Audit Program for 1995

June 8, 1995 REVENUE MEMORANDUM ORDER NO. 17-95 SUBJECT : Audit Program for 1995 TO : All Internal Revenue Officers and Others Concerned I. Objectives of the Audit Program The fundamental goal of enforcement (audit and investigation) activities is not primarily to increase enforcement revenue, but rather (a) to improve overall voluntary compliance and (b) to collect the correct amount of tax from taxpayers. The purpose of an audit is determine the taxpayer's substantially correct tax liability. To accomplish this objective, a quality audit must be performed. The concept of a quality audit, giving due consideration to the effective use of BIR resources, necessitates the utilization of those procedures and audit techniques appropriate for the determination of that liability. Such a concept embraces the following: (a) That the taxpayer's books and records will be reviewed in sufficient depth to reach a supportable conclusion regarding all items of a material tax consequence; (b) That appropriate income investigations will be performed where warranted to ensure the proper and complete ascertained; and (c) That the responsibilities of the taxpayer regarding the filing of all tax and information returns have been ascertained; and (d) That the conclusions expressed are documented in sufficient detail to enable the reader to comprehend the process whereby such a conclusion was reached. II. Selection and Audit Policies A. All Letters of Authority (LA) shall be issued and approved by the Revenue District Officers. Tax fraud cases and the issuance of LAs by the Intelligence and Investigation Service and the Special Investigation Division of the regional officers shall be covered by a separate revenue issuance. B. All tax audit, including verification of claims for tax credits and refunds, shall be covered by LAs, except the following: 1. Capital gains tax returns for transactions involving sale or transfer of real property and/or shares of stocks; 2. Protested cases; 3. Estate tax return with a gross estate of One Million Pesos (P1,000,000.00) or below for Revenue Region Nos. 5, 6, 7 and 8 (Valenzuela, Manila, Quezon City and Makati) and Five Hundred Thousand Pesos (P500,000.00) or below for all other regions, provided that the properties of the decedent are covered by only one revenue district office; 4. Donor's tax returns where the gross gift during the same taxable year amounts to Five Hundred Thousand Pesos (P500,000.00) or below for Revenue Region Nos. 5, 6, 7 and 8 and Two Hundred Thousand Pesos (P200,000.00) or below for all other regions, providing that the properties donated are located within the same revenue district office; 5. Claims for tax credit or refunds of individual taxpayers arising from business income where all of the following conditions are present: a. For Revenue Regions 5,6 7, and 8; (1) the amount of the claim does not exceed P10,000; and (2) the gross sales/receipts do not exceed P1,000,000. b. For all other Revenue Regions outside of Metro Manila: BIR Forms 1717 will be prepared for all of the above mentioned exceptions in accordance with Section VI, Reporting Requirements. C. Package audit system procedures shall be followed, regardless of the amount of gross sales/receipts of the taxpayer. D. No LA shall be issued unless the duplicate copy of the tax return of the taxpayer for the taxable year covered by the LA is attached thereto except in the following cases: 1. The tax return of the taxpayer cannot be located in the Revenue District Office. In this case, a certification to this effect (RDO) shall be issued and attached to the LA. 2. The basis of the LA or tax cases is the result of: a. Tax Mapping Program b. Third Party Information Program E. For large taxpayers or complex tax cases, more than one Revenue Officer in the same RDO may be assigned to conduct the audit. F. One LA shall be issued for each taxable year; G. No LA shall be revalidated without an attached progress report from the Revenue for the immediately succeeding period by the same Revenue Officer except in fraud cases and policy cases assigned by the Commissioner or Deputy Commissioner to be handled by revenue officers assigned in the RDO. H. Taxpayers who have been examined for the prior year shall not be investigated for the immediately succeeding period by the same Revenue Officer except in fraud cases and policy cases assigned by the Commissioners to be handled by revenue officers assigned in the RDO. I. Joint and coordinated examinations shall be undertaken by and between Revenue Officers of Different revenue district offices in the following cases: 1. Estate tax cases where the real properties are located in more than one regional/district office; 2. Large taxpayers; 3. Multinational companies; 4. Interrelated taxpayers; and 5. Other complex tax cases. J. Correspondence cases are strictly prohibited. All 1993 and prior year tax returns not currently under audit or pending refund which are not part of the Audit Program for 1995 shall be transmitted to the Administrative Division effective as of date of this RMO. Tax returns transmitted to the Administrative Division will be stored in a searchable order for ease of retrieval. K. Initial workload determination for every Revenue Officer will be a minimum of ten (10) cases and a maximum workload of twenty-five (25) cases. Each LA is counted as one case. L. The number of tax cases handled by each Revenue Officer involving old pending cases (PPY) (cases with one year or less before prescription), tax refund/credit cases, cases under reinvestigation, estate and donor's tax cases and cases involving taxpayers retiring from business should not exceed 25 percent of his total number of tax cases at only time during the year. This is to ensure that these cases are given top priority by the Revenue Officers in conducting their audit activities during the year. M. The proportion between individual and corporate taxpayers shall be as follows: 50% individual 50% corporate N. LAs will not be issued and revenue district offices will not initiate audits on tax returns that do not match the selection criteria outlined in this Revenue Memorandum Order. O. New Tax cases may be assigned to Revenue Officers only after they have completed and reported the following pending with them as of April 30, 1995 : 1. devolved cases from the National Office; 2. prescribing cases/dockets; 3. reinvestigations; and 4. tax refund/credit cases assigned before March 1, 1995 III. 1995 Audit Work Plan The audit work plan for 1995 for each revenue district (RDO) is Page 3 of Form 19.71, "Total Closed Cases/Dockets Year To Date" was used to project total closed cases for the one year period of April 1994 thorough May 1995. The audit plan for RDOs for which no data was available from Form 19.17 is computed based on the average percent of audit plan accomplished for RDOs with Form 19.71 data. For example, RDOs with data showed an average audit plan accomplishment of 140.4 percent. The 1994 audit plan for RDOs with no Form 19.71 data was increased by this percentage to project total accomplishments. Using the Form 19.71 data and the number of personnel shown on the 1994 audit plan, a rate was computed. This rate was used to compute the 1995 audit plan. The 1994 audit plan established a minimum rate of 15 cases per Revenue Officer or the actual rate for the RDO, whichever was higher. Form 19.71 data show that the average rate accomplished was 27 cases per Revenue Officer. This represents a significant increase in accomplishments. However, since this represents almost a doubling of the rate used in the 1994 audit plan, only one-half of the increase or a rate of 22 cases per Revenue Officer was used as the minimum rate for the 1995 audit plan. The rate was multiplied by the current number of Revenue Officers in Assessment activities to compute the RDOs audit plan. Grade IV Revenue Officers were excluded. Thus, for purposes of illustration, a revenue district officer with 20 Revenue Officers and a rate of 22 will have an annual work plan of 440 cases (20 x 22) for 1995. The RDO must complete 440 cases in order to accomplish the annual work plan. However, the work plan may be exceeded provided written authorization is secured from the Assistant Commissioner Assessment Service. (The work plan for all RDOs is shown in Annex A.) The 1995 audit plan represents the minimum number of audits that should be completed in 1995, that is from July 1, 1995 through June 30, 1996, consistent with the guidelines in this RMO . The rate represents, on an average, what each Revenue Officer should accomplish during the year; it does not represents the amount of case inventory needed to produce the planned accomplishments. Depending on the efficiency of individual Revenue Officers, the amount of inventory on hand at any time may be equal to or less than the maximum of 25 cases as specified in Section II above. Revenue District Officers and Revenue Regional Directors should perform ongoing workload reviews to ensure that Revenue Officers are effectively managing their inventories and time. A revenue memorandum order prescribing the methods and procedures for conducting workload reviews will be issued at a future date. IV. Selection Criteria The most current taxable year filed should be assigned for audit. This years ending through June 30, 1995. No 1994 tax return will be audited before July 1, 1995, the effectivity date of this RMO No audits of taxable year 1993 returns will be initiated after June 30, 1995. New tax cases will be distributed and assigned to Revenue Officers in accordance with the following instructions: A. Mandatory 1. Tax credit/refund cases arising from erroneously or illegally collected/paid taxes greater than P20,000 (TCR); 2. Taxpayer selected for tax audit based on third party information (TPI); 3. Individuals (self-employed and/or professional) with gross/receipts of P5 million or above (MIN); 4. Corporations, including partnerships, with gross assets of P50 million or above (MCO); and 5. Taxpayer selected for audit based on the result of tax mapping programs (Use Selection Code TPI). If the number of taxpayers under this category exceeds the number of cases in the annual audit work plan for the RDO, the Revenue District Officer will rank the individual and corporate taxpayers on the basis of the criterion stated above and select for audit those from the top (i.e. highest income or highest assets) in descending order until the maximum number is reached. The selection criteria are listed in order of priority. Lower priority tax returns will not be audited until all higher priority audits are assigned. (See Section V, Deviation From Policy B. Priority Target Population for 1995 The priority target populations for 1995 are based on audit results submitted on Forms 1717 and analyzed by the Assessment Service. As analysis of the data is a continuing process, the target industries may be adjusted by an amendment to this RMO at some time during the next 12 months. If the mandatory audits noted above does not provide sufficient workload for the RDO to accomplish the audit work plan, the top 10 percent (Priority Target Population Top 10 percent or PTT) or bottom 10 percent (Priority Target Population Bottom 10 percent or PTB) in terms of gross sales or receipts of the following industries have been identified for audit in priority order: Industry NEDA Classification Code Real Estate 8410 through 8499 Insurance 8310 through 8399 Retail Trade 6210 through 6290 Construction 5011 through 5030 Business Services 8511 through 8590 Thereafter, tax returns without substantial change in gross sales/receipts will be selected. For this purpose, the phrase "without substantial change" will mean less than 20 percent increase or decrease in the current year's gross sales/receipts over that of the preceding year (Priority Target Population - No Change or PTN). C. Revenue District Officer Discretion (RDO) Because Revenue District Officers are presumed to know the taxpayers who are not complying with their tax obligation in their respective districts, they are given the opportunity to select taxpayers which do not fall within the guidelines established above but the total selected will not exceed 10 percent of the annual work plan assigned to the RDO. In other words, 90 percent of the audit plan accomplishments will originate from the criteria noted above and 10 percent of the audit plan accomplishments will originate from RDO discretionary audits. V. Deviation From Policy Since this RMO cannot cover all possible situations of Revenue District Offices throughout the country, deviations from these policies (including number of cases in excess of the audit work plan) may be allowed but only upon prior written authorization from the Assistant Commissioner Assessment Service as recommended by the Revenue Regional Director. Any unauthorized deviation from this policy and instruction will result in disciplinary action and revocation of authority to issue LAs. In this regard, the Revenue Regional Directors are authorized to relieve, re-assign, or transfer within the region any Revenue District Officer violating the instructions in this RMO. The Regional Directors may recommended to the Commissioner replacements for Revenue District removed for noncompliance with this Order. VI. Reporting Requirements In order that uniform information will submitted by RDOs, monthly reports are required using BIR Form 19.71 (Annex B), containing the total number of dockets closed during the month segregated by tax year, type of tax and Audit Work Plan Selection Codes. The Audit Work Plan Selection Codes established under RMO 26-94 shall continue to be used for 1995. Form 19.71 will be submitted directly to the Assistant Commissioner (Assessment Service), Diliman, Quezon City, not later than the 10th day of the following month. A copy of Form 19.71 will also be submitted to the Revenue Regional Director. Page 3 of Form 19.71 will count all cases closed during the month including closed cases reported under the columns 4a and 4b, Other Closed Dockets. A cumulative total of all cases closed during the year is shown on Line 2 of Page 3. For the Audit Program for June 1995, the twelve-month reporting period will begin on July 1, 1995 and end on June 30, 1996. Accomplishment of the 1995 Audit Plan (Annex A) will be based on the number of closed cases as reflected on Form 19.71. The "Year To Date" line on Form 19.71 should start with July 1995 closures. Forms 1964S, Inventory of Pending Cases/Dockets, will be submitted directly to the Assistant Commissioner (Assessment Service), Diliman, Quezon City, not later than the 10th day of the following month. A copy of Form 19.64 will also be submitted to the Revenue Regional Director. Forms 1717, Revenue Officer's Report, will now be submitted by regional Assessment Divisions. The regional Assessment Division shall detach a copy of Form 1717 from the docket and transmit the same directly to the Assessment Service, Attention: Audit Data Bank Division, within five(5) days after receipt of the docket from the RDO. Forms 1717 will be prepared by the Revenue Officer conducting the audit at the RDO and will be included with the docket for review by the Assessment Division. Instructions for the accomplishment of BIR Form 19.71 is attached herewith as Annex C. VII. Repealing Clause Portions of RMO 26-94 dated April 11, 1994 (Audit Program for 1994), RMO 44-94 dated May 23, 1994 (Lifting the suspension of Letters of Authority and all on going audit/investigation under RMO 31-93), RMO 25-94 dated March 7, 1994 (Prescribing the use of Form 1717 [Revenue Officer's Audit Report] and providing the necessary guidelines and instructions for their use), and other orders and issuances inconsistent with these instructions are hereby modified or repealed accordingly. VIII. Effectivity This Order shall take effect on July 1, 1995. A Certification of Satisfactory Completion of Priority Work as per RMO 70-94 is still required before the RDO can commence audit activity. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue ANNEX A 1995 Audit Plan by Revenue District Office Updated: 5/19/95 Number Revenue of 1995 Revenue District Office Region Revenue Workload Audit Number Name Number Officers Factor Plan RR # 1 Baguio City 1 Laoag City 1 5 47 235 2 Vigan, Ilocos Sur 1 4 35 140 3 San Fernando, La Union 1 15 24 360 4 Calasiao, West Pangasinan 1 15 25 375 5 Alaminos, West Pangasinan 1 8 22 176 6 Urdaneta, East Pangasinan 1 10 34 340 Revenue Region Total 1,626 RR # 2 Cordillera Administrative Region 7 Bangued, Abra 2 2 28 56 8 Baguio City 2 8 22 176 9 La Trinidad, Benguet 2 8 22 176 10 Bontoc, Mt. Province 2 1 22 22 11 Tabuk, Kalinga-Apayao 2 4 22 88 12 Lagawe, Ifugao 2 1 22 22 Revenue Region Total 540 RR # 3 Tuguegarao, Cagayan 13 Tuguegarao, Cagayan 3 11 22 242 14 Bayombong, Nueva Vizcaya 3 5 22 110 15 Ilagan, Isabela 3 23 22 506 16 Cabarroguis, Quirino 3 2 22 44 Revenue Region Total 902 RR # 4 San Fernando, Pampanga 17 Tarlac, Tarlac 4 19 22 418 18 Olongapo City 4 3 46 138 19 Iba, Zambales 4 5 22 110 20 Balanga, Bataan 4 9 32 288 21 San Fernando, Pampanga 4 34 22 748 22 Baler, Aurora 4 2 35 70 23 Cabanatuan City 4 20 4 880 Revenue Region Total 2,652 RR # 5 Valenzuela 24 Valenzuela 5 49 44 156 25 Malolos, Bulacan 5 34 22 748 26 Malabon Navotas 5 21 51 1071 27 Caloocan City 5 57 31 1767 28 Novaliches 5 33 22 726 Revenue Region Total 6,468 RR # 6 Manila 29 San Nicolas Tondo 6 68 37 2516 30 Binondo 57 28 15 96 31 Sta. Cruz 6 55 22 1210 32 Quiapo Sampaloc San Miguel 6 25 40 1000 33 Intramuros Ermita Malate 6 44 22 968 34 Paco Pandacan Santa Ana 6 32 22 704 35 Romblon 6 2 22 44 36 Puerto Princesa 6 2 22 44 37 San Jose, Occidental Mindoro 6 1 22 22 Revenue Region Total 8,104 RR # 7 Quezon City 38 North Quezon City 7 71 38 2,698 39 South Quezon City 7 72 22 1,584 40 Cubao 7 67 22 1,474 41 Mandaluyong 7 63 22 1,386 42 San Juan 7 43 22 946 43 Pasig 7 70 22 1,540 44 Taguig Pateros 7 34 22 748 45 Marikina 7 42 22 924 46 Cainta Taytay 7 27 22 594 Revenue Region Total 11,894 RR # 8 Makati 47 East Makati 8 40 33 1,320 48 West Makati 8 36 22 792 49 North Makati 8 32 22 704 50 South Makati 8 45 22 990 51 Pasay City 8 6 22 792 52 Paraaque 8 28 22 616 53 Las Pias Muntinglupa 8 24 22 528 54 Trece Martinez City 8 14 24 336 Revenue Region Total 6,078 RR # 9 San Pablo City 55 San Pablo City 9 20 23 460 56 Calamba, Laguna 9 14 22 308 57 San Pedro, Laguna 9 15 22 330 58 Batangas City 9 15 22 330 59 Lipa City 9 7 53 371 60 Lucena City 9 15 22 330 61 Gumaca, Quezon 9 5 27 135 62 Boac, Marinduque 9 3 22 66 63 Calapan, Oriental Mindoro 9 3 22 66 Revenue Region Total 2,396 RR # 10 Legaspi City 64 Daet, Camarines Norte 10 4 71 284 65 Naga City 10 11 46 506 66 Iriga City 10 4 46 184 67 Legazpi City 10 8 78 624 68 Sorsogon, Sorsogon 10 3 56 168 69 Virac, Catanduanes 10 1 55 55 70 Masbate, Masbate 10 3 45 135 Revenue Region total 1,956 RR # 11 Iloilo City 71 Kalibo, Aklan 11 5 22 110 72 Roxas City 11 4 44 176 73 San Jose, Antique 11 3 26 78 74 Iloilo City 11 21 49 1,029 75 Barotac Nuevo, Iloilo 11 5 42 210 Revenue Region total 1,603 RR # 12 Bacolod City 76 Victorias, Negros Occ. 12 8 31 248 77 Bacolod City 12 23 81 1,863 78 Binalbagan, Negros Occ. 12 7 22 154 79 Dumaguete City 12 6 24 144 Revenue Region total 2,409 RR # 13 Cebu City 80 Mandaue City 13 18 22 396 81 Cebu City 13 34 22 748 82 Cebu City South 13 17 22 374 83 Talisay Cebu 13 9 22 198 84 Tagbilaran City 13 7 22 154 Revenue Region total 1,870 RR # 14 Tacloban City 85 Catarman, Northern Samar 14 1 22 22 86 Borongan, Eastern Samar 14 1 22 22 87 Catbalogan, Western Samar 14 5 22 110 88 Tacloban City 14 12 22 264 89 Ormoc City 14 7 22 154 90 Maasin, Southern Leyte 14 3 22 66 Revenue Region total 638 RR # 15 Zamboanga City 91 Dipolog City 15 5 29 145 92 Pagadian City 15 7 62 434 93 Zamboanga City 15 14 52 728 94 Isabela, Basilan 15 2 43 86 95 Jolo, Sulu 15 2 57 114 96 Bongao, Tawi-Tawi 15 2 42 84 Revenue Region Total 1,591 RR # 16 Cagayan de Oro City 97 Gingoog City 16 4 22 88 98 Cagayan de Oro City 16 22 28 616 99 Malaybalay, Bukidnon 16 6 22 132 100 Ozamis City 16 7 22 154 101 Iligan City 16 11 30 330 102 Marawi City 16 2 22 44 Revenue Region Total 1,364 RR # 17 Butuan City 103 Butuan City 17 9 51 459 104 Bayugan, Agusan del Sur 17 4 22 88 105 Surigao City 17 6 26 156 106 Tandag, Surigao del Sur 17 8 26 208 Revenue Region Total 911 RR # 18 Cotabato City 107 Cotabato City 18 14 23 322 108 Kidapawan, North Cotabato 18 9 50 450 109 Tacurong, Sultan Kudarat 18 7 32 224 110 General Santos City 18 14 22 308 111 Koronadal, South Cotabato 18 8 22 176 Revenue Region Total 1,480 RR # 19 Davao City 112 Tagum, Davao del Norte 19 12 22 564 113 Davao City 19 33 34 1,551 114 Mati, Davao Oriental 19 4 44 188 115 Digos, Davao del Sur 19 6 58 282 Revenue Region Total 2,585 Total Audit Plan for 1995 1,983 57,067