Priority Audit of 1996 and 1997 Value-Added Tax Returns

February 11, 1998 REVENUE MEMORANDUM ORDER NO. 11-98 SUBJECT : Priority Audit of 1996 and 1997 Value-Added Tax Returns TO : All Regional Directors, Revenue District Officers (RDOs), Chiefs of the Assessment Divisions, Heads of Revenue Data Centers (RDCs) and All Internal Revenue Officers Concerned I. Objectives The objectives of this Orders are to: 1. Increase collection and enhance voluntary compliance through quality audit of Value-Added Tax (VAT) returns; 2. Broaden the tax base by identifying buyers and sellers/suppliers of goods and services subject to VAT; and 3. Provide an audit trail for transactions of VAT taxpayers. II. Coverage 1. This Order shall cover 1996 and 1997 VAT returns in accordance with the following order of priority: 1.1 Returns with claims for VAT credit/refund; 1.2 Break-even VAT returns, i.e. Output tax = Input tax; 1.3 VAT returns with excess tax credit for any or all of the four quarters; and 1.4 VAT returns with quarterly gross sales/receipts of One Million Pesos (P1,000,000) and above for revenue districts in Metro Manila covered by Revenue Region (RR) Nos. 5, 6, 7 and 8 (Valenzuela, Manila, Quezon City and Makati) except Revenue District Office (RDO) Nos. 35-Romblon, 36-Puerto Princesa/Palawan and 37-San Jose, Occidental Mindoro; and quarterly gross sales/receipts of Five Hundred Thousand Pesos (P500,000) and above for all other RDOs including RDO Nos. 35, 36 and 37. 2. The following VAT returns shall be excluded from the coverage of this Order: 2.1 VAT returns selected for audit by the investigating divisions under the Enforcement Service of the Legal and Enforcement Group; and 2.2 VAT returns of taxpayers who availed of the Voluntary Assessment Program (VAP) under RMO No. 59-97, as amended by RMO Nos. 60-97 and 63-97 except VAT returns of taxpayers who availed of the VAP but whose availments were found to be substantially deficient by the Voluntary Assessment Program Committee as approved by the Commissioner. III. Audit Policies end Procedures A. In General 1. The RDO shall draw a list (Annex "A") of VAT taxpayers for taxable year 1996 and 1997 who have been selected for audit, rank them according to the order of priorities set forth in this Order and submit, through the Regional Director to the Assistant Commissioner, Assessment Service for approval. The list shall indicate the registered name of the taxpayer, address, nature of business, the taxable year, the amount of gross sales or receipts, total output tax, and the amount of purchase and total input tax. All VAT taxpayers selected for audit must be submitted in a list to the Assistant Commissioner for Assessment Service for approval before issuance of LAs/ANs. 2. One Letter of Authority (LA)/Audit Notice (AN) shall be issued for each taxable year by the Regional Director upon recommendation of the Revenue District Officer having jurisdiction over the taxpayer selected for audit. The LA/AN shall cover the VAT returns filed for the four (4) quarters. 3. A VAT Audit Group (VATAG) shall be created in each Revenue District Office by the Revenue District Officer, the membership of which shall be subject to the approval of the Regional Director. The VATAG, whose complement may be equal to at least one audit group, depending upon the number of VAT taxpayers in a District Office must be headed by a Group Supervisor. The VATAG shall be given the exclusive responsibility of investigating VAT returns, including claims for VAT credit/refund. It shall not undertake, nor be given, any other investigative work beyond that prescribed by this Order. 4. The number of VAT audit cases handled by a Revenue Officer shall not exceed ten (10) cases at any one time during the year, subject to replenishment after the submission of the report of investigation of each case. 5. The basic audit procedures prescribed in Revenue Audit Memorandum Order (RAMO) Nos. 1-90, 1-91 and 2-95 as well as the VAT Handbook on Audit Procedures and Techniques shall be strictly observed by all Revenue Officers concerned. 6. The Revenue Officer shall attach a worksheet/schedule stating the names of sellers/suppliers of the taxpayer for the period under audit or covered by the tax credit/refund claimed pursuant to Section 4.110-4 of Revenue Regulations No. 13-97. The worksheet shall clearly indicate the items of sales and purchases which have been matched with the data obtained from Third Party Information (TPI) sources or with any record available in the Bureau prior to the finalization of the audit results. 7. Each and every page of the worksheet prepared and/or schedules/documents verified shall bear the signature, printed name and designation of the Revenue Officer who performed the audit. 8. For computerized taxpayers, the taxpayers shall be required to submit the diskettes, together with the hard copies, containing the information required on their suppliers and buyers for each quarter of taxable year 1996 and 1997. For non-computerized taxpayers, the sales and purchase journals or subsidiary sales and purchase ledgers containing the details of the required information may be photocopied and shall serve as the schedules which will be verified by the Revenue Officer. 9. Whenever feasible, the RDO shall require the Revenue Officer to sample and cross check the details of sales/output tax and purchases/input tax against the books and records of the buyer and seller/supplier, as the case may be. The authorization to access such Third Party Information shall be submitted by the Revenue District Officer to the Regional Director concerned, for approval. All requests for access to Third Party Information, and the results thereof, shall form part of the official report of investigation. B. Non-ITS RDO 1. No LA shall be issued unless the duplicate copy of the return of the taxpayer for the year covered by the LA is attached. 2. The assignment of cases to the Revenue Officers of the VATAG shall be based upon the recommendation of the Revenue District Officer. The issuance of Letters of Authority shall be the responsibility of the Regional Director. 3. The Revenue Officer shall be required to finish the case and submit the report of investigation within 30 days from date of issuance of the LA. This constitutes an exception to the 120-day rule on the reporting of cases with LAs. 4. No LA shall be revalidated without an attached progress report from the Revenue Officer(s) conducting the audit duly noted by the Group Supervisor. Only one time revalidation of LAs shall be allowed. Any deviation from this rule must be duly approved by the Assistant Commissioner for Assessment Service upon the recommendation of the Regional Director. 5. Revenue Officer's Audit Report (BIR Forms 1717) shall be prepared for all reports of audit. C. ITS RDOs 1. The Revenue Data Center (RDC) shall prioritize the encoding or 1996 and 1997 VAT returns. 2. The RDC shall upload to the Assessment Service the list of taxpayers selected for audit as approved by the Regional Director. The procedures for specific taxpayer request, approval of audit candidates at the National Office, conduct of audit, preparation of reports of investigation and all other activities related to audit prescribed in the ITS Operations Manual shall be followed, except for the 120-day rule for templates. The 30-day rule shall apply to all VAT cases. 3. Revenue Officer's Audit Report (Forms 0500) shall be prepared for all reports of audit. D. Assessment Division The Assessment Division of the Regional office shall review all dockets/cases covered by LAs/ANs prior to the issuance of a preliminary assessment notice, termination letter, tax credit or refund. For non-ITS RDOs, the duplicate copy of the Form 1717 shall, upon receipt of the docket, be detached and batched by the Assessment Division and submitted every Monday directly to the Assessment Service at the National Office pursuant to RMO No. 8-97. IV. Reporting Requirements The RDOs of non-ITS and ITS districts shall submit directly to the Assistant Commissioner, Assessment Service a monthly report of all cases closed during this period using the revised BIR Form 0603 (formerly Form 19.71) (Annex C) and the Monthly Summary of Audit Results (Annex "B") not later than the 10th day of the following month. The submission of timely and accurate reports shall be the responsibility of both the RDOs and the Revenue Regional Directors. The Assistant Commissioner, Assessment Service shall submit to the Management Committee a quarterly report with appropriate recommendations based on the analysis of the above reports. V. Violations Any violation of this Order will be referred by the concerned revenue official through the Assistant Commissioner, Assessment Service to the Internal Affairs for investigation. In this regard, the Assistant Commissioner, Assessment Service may recommend to the Commissioner the relief, re-assignment or transfer of any revenue official violating any provisions of this Order. VI. Repealing Clause All other issuances inconsistent herewith are hereby modified or repealed accordingly. VII. Effectivity This Order takes effect immediately. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue