Cases Subject to Reinvestigation

July 28, 1976 REVENUE MEMORANDUM CIRCULAR NO. 35-76 SUBJECT : Cases Subject to Reinvestigation TO : All Internal Revenue Officers and others concerned Section 337 of the Tax Code provides that the books of accounts and other records of taxpayers shall be subject to examination and inspection only once in a taxable year, except in cases of (a) fraud; (b) irregularity; (c) mistake; and (d) when the taxpayer requests for reinvestigation of his case. In other words, in such cases, a reinvestigation is authorized and consequently, the aforesaid limitation on the examination and inspection of books of accounts and records of taxpayers concerned will not apply. I. Examples of cases of fraud, irregularity and/or mistake A. Fraud The following circumstances are generally recognized as indications of frauds: (1) Intentional understatement or omission of income substantial in amount per se or substantial in relation to the total reported income. (2) Intentional overstatement of deductions, substantial in amount per se or substantial in relation to the total reported income. (3) The use of a corporate entity as a shield for tax evasion, as when it only serves as a dummy, is unreal or sham and serves no business purpose. (4) False allocation of income and deductions with intent to evade the tax. (5) False financial statements with intent to mislead or deceive, to avoid or evade the tax. (6) False entries in the accounting records with intent to mislead or deceive, to evade or avoid the tax. (7) Suppression or omission of accounting entries or pertinent documents or records, with intent to evade tax. (8) Other acts of deceit. (See Revenue Memorandum Circular No. 10-75 dated April 28, 1975) B. Irregularity Irregularity means substantial departure on the part of the taxpayer, and/or his accountant or auditor, or the examiner in his examination and preparation of report of investigation, from established rules, methods or procedures, thereby materially affecting the liability of the taxpayer for internal revenue taxes. The following circumstances and/or acts may be considered as irregularities requiring further investigation of a case: (1) Failure of the taxpayer to submit the required financial statements and other attachments to his tax return which, if presented, would essentially alter the financial picture of the taxpayer's transactions. (2) Suppression by the taxpayer and/or his accountant, and/or by the examiner who conducted the investigation, of pertinent papers, documents, and information, which are material in the determination of the correctness of the taxes paid by the taxpayer. (3) Investigation of the taxpayer's transactions without proper authority from the duly authorized officials of the Bureau. (4) Other acts or circumstances which constitute a departure from established rules and procedures and which have resulted in a loss of taxes due the government. C. Mistake Mistake, as a basis for reinvestigation, means such errors which substantially affect the liability of the taxpayer for internal revenue taxes, as in the following examples: (1) Errors in the mathematical computation of the items claimed and shown in the return and/or report of investigation. (2) Erroneous basis of the tax assessed or paid. (3) Inadvertent omission of items in the return filed by the taxpayer, and which fact was not discovered during the original investigation of the case. (4) Erroneous application and/or interpretation of pertinent provisions of the tax laws and established jurisprudence affecting transactions with taxable consequences. (5) Erroneous treatment of accounts, resulting in a loss of revenues. (6) All other mistakes which affect materially not only the taxpayer's current tax liability, but also his future tax liabilities. D. Where the taxpayer requests reinvestigation of his case A request by a taxpayer for a reinvestigation of his case is tacit consent to a reexamination of his books of accounts and records. However, not every request for reinvestigation shall be given due course. A taxpayer requesting reinvestigation of his case should specify the reasons or basis for reinvestigating his case, indicating the evidence he proposes to present to the examiners or revenue officer assigned to review the case. If the reviewing internal revenue officer finds the request to be meritorious and not merely a scheme on the part of the taxpayer to delay collection of the assessment against him, then the request shall be given due course. A request by the taxpayer for reinvestigation or reconsideration should be answered, and where an adverse decision is arrived at, he should be informed of said decision and advised that it is final, from which he may appeal to the Court of Tax Appeals within thirty days from the receipt thereof. II. Procedure to be followed An examiner or internal revenue official who discovers a case of fraud, irregularity or mistake should report such discovery in a memorandum to his immediate superior where he should state the facts and/or circumstances constituting the fraud, irregularity or mistake and the evidence supporting his findings. After a review of the report of the examiner, the superior officer shall forward the said report, together with his recommendation, to the Regional Director, if reported by an examiner of the region, or to the Commissioner of Internal Revenue, if reported by an examiner of the Central Office. If, after a review of the report, a prima facie case of fraud, irregularity or mistake is found to exist, then the Regional Director, or the Commissioner, if the case is within the jurisdiction of the Central Office, shall authorize the reinvestigation of the case of the taxpayer concerned. The records of cases of fraud investigated by the Regional Offices, irrespective of the amounts involved, should be forwarded to the Commissioner of Internal Revenue, Attention: Chief, Tax Fraud Division, together with the findings and recommendation of the Regional Director concerned. All internal revenue officers charged with enforcement of internal revenue laws are enjoined to be guided by this circular and to give it as wide a publicity as possible. EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3