Abatement of Deficiency Income Tax Assessment Arising from Jeopardy Assessment of an Individual for 1981 and Prior Years

May 15, 1985 REVENUE MEMORANDUM ORDER NO. 17-85 SUBJECT : Abatement of Deficiency Income Tax Assessment Arising from Jeopardy Assessment of an Individual for 1981 and Prior Years TO : All Internal Revenue Officers and Others Concerned A. PURPOSE/COVERAGE The purpose of this Revenue Memorandum Order is to provide for the abatement of any deficiency income tax assessment which qualify as a jeopardy assessment (as defined in this Revenue Memorandum Order) made against an individual for 1981 and prior years. casia B. JEOPARDY DEFICIENCY INCOME TAX ASSESSMENT For purposes of this Revenue Memorandum Order, the term "jeopardy deficiency income tax assessment" shall refer to a deficiency income tax assessment which was made without the benefit of complete or partial audit by an authorized revenue officer who has reason to believe that the assessment and collection of a deficiency income tax will be jeopardized by delay because of the taxpayer's failure to comply with audit and investigation requirements to present his books of accounts and/or pertinent records or to substantiate all or any of the deductions, exemptions or credits claimed in his return. C. JUSTIFICATION FOR THE ABATEMENT UNDER SECTION 295(2)(a) OF THE TAX CODE Abatement has been placed in our statute book in order to prevent the collection of taxes that have been "unjustly or excessively assessed" and the rationale is enunciated in the case of COHAN V. COMMISSIONER, 39 F (2d) 540 and cited in the cases of VISAYAN CEBU TERMINAL CO. V. COLLECTOR, CTA Case No. 128, June 29, 1957, affirmed in G.R. No. L-12798, May 30 1960; GANCAYCO V. COLLECTOR, G.R. Nos. 13325, April 30, 1961, 1 SCRA 980; ZAMORA V. COLLECTOR G.R. Nos. 15280-81 and L-15289- 90 May 31, 1963, 8 SCRA 163. As aptly stated in the Cohan Rule: "The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent. True, we do not know how many trips Cohan made, nor how large his entertainment were; yet there was obviously some basis for computations, if necessary by drawing upon the Board's personal estimates of the minimum of such expenses. The amount may be trivial and unsatisfactory, but there was basis for some allowance, and it was wrong to refuse any even though it were the travelling expenses of a single trip. It is not fatal that the result will inevitably be speculative; many important decisions must be such. . . ." (COHAN V. COMMISSIONER OF INTERNAL REVENUE, No. 114, Circuit Court of Appeals, Second Circuit, March 3, 1930). D. GUIDELINES FOR THE ABATEMENT 1. The request for abatement of an individual's income tax liability/ies shall be made in the form prescribed therefor (ANNEX A) and shall be filed (i) with the Assessment Branch, subject to approval by the Regional Director (in case the assessment subject to abatement was previously issued by the Revenue Region); or (ii) with the National Assessment Office, subject to approval by the Deputy Commissioner of Internal Revenue (in case the assessment to be abated was previously issued by the National Office), as the case may be. 2. The duly approved computation form (ANNEX A) shall serve as the corresponding authority to change assessment and upon payment by the taxpayer of the corresponding amount determined in accordance with these guidelines, the warrant of distraint and levy, if any has been previously issued, shall be lifted. 3. All dockets with duly approved requests for abatement shall be forwarded to the Chief, Collection Branch (in Regional Offices) or the Collection Office (in the National Office), as the case may be, for appropriate action and deletion of the assessment from the list of delinquent accounts. cd E. MANNER OF COMPUTATION 1. The amount which may be accepted in abatement of the jeopardy deficiency income tax assessment shall be whichever is the lesser of the - (a) excess of the amount of tax on taxable income base for 1981 and prior years determined by applying the rates prescribed in Section 21 of the Tax Code, as amended by B.P. 135 and P.D. 1959, over the income tax declared and paid by the taxpayer per his income tax return; and (b) the amount of the jeopardy deficiency income tax assessment, (c) provided, however , that in no case shall the amount to be paid be lesser than FIFTEEN PERCENT (15%) of the jeopardy deficiency income tax assessment. 2. The taxable net income/profit on which the rates prescribed in Section 21(b) of the Tax Code shall be applied for purposes of these guidelines, shall represent the following percentages applied on the gross sales/revenues as declared in the taxpayer's return for 1981 and prior years: KIND OF BUSINESS RATE 1. Trading business 4% 2. Manufacturers/producers 4% 3. Services, including professionals 5% 4. Others 3 1/2% F. COMPUTATIONAL ILLUSTRATIONS FOR DETERMINING THE AMOUNT TO BE PAID UNDER ABATEMENT 1. Pure compensation income taxpayer . - Assume that in 1979, a married individual with two qualified dependents derived income from salary in the amount of P100,000.00. He claimed itemized deductions in the amount of P55,000.00, declared and paid income tax of P9,480.00, computed as follows: Salary P100,000.00 Deduction claimed 55,000.00 Net income 45,000.00 Less: Personal and additional exemptions 5,000.00 Taxable net income 40,000.00 Income tax due P 9,480.00 ========= The Examiner who audited his return recommended a deficiency income tax assessment of P22,852.00 by arbitrarily disallowing one-half of the total deductions claimed because of the taxpayer's failure to respond to a series of requests for documentary substantiation of the itemized deductions, computed as follows: Net income per return P45,000.00 Add: disallowed deductions (1/2) 27,500.00 Net income per audit 72,500.00 Less: Personal and additional exemptions 5,000.00 Taxable net income 67,500.00 Income tax due 22,030.00 Less: Tax paid per return 9,480.00 Deficiency income tax 12,550.00 Add: Deficiency interests 7,302.00 Total assessed P22,852.00 ========= The above assessment qualifies as jeopardy assessment under this Revenue Memorandum Order and the amount of abatement shall be computed as follows: Apply the rates prescribed in Section 21 of the Tax Code, as amended by B.P. 135 and P.D. 1959, in computing the amount to be paid under abatement: cd Salary P100,000.00 Less: Personal and additional exemptions applicable for 1979 5,000.00 Basis for abatement 95,000.00 Tax due at BP 135 rates 12,725.00 Less: Tax paid 9,480.00 Balance P3,245.00 ========= The acceptable amount under abatement is P3,245.00 which is the lesser amount than the jeopardy assessment of P22.852.00 but in no case less than fifteen percent (15%) of the assessment issued (P22,852.00 x 15% = P3,428.00). 2. Mixed income taxpayer . - Assume, further, that the same individual derived income from business and dividends, in addition to his salary. He paid income tax thereon in the amount of P25,880.00, declared as follows: Gross Deductions Net Income Salary P100,000 P 55,000 P45,000 Business 150,000 145,000 5,000 Dividends 30,000 30,000 Total P280,000 P200,000 P80,000 ======= ======= ======= Less: exemptions 5,000 Taxable net income P75,000 Tax due thereon P25,880 ======= Jeopardy deficiency income tax assessment was made, as follows: Taxable net income per return P 75,000 Add: Disallowed deductions (1/2) 100,000 Taxable net income per audit 175,000 Tax due thereon 85,540 Less: Tax paid 25,880 Deficiency income tax 59,660 Add: Deficiency interests 26,532 Total assessed P 86,192 ======= Compute the abatement by applying the tax rates prescribed under Section 21 of the Tax Code, as amended by B.P. 135 and P.D. 1959, as follows: (i) Rates under Section 21(a) for compensation income; (ii) Rates under Section 21 (b) for the business income; and (iii) Rates under Section 21(c) for the dividend income. The tax rates prescribed for business income shall be based on the assumed net income, computed in accordance with the assumed net profit ratios prescribed in paragraph E above. casia COMPUTATION OF ABATEMENT Gross Taxable Base Basis Rate Abatement Salary P100,000 P95,000 Sec. 21(a) P12,752 Business 150,000 (4%) 6,000 Sec. 21(b) 300 Dividends 30,000 30,000 Sec. 21(c) 4,500 ======= Total P17,552 Less: Tax paid per return 25,880 Balance (P 8,328) ======== In this situation, the acceptable amount payable under abatement shall be P12,929.00 which is the lesser amount but in no case less than fifteen percent (15%) of the assessment issued (P86,192.00 x 15% = P12,929.00). G. EFFECTIVITY This Revenue Memorandum Order shall take effect immediately. All Revenue Officers concerned are enjoined to give this Order a publicity as wide as possible. (SGD.) RUBEN B. ANCHETA Acting Commissioner ATTACHMENT COMPUTATION OF ABATEMENT PER RMO NO. 17-85 Taxpayer's name: ______________________________________________________ Address: _____________________________________________________________ Tax Account Number: ___________________________________________________ Taxable Year: _________________________________________________________ A. Gross compensation income P ___________ B. Less: Personal and additional exemptions ___________ C. Basis ___________ D. Tax due under Sec. 21(a); B.P. 135 rates P ___________ E. Gross sales/revenues (business) P ___________ F. Assumed net income (assumed net profit rate _____%) ___________ G. Tax due under Sec. 21(b); B.P. 135 rates P ___________ H. Passive Income Basis Tax Dividend P _________ P _________ Interest _________ _________ Others _________ _________ P ___________ I. Total amount due (D,G and H) ___________ J. Less: Amount of tax paid per return ___________ K. Balance P ___________ L. Jeopardy deficiency income tax assessment, including increments ___________ M. Fifteen percent (15%) of jeopardy of deficiency income tax assessment, including increments (15% of amount under item L) ___________ N. ACCEPTABLE AMOUNT PAYABLE UNDER ABATEMENT (Amount under Item K or under item M, whichever is higher) ___________ RECOMMENDED BY: APPROVED: Chief Assessment Branch Revenue Regional Director National Assessment Office Deputy Commissioner