Audit Program for 1998

February 11, 1998 REVENUE MEMORANDUM ORDER NO. 12-98 SUBJECT : Audit Program for 1998 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. Objective 1. To enhance a high degree of voluntary compliance; 2. To encourage the correct reporting of income, transfer, business and all other internal revenue taxes through the exercise of the assessment function of the Bureau; and 3. To ensure the performance of quality audit or tax returns. Quality audit means the examination of the taxpayer's books and records in sufficient depth to ascertain the correctness and validity of entries thereon and the propriety of application of tax laws; the conduct of income investigations, where warranted, to ensure the proper and complete reporting of income regardless of source; the determination of the taxpayer's responsibilities regarding the filing of all tax and information returns; and the documentation in sufficient detail of the conclusions reached to enable the reader to comprehend the process on how the results of the audit were arrived at. II. Coverage Letters of Authority/Audit Notices shall be issued to cover 1996 and 1997 internal revenue tax returns based on the following criteria with their corresponding selection codes: A. Mandatory 1. Estate/Donor's tax returns with a gross estate/gift above Five Million Pesos (P5,000,000) for Revenue Region Nos. 5, 6, 7 and 8 (Valenzuela, Manila, Quezon City and Makati) and above Three Million Pesos (P3,000,000.00) for all other regions (code: EST/DON) 2. Taxpayers retiring from business with gross assets amounting to P5,000,000.00 or more for Revenue Region Nos. 5, 6, 7 and 8 and P2,000,000.00 or more for all other regions, as the case may be (code: RET); 3. Claims for tax credit/refund of individual taxpayers arising from business income where all of the following conditions are present (code: TCR); For Revenue Regions 5, 6, 7 and 8: a. the amount of the claim exceeds Twenty Thousand Pesos (P20,000); and b. the gross sales/receipts exceeds Five Million Pesos (P5,000,000). For all other Revenue Regions outside Metro Manila: a. the amount of the claim exceeds Ten Thousand Pesos (P10,000); and b. the gross sales/receipts exceeds Two Million Pesos (P2,000,000) 4. Claims for tax credit/refund of corporate taxpayers (code: MCO); 5. Other claims for tax credit/refund, except VAT claims, exceeding P100,000.00 for the period(s) covered (code: OTR); 6. 1996 tax returns of taxpayers who availed of the Voluntary Assessment Program (VAP) but whose availments were found to be substantially deficient by the Voluntary Assessment Program Committee, as approved by the Commissioner (code: VAP); and 7. Government withholding agents on the withholding tax liabilities or these agencies (code: GWA). B. Other Priorities 1. Taxpayers whose tax due per return is less than 2% of the reported gross sales/revenue (code: TDR); 2. Manufacturers/Wholesalers (code: MFW); 3. Recreational and Cultural Services (code: RCS); Exceptions 1. 1996 and 1997 Value-Added Tax (VAT) returns, the audit or which is authorized in Revenue Memorandum Order No. 11-98; 2. 1996 tax returns filed under VAP by taxpayers whose availments had been determined as satisfactory by the National Office Voluntary Assessment Program Committee; and 3. 1996 and 1997 tax returns of taxpayers to be examined by the investigating divisions under the Enforcement Service of the Legal and Enforcement Group. III. Audit Policies and Procedures A. In General 1. One Letter of Authority (LA)/Audit Notice (AN) shall be issued for each taxable year. 2. All taxpayer selected for audit by the RDOs must be submitted in a list, through the Regional Director, to the Assistant Commissioner, Assessment Service for approval before the issuance of LAs/ANs. Except for tax cases to be investigated by the Enforcement Service, LAs/ANs shall be issued and signed by the Revenue Regional Directors after approval of the list of taxpayers for audit by the Assistant Commissioner for Assessment Service. 3. A copy of the return for the year under audit shall be attached to the LA/AN. 4. No new audit cases may be assigned to Revenue Officers until after they have reported all pending cases assigned to them before July 1, 1997. 5. The policy on the simultaneous investigation of all tax liabilities, except VAT liabilities, shall be followed, regardless of the amount of gross sales/receipts of the taxpayer. 6. Revenue Officers shall follow the audit procedures and techniques prescribed under Revenue Audit Memorandum Order (RAMO) No. 2-95. 7. In the RDOs, taxpayers who have been examined for the prior year shall not be investigated for the immediately succeeding period by the same Revenue Officer and/or Group Supervisor except when there is only one Group Supervisor or at most four Revenue Officers in one district. 8. Return Verification Order (RVO) shall be issued to cover the verification/processing of the following non-LA cases: a. Capital gains tax and withholding tax returns involving sale or transfer of properties; b. Estate and Donor's tax returns below the audit threshold; c. Claims for tax credit/refund of individuals below the audit threshold; d. Taxpayers retiring from business with gross assets below the audit threshold; and e. Protested cases RVOs shall be issued in duplicate and signed by the Revenue District Officer. For effective control. RVOs shall be serially numbered in accordance with the following codes: Capital Gains Tax Return RVO-C (RDO No.)-(year issued)-(no.) Estate Tax Return RVO-E (RDO No.)-(year issued)-(no.) Donor's Tax Return RVO-D (RDO No.)-(year issued)-(no.) Protested Cases RVO-P (RDO No.)-(year issued)-(no.) Taxpayers retiring from business RVO-R (RDO No.)-(year issued)-(no.) Claims for tax credit or refund to be assigned in batches RVO-R/C (RDO No.)-(year issued)-(no.) Cases covered by RVOs shall be processed within thirty (30) days from receipt thereof by the Revenue Officer. However, capital gains and withholding tax cases shall be processed within five (5) working days counted from receipt of the returns. 9. The Assessment Division shall review all dockets covered by LAs/ANs and RVOs prior to the issuance of a preliminary assessment notice, termination letter, tax credit or refund. B. Non-ITS RDO 1. The RDO shall submit a list (Annex "B-1") of all taxpayers selected for audit for taxable years 1996 and 1997 to the Regional Director. The list shall indicate the name of the taxpayer, TIN, address, nature of business, taxable year, amount of gross sales/revenue, tax due per return and reason for selection. The Regional Director shall collate all the lists submitted by the RDOs within his jurisdiction and forward them to the Assistant Commissioner, Assessment Service for approval. The list of taxpayers for 1996 shall be submitted not later than March 1, 1998 while the list of taxpayers for 1997 must be submitted on or before June 15, 1998. For income tax returns of taxpayers on a fiscal year basis and other income tax returns filed after April 15, 1998, the list of taxpayers shall be submitted not later than the 30th day of the month following the end of each quarter. 2. The reports of investigation shall be submitted within 120 days from date of receipt of the LA by the Revenue Officer. 3. 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 to this rule must be duly approved by the Assistant Commissioner for Assessment Service through the recommendation of the Regional Director. 4. Revenue Officer's Audit Report (BIR Forms 1717) shall be prepared for all reports of verification or audit, whether or not covered by a Letter of Authority. C. ITS RDOs 1. The RDC shall prioritize the encoding of 1997 and 1996 tax returns of taxpayers who did not avail of the VAP. 2. The concerned division of the RDC shall upload to the Regional Director, copy furnished the Assistant Commissioner, Assessment Service, the list of all taxpayers who failed to avail of the VAP for 1996 and all taxpayers for taxable year 1997 for each RDO within its jurisdiction using the form prescribed in Annexes "B-2" and "B-3" hereof not later than March 1, 1998 and June 15, 1998, respectively. The taxpayers shall be ranked based on gross sales or receipts. 3. The procedures for the request and approval of audit candidates, conduct of audit, preparation or reports of investigation and all other activities related to audit prescribed in the Integrated Tax System (ITS) Operations Manual shall be followed. 4. The RDO shall request from the RDC photocopies of returns of taxpayers approved for audit. 5. Revenue Officer's Audit Report (BIR Forms 0500) shall be prepared for all reports of verification or audit, whether or not covered by an AN. IV. 1998 Audit Workplan The 1998 Audit Workplan shall run from March 1, 1998 to December 31, 1998. The prescribed workplan per RDO shall be approved by the Commissioner and communicated to the respective RDOs at a later date. Any increase or decrease in the audit plan will require the approval of the Assistant Commissioner, Assessment Service. Initial workload per Revenue Officer is twenty (20) cases. Any pending inventory as of March 1, 1998 shall be included in the computation of the workload. In no case shall the number of audit cases handled by a Revenue Officer exceed twenty (20) cases at any one time during the year, subject to replenishment after the submission of the report of investigation of each case. V. Deviation from Policy Deviations from these policies may be allowed but only upon prior written authorization from the Assistant Commissioner, Assessment Service as recommended by the Revenue Regional Director. VI. Reporting Requirements The RDOs (non-ITS and ITS) shall submit directly to the Assistant Commissioner, Assessment Service, through the Regional Director, a monthly report of all cases closed during this period using the revised BIR Form 0603 (formerly Form 19.71) (Annex C) not later than the 10th day of the following month. BIR Form 0603 incorporates the Selection Codes for the RMO on the priority audit of VAT returns. 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. VII. Violations Any violation of this Order will be referred by the concerned revenue official, through the Assistant Commissioner, Assessment Service, to the Internal Affairs Service 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. VIII. Repealing Clause Revenue Memorandum Order Nos. 12-96, 17-95 and 26-94 and all other issuances inconsistent herewith are hereby modified or repealed accordingly. IX. Effectivity This Order takes effect on March 1, 1998. However, the audit of 1997 income and other internal revenue tax returns shall commence on July 16, 1998. LIWAYWAY VINZONS-CHATO Commissioner or Internal Revenue ANNEX A1 Revenue Region No. __ __________________ RDO No. __ __________________ _______________ Date RETURN VERIFICATION ORDER RVO-C- __________ TO: Revenue Officer/s _____________ Thru Group Supervisor __________ Referred to you for verification and processing is the attached Capital Gains Tax Return of __________________ filed on ___________. (taxpayer) You are hereby directed to submit immediately a complete report on the above-stated case. ___________________ Revenue District Officer Received By: ___________________ ___________________ Revenue Officer/s Date Received ___________________ Group Supervisor ANNEX A2 Revenue Region No. __ __________________ RDO No. __ __________________ _______________ Date RETURN VERIFICATION ORDER RVO-E- __________ TO: Revenue Officer/s ___________ Thru Group Supervisor ________ Referred to you for verification and processing is the attached Estate Tax Return of __________________ filed on ___________. (taxpayer) You are hereby directed to submit immediately a complete report on the above-stated case. ___________________ Revenue District Officer Received By: ___________________ ___________________ Revenue Officer/s Date Received ___________________ Group Supervisor ANNEX A3 Revenue Region No. __ __________________ RDO No. __ __________________ _______________ Date RETURN VERIFICATION ORDER RVO-D- __________ TO: Revenue Officer/s ___________ Thru Group Supervisor ________ Referred to you for verification and processing is the attached Donor's Tax Return of ___________________ filed on ___________. (taxpayer) You are hereby directed to submit immediately a complete report on the above-stated case. ___________________ Revenue District Officer Received By: ___________________ ___________________ Revenue Officer/s Date Received ___________________ Group Supervisor ANNEX A4 Revenue Region No. __ __________________ RDO No. __ __________________ _______________ Date RETURN VERIFICATION ORDER RVO-P- __________ TO: Revenue Officer/s ___________ Thru Group Supervisor ________ Referred to you for reinvestigation and appropriate action is the attached protest letter of ________________ with address at _______________ covering the ___________ tax liabilities for the period _________. You are hereby directed to submit immediately a complete report on the above-stated case. ___________________ Revenue District Officer Received By: ___________________ ___________________ Revenue Officer/s Date Received ___________________ Group Supervisor ANNEX A5 Revenue Region No. __ __________________ RDO No. __ __________________ _______________ Date RETURN VERIFICATION ORDER RVO-R- __________ TO: Revenue Officer/s ___________ Thru Group Supervisor ________ Referred to you for verification and processing is the attached Income Tax Return for the period ____________ of ____________________ who is retiring from (taxpayer) business on __________. You are hereby directed to submit immediately a complete report on the above-stated case. ___________________ Revenue District Officer Received By: ___________________ ___________________ Revenue Officer/s Date Received ___________________ Group Supervisor ANNEX A6 Revenue Region No. __ __________________ RDO No. __ __________________ _______________ Date RETURN VERIFICATION ORDER RVO-R/C- __________ TO: Revenue Officer/s ___________ Thru Group Supervisor ________ Referred to you for verification and processing is the creditable/refundable income tax return for the period _______________ of _____________________ with (taxpayer) address at ___________________________________________________________. You are hereby directed to submit immediately a complete report on the above-stated case. ___________________ Revenue District Officer Received By: ___________________ ___________________ Revenue Officer/s Date Received ___________________ Group Supervisor ANNEX B-1 Revenue Region No. __ ____________________ Revenue District Office No. __ __________________________ LIST OF TAXPAYERS SELECTED FOR AUDIT FOR TAXABLE YEAR ___ Name/Address of Taxpayer Nature of Business Annual Gross Tax Due Reason Sales/Revenue per Return for Selection 1. __________ __________ __________ __________ __________ 2. __________ __________ __________ __________ __________ 3. __________ __________ __________ __________ __________ 4. __________ __________ __________ __________ __________ 5. __________ __________ __________ __________ __________ 6. __________ __________ __________ __________ __________ 7. __________ __________ __________ __________ __________ 8. __________ __________ __________ __________ __________ 9. __________ __________ __________ __________ __________ 10. __________ __________ __________ __________ __________ 11. __________ __________ __________ __________ __________ 12. __________ __________ __________ __________ __________ 13. __________ __________ __________ __________ __________ 14. __________ __________ __________ __________ __________ 15. __________ __________ __________ __________ __________ 16. __________ __________ __________ __________ __________ 17. __________ __________ __________ __________ __________ 18. __________ __________ __________ __________ __________ 19. __________ __________ __________ __________ __________ 20. __________ __________ __________ __________ __________ 21. __________ __________ __________ __________ __________ 22. __________ __________ __________ __________ __________ 23. __________ __________ __________ __________ __________ 24. __________ __________ __________ __________ __________ 25. __________ __________ __________ __________ __________ Submitted By: ____________________________ Revenue District Officer Date: _______________________ ANNEX B-2 Revenue Region No. __ ____________________ Revenue District Office No. __ __________________________ LIST OF TAXPAYERS WHO DID NOT AVAIL OF THE VAP FOR TAXABLE YEAR 1996 Name/Address of Taxpayer Nature of Business Annual Gross Tax Due Reason Sales/Revenue per Return for Selection 1. __________ __________ __________ __________ __________ 2. __________ __________ __________ __________ __________ 3. __________ __________ __________ __________ __________ 4. __________ __________ __________ __________ __________ 5. __________ __________ __________ __________ __________ 6. __________ __________ __________ __________ __________ 7. __________ __________ __________ __________ __________ 8. __________ __________ __________ __________ __________ 9. __________ __________ __________ __________ __________ 10. __________ __________ __________ __________ __________ 11. __________ 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____________________ Revenue District Office No. __ __________________________ LIST OF REGISTERED TAXPAYERS For 1997 Name/Address of Taxpayer Nature of Business Annual Gross Tax Due Reason Sales/Revenue per Return for Selection 1. __________ __________ __________ __________ __________ 2. __________ __________ __________ __________ __________ 3. __________ __________ __________ __________ __________ 4. __________ __________ __________ __________ __________ 5. __________ __________ __________ __________ __________ 6. __________ __________ __________ __________ __________ 7. __________ __________ __________ __________ __________ 8. __________ __________ __________ __________ __________ 9. __________ __________ __________ __________ __________ 10. __________ __________ __________ __________ __________ 11. __________ __________ __________ __________ __________ 12. __________ __________ __________ __________ __________ 13. __________ __________ __________ __________ __________ 14. __________ __________ __________ __________ __________ 15. __________ __________ __________ __________ __________ 16. __________ __________ __________ __________ __________ 17. __________ __________ __________ __________ __________ 18. __________ __________ __________ __________ __________ 19. __________ __________ __________ __________ __________ 20. __________ __________ __________ __________ __________ 21. __________ __________ __________ __________ __________ 22. __________ __________ __________ __________ __________ 23. __________ __________ __________ __________ __________ 24. __________ __________ __________ __________ __________ 25. __________ __________ __________ __________ __________ 26. __________ __________ __________ __________ __________ 27. __________ __________ __________ __________ __________ 28. __________ __________ __________ __________ __________ 29. __________ __________ __________ __________ __________ 30. __________ __________ __________ __________ __________ Submitted By: ____________________________ Revenue District Officer Date: _______________________ ANNEX C ANNEX C-1 Instruction for BIR Form 0603 (FORMERLY Form 19.71) 1. BIR Form 0603 will be completed monthly by Revenue District Offices in triplicate. The form is a district-wide summary of the case/dockets closed by individual Revenue Officers. The original form will be forwarded to the Assistant Commissioner, Assessment Service, one copy will be sent to the Revenue Regional Office, and one copy will be retained by the Revenue District Office. The form will be completed and forwarded to the National Office and Regional Office on the 10th day of the month following the reporting period. 2. BIR Form 0603 is divided into five sections. Sections A through D apply to closed cases/dockets with Letters of Authority/Audit Notices. Section E applies to closed cases/dockets without Letters of Authority/Audit Notices. income tax individuals including withholding returns income tax corporations and partnerships including withholding returns value-added tax and excise tax estate tax, donor's tax and capital gains tax closed cases not covered by Letters of Authority/Audit Notices The sections on income tax returns also include withholding tax investigations. Each Letter of Authority/Audit Notice issued is counted as one audit. Under the package audit concept, Letters of Authority/Audit Notices are applicable to all types of tax. In the event an excise tax return or a VAT return is audited before the filing of the annual income tax return, the Letter of Authority will be issued for the applicable tax type (VAT or Excise). 3. Specific Instructions for BIR Form 0603 Heading Enter the revenue district office number and name and the month covered by the report. Column 1 Tax Year Information on reported cases (dockets) will be provided by tax year. Tax years 1997, 1996, 1995 and 1994 will be shown on separate lines. Data for tax years 1993 and prior years will be combined and entered on single line. Column 2 Total Reported Dockets Enter the total number of dockets/cases closed during the month including original and reinvestigation audits. For purposes of this report, a docket is considered closed when it is forwarded to management for review consisting of the Chief, Assessment Unit, ARDO and the RDO. The data in this column should match the total of the data in Columns 4a of BIR Form 19.645 Column 3 Breakdown of Closed Cases/Dockets This column breaks down the number of original audit investigation closed cases/dockets based on the Audit Work Plan Selection Code. The Audit Work Plan Selection Codes are outlined below. Note: Not all selection codes are applicable to each section of the report.