Policies, Guidelines and Procedures on Tax Fraud Investigations Conducted by Special Investigation Units in Revenue Regions

February 25, 1983 REVENUE MEMORANDUM ORDER NO. 05-83 SUBJECT : Policies, Guidelines and Procedures on Tax Fraud Investigations Conducted by Special Investigation Units in Revenue Regions TO : All Regional Directors Chief, Tax Fraud Division, Chiefs of Special Investigation Units and All Others Concerned Pursuant to the provisions of Revenue Administrative Order No. 5-80 dated December 8, 1980 and in order to effectively implement the tax fraud program of the Bureau, the policies, guidelines and procedures set forth in this RMO are hereby prescribed for compliance by all concerned. I. JURISDICTION A. Special Investigation Units organized in Revenue Regions shall have jurisdiction over the following: 1. Tax fraud cases referred to the Region by the Tax Fraud Division; acd 2. Tax fraud cases initiated within the Region under the following conditions; a) where the taxpayer's legal residence or principal place of business as indicated in his tax returns is within the jurisdiction of the Revenue Regional Office; b) where the taxpayer has his legal residence or principal place of business in one Region but has businesses or engages in transactions in one or two other adjacent Revenue Regions, the Special Investigations Unit that initiated the investigation shall have jurisdiction over the case. However, investigation of such cases shall be done in coordination with the Special Investigation Unit for the other regions involved. c) Examples of cases which have fraud potentials that may be initiated by the Unit: (1) Where taxpayers declaration in their return show a very low percentage of net income compared to gross sales or receipts, after due consideration of the normal percentage rates of similarly situated businesses within the region or district; acd (2) Where there is an apparent disparity of the income declared by taxpayers compared to their standard of living and lifestyle, their property acquisitions and their extra curricular activities such as, as members of exclusive clubs and resorts; aisa dc (3) Apparently uniform income declarations of taxpayers every taxable period, for the past three years, and where the findings of the Revenue District Offices in the routine examination of the accounting records of said taxpayers are minimal or that the discrepancies discovered are practically the same for the past three years; (4) Those covered by letters or affidavits of denunciation of tax evasion schemes of taxpayers within the Region. 3. Examination of accounting records of taxpayers whose businesses or sources of income are located in two or more districts within the Revenue Region; 4. Examination of transfer tax cases where the real and personal properties of the deceased are situated in two or more Revenue Districts within the Region; 5. Examination of accounting records of branch offices for percentage tax purposes, under Revenue Memorandum Circular No. 1-82; 6. Gathering of facts on administrative cases of Regional personnel in close coordination with the Legal Branch. B. Where investigation would involve two or more non-adjacent Regions, the fraud case shall come under the investigative jurisdiction of the Tax Fraud Division. C. If a taxpayer is being investigated simultaneously by two or more Regions or by the Tax Fraud Division and another Region (without one unit knowing of the other investigation), the Chief, Tax Fraud Division shall, upon learning of the multiple tax probes being conducted, and after considering all factors involved, recommend to the Commissioner the unit that should pursue the investigation. The Commissioner shall make the decision on which investigating unit shall have jurisdiction over the case. D. Policy cases shall fall under the investigate jurisdiction of the Tax Fraud Division or any other investigating unit designated by the Commissioner. E. The Regional Director may, when circumstances so warrant, refer any tax fraud case to the Tax Fraud Division for completion. cdt II. RECORDING A. Special Investigation Units shall: 1. Maintain a system of retrieval of information to serve as basis for initiating tax fraud cases in the Region; information obtained in the Region which would affect tax liabilities of taxpayers of other revenue regions shall be forwarded to the Regional Director concerned. cd 2. Maintain a record of tax fraud cases handled by the Unit; 3. Keep a separate log book on all denunciations or information received in the Region; 4. Submit monthly reports on the prescribed format on its tax fraud cases and information received, to the Commissioner, Attention: Tax Fraud Division, within ten (10) days after the end of each month. B. The tax Fraud Division shall: 1. Maintain a systematic record of tax fraud cases handled including information and denunciations received by Regional Offices so that investigations conducted by two or more investigating units on the same taxpayer can be easily detected; 2. Consolidate reports submitted by the Revenue Regions on the status of tax fraud cases being handled by the Special Investigation Units for submission to the Commissioner. III. INVESTIGATION PROCEDURE A. Preliminary Investigation - 1. Upon receipt of an information or denunciation, a preliminary investigation of the taxpayer concerned shall be conducted. 2. Even if no information is received on a taxpayer, but if a review of at least the past three years of his tax declarations shows a wide disparity between income declared and property acquisitions or expenses incurred for the same period, a preliminary investigation may be conducted to establish a tax evasion case. 3. The examiner shall refer to returns and other records available in the Region or districts, other offices or any third party without contact with the taxpayer concerned to establish the veracity of the information or denunciation received. Access to records of government or private offices, as authorized under Section 7 of the Tax Code, as amended, must be availed of for this purpose. 4. A report shall be rendered on the results of the preliminary investigation for the approval of the Regional Director or of the Assistant Director if so authorized by the Regional Director. B. Formal Investigation - 1. If a prime facie case is established on the taxpayer, a letter of authority shall be issued by the Regional Director. 2. Tax fraud investigations shall be conducted with minimum contact with the taxpayer. Only after a strong case is established shall the taxpayer be appraised of the results of the investigation and be given the opportunity to present his own evidence or explanations. 3. Examiners shall exert particular efforts to obtain the necessary documentation for the successful prosecution of a fraud case. Assistance of the Legal Branch shall continuously be sought particularly on the kind and quality of evidence needed. 4. If no finding of criminal fraud can be established at any time during the development of a case, the Chief of the Special Investigation Unit shall render a report to the Regional Director. If the Director, after consultation with the Chief, Legal Branch concurs with the recommendation, he shall arrange a coordinated investigation with the Revenue District Officer concerned for purposes of completing the case. In all cases (whether civil or criminal) the resulting tax collections or assessment shall be credited to the Revenue District Office concerned. The examiners concerned shall be given credit for purposes of their individual performance. aisa dc IV. PROCESSING OF INVESTIGATION REPORTS - The following procedure shall be followed in the processing of reports of investigation emanating from the Special Investigation Units. 1. Reports of investigation on completed tax fraud cases shall be submitted to the Office of the Regional Director. 2. The Regional Director shall refer the case to a Special Review Team composed of representatives from the Legal Branch and the Review Unit of the Assessment Branch for proper review and evaluation. 3. When the recommendation of the Special Investigation Unit is for the criminal prosecution of the taxpayer, the Regional Director shall transmit the docket of the case to the Prosecution Division for appropriate evaluation and review. If the Chief, Prosecution Division, after said evaluation and review, finds the case for the criminal prosecution of the taxpayer to be in order, be shall return the docket to the Revenue Region, for the filing of the necessary criminal complaint. 4. When a criminal fraud case has not been established, but the case calls for the imposition of the civil fraud penalty of 50%, the entire docket of the case shall be forwarded to the Legal Office, Attention: Prosecution Division, for review. If the Prosecution Division finds that the evidence of fraud is clear and convincing and, therefore, the imposition of the 50% surcharge is proper, he shall forward the docket to the Office which has the authority to approve the particular case, as provided for under RMO 65-75 and RMO 22-80, for the issuance of the assessment notice or letter of demand. 5. Non-fraud cases handled by the Special Investigation Unit shall be processed in accordance with the procedures on the flow of reports of such cases, as provided for under general rules and issuances. 6. The Regional Director shall submit a capsule report to the Commissioner on all tax fraud cases closed in the Revenue Region. cdt V. REPEALING CLAUSE - The provisions of Revenue Memorandum Orders and other pertinent issuances inconsistent herewith are hereby revoked or amended accordingly. aisa dc VI. EFFECTIVITY - This Order takes effect immediately. (SGD.) RUBEN B. ANCHETA Acting Commissioner