission of an Audit Program of Investigation. 2. The Revenue District Officer shall request the Regional Director for the returns needed depending on the number of examiners in the district, their classification and pending workload. The request shall specifically indicate the quantity of returns per class. 3. The Revenue Regional Director, upon receipt of the memorandum request from the Revenue District Officer, shall examine the validity and reasonableness of the said request. He shall then indicate his correction, if any, in the memorandum itself, approves it and forwards same to the Assessment Branch. The Assessment Branch shall prepare the duplicate copies of the returns strictly in numerical sequence from the files of returns and forward them to the Revenue District Officer through the Regional Director. No selection of returns shall be made and the numerical sequence shall be observed strictly. 4. a) The Revenue District Officer shall equitably distribute the returns in accordance with the classifications and capabilities of the examiners, observing at all times that no discrimination or favoritism is done. (b) The same procedure shall be observed in the National Office. (c) Care should be taken that in the initial distribution of returns, the returns are distributed in accordance with their classification and the classification of the examiners and that each examiner shall receive initially the same number of returns. (d) After the initial distribution, the corresponding authority shall be prepared thereafter and the pertinent procedure and requirements provided for under the circular regarding the preparation and issuance of authorities shall be followed. D. Limitation of Distribution 1. In the initial distribution of current year's returns, not more than five (5) cases shall be given to each fieldman. 2. Subsequent distributions made shall see to it that there are not more than 20 cases pending in the hands of each fieldman. The workload of the examiner shall not be more than 20 returns, cases or dockets at any one time. 3. Replenishment shall not be more than five (5) returns/cases a month. 4. No additional assignment shall be made if there are cases more than four (4) months old in the hands of the examiner unless justification thereof is approved by the Revenue District Officer or Revenue Operations Head. If the inventory is less than 20 cases, the fieldman will be entitled to replenishment only if his inventory does not contain any of the following cases: a. Returns about to prescribe in two years such as those for the years 1962 and 1963. b. Refund cases. c. Protested cases. d. Cases returned to the examiner by the Group Supervisor, Revenue District Officer, or Regional Director for mistakes therein, discrepancies, failure to submit supporting papers, etc. This class of cases shall be considered as outstanding if it is still in the hands of the examiner. 5. The Revenue District Officer shall, from time to time and as the need arises, requisition for additional returns to keep the examiners continuously working. 6. The returns of partners shall be grouped separately and shall be assigned to the examiner to whom the partnership return has been assigned. If the addresses of the partners are in Regional Offices Nos. 6, 7 and 8, the examiner assigned to investigate the partnership returns is authorized to conduct the investigation of partners within the territorial boundaries of the three regions. If there is a partner whose residence is outside Regional Offices Nos. 6, 7 and 8, and his return was filed in the said region, the field audit report of the partner shall be requisitioned and incorporated in the report of the return of the partnership. 7. The procedure set forth above shall also apply to the distribution, assignment and replenishment of business and transfer tax returns and dockets as far as they are material and/or applicable. V. Office Audit A. The procedure outlined in Revenue Administrative Order No. 7-64 dated September 1, 1964 shall continue to be followed in Regional Offices Nos. 6, 7 and 8 and such other regions as may have been or may be authorized to conduct office audit of returns. VI. Miscellaneous Provisions A. Only one examiner shall be assigned to investigate a case except where the case is complicated, in which case, two or more examiners may be assigned but their names shall be indicated in the authority to investigate. B. No examiner shall be assigned cases which had been previously investigated by him during the preceding year. C. Reinvestigation shall normally be conducted by the original examining officer unless he is already outside the district. However, if the taxpayer requests for a different reinvestigating officer with justifiable reason, the reinvestigation may be assigned to another examiner. D. All unverified returns of a taxpayer for previous years shall be included in the authority for the latest year. E. If two or more authorities were issued for different years to different examiners, the examiner assigned the latest year shall be given the right to consolidate the investigation. If authorities were not served upon the taxpayer within thirty (30) days after issuance, they shall be cancelled and surrendered. F. Submission of Field and Office Audit Reports. 1. All field and office audit reports submitted must comply with the requirements of the Handbook on Auditing Techniques and Procedures as promulgated in Revenue Memorandum Order No. 25-65, dated July 1, 1965. 2. The said reports shall likewise comply with the requirements of the following: a. Revenue Memorandum Circular No. 33-64, dated August 5, 1964, the subject matter of which is the submission of details of purchases. b. Revenue Memorandum Order No. 8-67, dated February 1, 1967, the subject matter of which is the submission of a separate report on the tax payments of the taxpayer for the period or years investigated. 3. All employees in a supervisory capacity passing upon the field audit reports shall be held responsible in seeing to it that the requirements in sub-paragraph 1 and 2 are complied with. VII. Repealing Clause The provisions or portions thereof of Field Circulars Nos. V-70 and V-157; Revenue Memorandum Circular Nos. 22-64; 30-64; 21-65; 33-65 and 40-65; and Revenue Memorandum Orders Nos. 28-64; 14-65 and 29-65, which are inconsistent with the provisions of this Revenue Administrative Order are hereby revoked or amended accordingly. VIII. Effectivity This Revenue Administrative Order shall take effect upon approval thereof subject to the following limitations: cdll A. That the accompanying instructions contained in the memorandum dated May 15, 1967 as a supplement to Revenue Memorandum Circular No. 23-67, dated May 12, 1967 have been complied with, in accordance with the following: 1. All those concerned must have submitted the requirements embodied in paragraphs 4, 5, 6, 7, 8, 9, 11 and 12 of the memorandum dated May 15, 1967. 2. That a determination has been made by the National Office as to the unit who will have jurisdiction over those cases which have conflicting authorities. (SGD.) MISAEL P. VERA Commissioner of Internal Revenue APPROVED: (SGD.) EDUARDO Z. ROMUALDEZ Secretary of Finance