General Policy Guidelines for Examination, Audit Jurisdiction and Issuance of Letters of Authority to Audit

January 31, 1989 REVENUE MEMORANDUM ORDER NO. 10-89 SUBJECT : General Policy Guidelines for Examination, Audit Jurisdiction and Issuance of Letters of Authority to Audit TO : All Internal Revenue Officers and Others Concerned A. Purpose This Revenue Memorandum Order is hereby promulgated for the purpose of prescribing general policy guidelines for the audit/investigation; determination of audit jurisdiction; and issuance of letters of authority to audit (LA). Details of implementation of these general policy guidelines will be prescribed in separate revenue memorandum orders. B. Examination policies 1. Audit of internal revenue taxes Tax audit shall be conducted simultaneously for all internal revenue tax liabilities of a taxpayer, except the following which shall be audited separately: 1.1 Value-added tax VAT shall be separately audited in cases where the annual gross sales or receipts subject to VAT exceed P5 Million. However, the Revenue Director may require and assign the separate audit of the VAT liability of a taxpayer whose gross sales or receipts does not exceed P5 million. 1.2 Withholding tax In general, a letter of authority issued for the purpose of auditing income tax liability includes the verification of withholding tax liability of a taxpayer in connection with the determination of the deductibility of income payments under Section 30(j) of the Tax Code. However, pursuant to Section 235(c) of the said Code, as implemented by Revenue Audit Memorandum Order No. 5-86, the Withholding Tax Division, upon authority issued by the Assistant Commissioner (Collection), may conduct selective audit verification of withholding agents with respect to compliance with withholding tax laws and regulations. 1.3 Capital gains tax Assignment and reporting requirements shall be complied with in accordance with guidelines to be prescribed in a separate Revenue Memorandum Order. 1.4 Transfer tax Estate and gift taxes shall be subject to separate audit. However, estate tax cases, income and other internal revenue tax liabilities of a decedent and those of his estate shall be examined simultaneously with the estate tax in accordance with Revenue Memorandum Order No. 40-83. 1.5 Excise tax As a rule, excise tax liabilities shall be audited separately. However, if it is necessary to look into the books of accounts of the person liable to excise tax, the examination shall be coordinated with the Revenue Enforcement Officer assigned to audit the income and other revenue tax liabilities of the same taxpayer. acd 2. Integration of results of investigation The results of the separate investigation of these tax liabilities, when applicable, must be communicated to the concerned Revenue Enforcement Officer assigned to audit the income tax liability of the taxpayer for integration. 3. Coordinated examination program In all cases where an examination requires the application of specialized audit procedures or techniques or where the economic or business activities of a taxpayer are of such a magnitude that require a group or team audit, joint and coordinated examination of the taxpayer shall be conducted by a team of Revenue Enforcement Officers to be created by the Commissioner upon recommendation of the Coordinated Examination Program Committee. The coordinated examination program will be initially implemented on a pilot project basis under guidelines to be prescribed in a separate revenue memorandum order. C. Audit jurisdiction policies The jurisdiction to audit internal revenue taxes shall be determined in accordance with the following general guidelines: 1. Special Operations Service 1.1 Taxpayers who have not been subject to income tax audit for the past three consecutive years by any audit division of the Special Operations Service (then Sector Operations Office) may be listed for audit by the Industry Audit Division. 1.2 The Banks, Financing and Insurance Division shall continue to audit selected banks, finance, insurance companies and other non-bank financial institutions and intermediaries, and transfer taxes in accordance with RAO No. 5-88 and RAO No. 11-88. 1.3 The International Tax Affairs Division shall perform audit of selected international carriers, overseas construction contractors and non-resident taxpayers. 1.4 The Value-Added Tax Division shall conduct separate audits of selected value-added taxpayers listed in a separate revenue memorandum order. 1.5 Annual listing of selected taxpayers to be audited by these audit divisions, except that of the VAT Division, will be embodied in a separate Revenue Memorandum Order. 2. Regional Offices The Revenue District Offices and other investigating offices under the Regional Directors shall have audit jurisdiction over taxpayers which are not listed under the Revenue Memorandum Order containing the names of taxpayers to be audited by the audit divisions under the Special Operations Service, unless the Commissioner has assigned the particular taxpayers (a) to be audited by the Investigation and Intelligence Office (IIO), (b) or other special audit group, or (c) for coordinated examination. cd 3. Special audit or investigating teams, IIO and Special Investigation Branches (SIB) Special audit or investigating teams, IIO and SIB's shall undertake audit and investigation only upon order and directive from the Commissioner, or the Regional Director in the case of SIB. It shall be the policy of the Bureau to limit the function of these offices or units (a) to the implementation of special projects or programs designed to develop criminal cases for the purpose of prosecuting persons suspected of evading taxes, (b) to undertake gathering of data; information in aid of legislation or for purposes of formulating tax administration policy; and (c) to determine the correct internal revenue tax liability of certain taxpayers identified and selected by the Commissioner in a separate directive. Where a letter of authority has been issued by the other audit units, the same shall be withdrawn and all findings shall be turned over to the revenue enforcement officers assigned by the Commissioner to undertake special investigation. D. Policy on issuance of Letters of Authority to audit 1988 taxable year returns Letters of Authority to investigate income tax and other internal revenue tax liabilities shall be issued only if the following requirements are met: 1. The duplicate of the tax returns are available for attachment to the letter of authority. 2. Pursuant to RMO 33-84, a revenue enforcement officer who has in his possession twenty or more pending cases for original investigation shall not be assigned additional letters of authority to investigate. If his pending cases are less than twenty (excluding reported cases which were returned to him by audit reviewers for further compliance with certain requirements), he may be assigned additional tax returns or cases to replenish those cases the investigation of which were terminated and report thereon submitted to the audit division chief, revenue district officer, or any other head of audit unit. In no case shall the total number of cases for original investigation by an examiner exceed twenty. 3. The income tax liability of the taxpayer to be audited has not been audited by the same revenue officer for the taxable year or period immediately preceding the taxable period under investigation. 4. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing LAs covering audit of "unverified prior years" is hereby prohibited. E. Repealing clause The provisions of other issuances which are inconsistent herewith are hereby revoked or amended accordingly. F. Effectivity This Revenue Memorandum Order shall take effect upon issuance of the relevant revenue memorandum order implementing the particular policies prescribed herein. (SGD.) JOSE U. ONG BIR Commissioner