Classification of Income Tax Returns

April 28, 1972 REVENUE MEMORANDUM ORDER NO. 16-72 SUBJECT : Classification of Income Tax Returns TO : All internal revenue officers and others concerned In consonance with the procedures promulgated under Revenue Administrative Order No. 12-70 regarding the investigation by lines of businesses and in order to update the procedures of the classification of income tax returns, the following amendments to Field Circular No. V-136, dated September 10, 1959, as amended by Revenue Memorandum Order No. 19-65, dated June 29, 1965, insofar as it affects classification of returns, are hereby promulgated for the guidance of all concerned: CLASSIFICATION OF RETURNS After the returns have been processed in accordance with established procedures, the duplicate income tax returns shall be sorted, segregated and classified in the Assessment Branch of Regional Offices in accordance with the following: I. General Classification A. Field Audit All returns selected hereunder shall be considered for automatic field investigation and shall be stamped "Field" on the upper right hand margin of the return. 1. Individual returns (BIR Form No. 1701 and 1701A) a. Regional Offices Nos. 6, 7 and 8 (1) Business or professional income (Schedule 2) with gross receipts in excess of P75,000.00. (2) Farming income (Schedule 3) with gross receipts in excess of P30,000.00. (3) Income from capital asset transactions (Schedule 4) with gross receipts in excess of P30,000.00. (4) Rental income (Schedule 5) with gross receipts in excess of P30,000.00. b. Other Regional Offices (1) Business or professional income (Schedule 2) with gross receipts in excess of P30,000.00. (2) Farming income (Schedule 3) with gross receipts in excess of P10,000.00. (3) Income from capital asset transactions (Schedule 4) with gross receipts in excess of P10,000.00. (4) Rental income (Schedule 5) with gross receipts in excess of P10,000.00. 2. Corporation, partnership and insurance company returns (BIR Form Nos. 17.02, 17.03, 17.04, 5186 and 6135) 3. Withholding Tax at Source Returns (BIR Form No. 1743) All returns of this kind are to be automatically classified for field investigation and should be stamped "Field" on the upper right hand margin of the return. B. Office Audit All returns selected under this classification shall be stamped with "Office Audit" in the upper right hand margin of the return. 1. Individual returns a. Regional Offices Nos. 6, 7 and 8 (1) Salary income (Section B of 1701A and Schedule 1 of 1701) with or without W-2 and commission income claiming traveling, representation and entertainment expenses and/or other deductions which appear to be excessive or the total of which amount to more than 30% of gross income. (2) Business or professional income (Schedule 2) with gross receipts not exceeding P75,000.00. (3) Farming income (Schedule 3) with gross receipts not exceeding P30,000.00. (4) Income from capital asset transactions (Schedule 4) with gross receipts not exceeding P30,000.00. (5) Rental income (Schedule 5) with gross receipts not exceeding P30,000.00. b. Other Regional Offices (1) Salary income (Section B of 1701A and Schedule 1 of 1701) with or without W-2 and commission income claiming traveling, representation and entertainment expenses and/or other deductions which appear to be excessive or the total of which amount to more than 30% of gross income. (2) Business or professional income (Schedule 2) with gross receipts not exceeding P30,000.00. (3) Farming income (Schedule 3) with gross receipts not exceeding P10,000.00. (4) Income from capital asset transactions (Schedule 4) with gross receipts not exceeding P10,000.00. (5) Rental income (Schedule 5) with gross receipts not exceeding P10,000.00 C. Individual returns showing income from registered general Partnership. Returns showing income from registered general partnerships are to be classified as a separate group irrespective of whether the returns show income from business, farming, rentals, salaries or other sources. D. Returns for Filing Returns falling under this classification may be accepted as filed and stamped "Reviewed" on the upper right hand margin of the return. 1. Individual returns showing salary income and claiming optional standard deduction. 2. Individual returns showing very small income from other sources and claiming a big amount of personal and additional exemptions, which in the opinion of the reviewer need no office audit verification. 3. All returns showing only dividend or interest income and claiming optional standard deduction or no deduction at all. II. Specific Classification When the income tax returns have been selected in accordance with the procedure outlined in the preceding paragraph, those for field investigation should be further classified into the following: A. Class A (Difficult) 1. Regional Offices Nos. 6, 7 and 8 a. Individual returns with gross receipts from business or profession (Schedule 2) in excess of P1,000.00. b. Individual returns with gross receipts from farming (Schedule 3) in excess of P300,000.00. c. Individual returns with gross receipts from capital asset transactions (Schedule 4) in excess of P100,000.00. d. Individual returns with gross receipts from rents and royalties (Schedule 5) in excess of P100,000.00. e. Corporation and insurance company returns (taxable or exempt) and partnership returns with aggregate gross receipts in excess of P1,000,000.00. 2. Other Regional Offices a. Individual returns with gross receipts from business or professional income (Schedule 2) in excess of P500,000.00. b. Individual returns with gross receipts from farming (Schedule 3) in excess of P150,000.00. c. Individual returns with gross receipts from capital asset transactions (Schedule 4) in excess of P50,000.00. d. Individual returns with gross receipts from rents and royalties (Schedule 5) in excess of P50,000.00. e. Corporation and insurance company returns (taxable and exempt) and partnership returns with aggregate gross receipts in excess of P500,000.00. B. Class B (Average) 1. Regional Offices Nos. 6, 7 and 8 a. Individual returns with gross receipts from business or professional income (Schedule 2) in excess of P500,000.00 but not more than P1,000,000.00. b. Individual returns with gross receipts from farming (Schedule 3) in excess of P100,000.00 but not more than P300,000.00 c. Individual returns with gross receipts from capital asset transactions (Schedule 4) in excess of P50,000.00 but not more than P100,000.00. d. Individual returns with gross receipts from rents and royalties (Schedule 5) in excess of P50,000.00 but not more than P100,000.00. cdt e. Corporation and insurance company returns (taxable and exempt) and partnership returns with aggregate gross receipts in excess of P500,000.00 but not more than P1,000,000.00. 2. Other Regional Offices a. Individual returns with gross receipts from business or professional income (Schedule 2) in excess of P200,000.00 but not more than P500,000.00. b. Individual returns with gross receipts from farming (Schedule 3) in excess of P50,000.00 but not more than P150,000.00. c. Individual returns with gross receipts from capital asset transactions (Schedule 4) in excess of P30,000.00 but not more than P50,000.00. d. Individual returns with gross receipts from rents and royalties (Schedule 5) in excess of P30,000.00 but not more than P50,000.00. e. Corporation and insurance company returns (taxable and exempt) and partnership returns with aggregate gross receipts in excess of P300,000.00 but not more than P500,000.00. C. Class C (Easy) 1. Regional Offices Nos. 6, 7 and 8 a. Individual returns with gross receipts from business or professional income (Schedule 2) in excess of P75,000.00 but not more than P500,000.00. b. Individual returns with gross receipts from farming (Schedule 3) in excess of P30,000.00 but not more than P100,000.00. c. Individual returns with gross receipts from capital asset transactions (Schedule 4) in excess of P30,000.00 but not more than P50,000.00. d. Individual returns with gross receipts from rents and royalties (Schedule 5) in excess of P30,000.00 but not more than P50,000.00. e. Corporation and insurance company returns (taxable and exempt) and partnership returns with aggregate gross receipts not exceeding P500,000.00. 2. Other Regional Offices a. Individual returns with gross receipts from business or professional income (Schedule 2) in excess of P30,000.00 but not more than P200,000.00. b. Individual returns with gross receipts from farming (Schedule 3) in excess P10,000.00 but not more than P50,000.00. c. Individual returns with gross receipts from capital asset transactions (Schedule 4) in excess of P10,000.00 but not more than P30,000.00. d. Individual returns with gross receipts from rentals and royalties (Schedule 5) in excess of P10,000.00 but not more than P30,000.00. e. Corporation and insurance company returns (taxable and exempt) and partnership returns with aggregate gross receipts not exceeding P300,000.00. III. Classification by Industry After the returns have been classified in accordance with the preceding paragraph, the returns so classified shall be further segregated by lines of businesses or industries in accordance with the provisions of Revenue Administrative Order Nos. 12-70 and 4-72, dated July 7, 1970 and February 14, 1972, respectively. casia IV. Miscellaneous Provisions A. Individual returns of BIR permanent and emergency employees shall not be classified under any class as abovementioned. After the said returns have been processed, the duplicates thereof should be forwarded immediately to the Internal Audit Department. B. Withholding tax at source returns shall be transmitted to the Withholding Tax Division. C. Information returns (BIR Form 1702A) which are filed by tax exempt corporations shall be transmitted to the Income Tax Division. D. Returns filed by BOI enterprises (Forms 5186 and 6135) are to be classified as corporation returns. E. Individual returns showing income in more than one schedule and the gross receipts thereon are classifiable under different classes, should be classified in the highest class to which the gross receipts fall. Thus, if the return is to be classified as a Class A return on the basis of the gross receipts from business but a Class C return on the basis of the farming income, the return should be classified as a Class A return, the highest class to which the return may be classified if the income schedules are to be taken up separately. F. Returns classified as office audit returns in the general classification should automatically be classified as Class C returns in regional offices where office audit is not practical or an established procedure. G. Regional Offices are authorized to organize an office audit section in the Assessment Branch, if there are sufficient examiners in the branch to handle office and review work. H. The Office Audit Section should limit the investigation of office audit returns to those returns classified for office audit purposes whose addresses are within the limits of the City or Municipality, as the case may be, where the Regional Office is located. I. Returns that have been classified for office audit whose addresses are outside the station town of the Regional Office are to be considered and classified as Class C returns and should be transmitted to the corresponding Revenue District Officers for field investigation. IV. Effectivity The provisions of this memorandum order shall become effective beginning with the 1971 income tax returns whether on a calendar or fiscal year basis. MISAEL P. VERA Commissioner of Internal Revenue APPROVED: CESAR VIRATA Secretary of Finance