Prescribing a Short-Term Audit Program for Revenue District Offices

June 6, 2000 REVENUE MEMORANDUM ORDER NO. 19-00 SUBJECT : Prescribing a Short-Term Audit Program for Revenue District Offices TO : All Regional Directors, RDC Heads, Assistant Regional Directors, Chiefs of the Assessment Division of Regional Offices, Revenue District Officers, Revenue Officers and Others Concerned I. OBJECTIVES 1. To enhance voluntary compliance of taxpayers thru the immediate audit of currently filed quarterly, monthly and other tax returns; llcd 2. To collect additional revenue from short-term audit of cases and institute necessary action where warranted: and 3. To ensure uniformity of action in the investigation and reporting of the above cases by providing the necessary audit guidelines and reporting requirements. II. COVERAGE AND AUDIT SELECTION CRITERIA 1. The Short-term Audit Program shall cover the following tax returns of individual and corporate taxpayers for any of the month/quarter in year 2000: 1.1. Monthly Remittance Returns of Income Taxes Withheld (WTR) 1.1.1. Final Withholding Tax on: Profit remittances to head office of multinational companies Royalties/technical services fees/management fees paid to foreign holding companies, parent companies or other non-resident taxpayers Royalties on cinematographic films Interest on foreign loans Fringe benefits Lease rentals of vessels, aircrafts, machineries and other equipment 1.1.2. Creditable Withholding Tax Expanded Withholding Tax at Source Withholding Tax on wages of retired company officers 1.2. Quarterly Value-Added Tax Returns (VTS) 1.2.1 VAT on: Public works contractors [in relation to Section III (B)(2) of the Tax Code] Telecommunications companies Taxpayers with claims for tax credit/refund and excess tax credits Taxpayers belonging to the top five (5) industries subject to VAT within the RDO but whose returns have no tax payment or their tax payments are below the normal net VAT payment rate per industry or taxpayers with substantial reduction in tax payments. A reduction of twenty percent (20%) in current year's tax payment from that of the immediately preceding year shall be considered as substantial. 1.3. Quarterly Percentage Tax Returns (PTS) 1.3.1 Percentage Tax on: Domestic carriers and keepers of garages International carriers Franchises Radio and television broadcasting who have not taken the option to register as VAT taxpayers Electric, gas and water utility companies Banks and non-bank financial intermediaries Finance companies Insurance companies on total premiums collected Proprietors, lessees and operators of amusement places/events Cockpits Cabarets, night or day clubs Boxing exhibitions Professional basketball games Jai-Alai and racetracks Sale, barter or exchange of shares of stock listed and traded through the Local Stock Exchange or through Initial Public Offering Persons exempt from VAT under Section 109 (z) of the Tax Code 1.4. Documentary Stamp Tax Returns (DST) 1.4.1 Documentary Stamp Tax on: Newly registered corporations with the Securities and Exchange Commission Banks and insurance companies outside the jurisdiction of the Large Taxpayers Service 2. The above returns shall be selected according to the following order of priority 2.1 Tax cases for audit based on policy direction of the Commissioner 2.2 Taxpayers with third party information which resulted to substantial reduction in tax payments as clarified in the last item of Section II 1.2.1 above 2.3 Taxpayers with low tax compliance In setting the priority for selection of taxpayers subject to percentage tax and VAT, except those with claims for tax credit/refund, the Revenue District Officer must perform the following: 2.3.1 Classify taxpayers within his jurisdiction by type of industry. 2.3.2 Sub-classify further taxpayers belonging in the same industry according to gross assets or gross sales/receipts as of December 31, 1999: Classification Gross Sales/Receipts Gross Assets Small Not more than P5,000,000.00 Not more than P10,000,000.00 Medium P5,000,000.01 - P50,000,000.00 P10,000,000.01 - P100,000,000.00 Large P50,000,000.01 - P100,000,000.00 P100,000,000.01 - P400,000,000.00 Very Large Over P100,000,000.00 Over P400,000,000.00 2.3.3 Prepare a summary report showing total taxable gross sales/receipts, net amount of VAT/Percentage Tax payment and percentage of net VAT/Percentage Tax payment over gross sales/receipts of each taxpayer per industry and classification. 2.3.4 Draw-up a statistical report (Annex "A") based on the above summary stating the number of taxpayers per industry and classification with their respective rates of tax payments and submit the same to the Assistant Commissioner, Assessment Service (ACIR, AS). Example Industry Restaurants/Food Chains a. Very Large No. of Taxpayers Percentage of Net VAT payments 10 4% 50 3% 100 2% 70 1% b. Large No. of Taxpayers Percentage of Net VAT payments 20 6% 75 5% 150 3% 95 2% 100 1% c. Medium No. of Taxpayers Percentage of Net VAT payments 35 7% 50 4% 200 3% 150 1% d. Small No. of Taxpayers Percentage of Net VAT payments 50 8% 100 6% 500 3% 100 1% 400 0% Based on the foregoing example, the normal level of compliance is the percentage of tax payment paid by majority of taxpayers within the same classification in the same industry. cdlex 2.3.5 Identify the taxpayers below the level of normal tax compliance and recommend them for audit. No threshold shall be set in selecting taxpayers to be audited. However, priority shall be given to taxpayers belonging to higher classification group. Exception: Taxpayers under the jurisdiction of the Large Taxpayers Service and Excise Tax Service shall not be covered by this Order. III. GUIDELINES AND PROCEDURES 1. Only the Revenue District Offices are authorized to conduct a short-term audit. In no case shall the Assessment Division and Special Investigation Division in the Regional Offices be allowed to perform a short-term audit of tax returns. 2. The cases to be recommended by the Revenue District Officers shall be identified as those taxpayers with the highest potential upon audit thereof based on Section II of this Order. 3. The Regional Director and ACIR, AS shall ensure that the taxpayers to be audited/investigated by the RDOs under this program are not among those to be audited by the Assessment Division under the Office Audit Program, annual Audit Program for Revenue District Offices and by the investigating division/teams in the National Office. 4. The Revenue District Officer shall draw a list of taxpayers selected for audit following the format prescribed under Annex "B" hereof. The said list shall be submitted by the Revenue District Officer to the Regional Director on or before June 30, 2000 for pre-approval. 5. The Regional Director shall submit to the ACIR, AS the pre-approved list not later than July 14, 2000 for final approval. 6. All Letters of Authority (LAs)/Audit Notices (ANs) shall be issued and approved by the Regional Director. However, no LAs/ANs shall be issued by the Regional Director without prior written approval of the ACIR, AS. 7. Only Revenue Officers-Assessment Group shall be authorized to conduct audit and investigation of tax cases, whether in a principal or assisting capacity. LexLib 8. The same Revenue Officer and/or Group Supervisor shall not be assigned to audit/investigate the same taxpayer during the year except when this is not possible due to limited number of Group Supervisor/Revenue Officer in the RDO. 9. LAs/ANs shall be issued only when the duplicate copy of the tax return for the month/quarter covered by the LA/AN is attached thereto. 10. The initial workload for short-term audit cases for every Revenue Officer will be twenty (20) cases irrespective of the existing inventory of the Revenue Officer at the time of the effectivity of this Order. In no case shall the number of short-term audit cases handled by a Revenue Officer exceed 20 cases at any given time during the year, subject to replenishment after the submission of the report of investigation/closure of each case. 11. Revenue Officers shall strictly follow the applicable audit procedures and techniques provided for under Revenue Audit Memorandum Order Nos. 2-95 and 1-99 and shall comply with the reporting requirements prescribed under Revenue Memorandum Order No. 53-98. 12. The Revenue Officer shall utilize data obtained from Third Party Information (TPI) sources or any record available in the Bureau that may provide valuable basis for the determination of the taxpayer's true tax liabilities prior to the finalization of the audit. 13. Audits of all cases covered by LAs/ANs shall be completed and corresponding reports thereon shall be submitted by the Revenue Officer within the following number of days from the issuance of LAs/ANs: Case No. of Days Classification a. Very Large 120 b. Large 90 c. Medium 60 d. Small 45 In case the report cannot be rendered within the prescribed period due to constraints attributable to the taxpayer, the Revenue Officer may request for the revalidation of the LA/AN. prcd 14. Only one revalidation of the LA/AN shall be allowed provided the Revenue Officer shall render a progress report on the case duly noted by the Group Supervisor and approved by the Revenue District Officer. The previously issued LA/AN shall be stamped "Revalidated on ________________" and shall be signed by the Regional Director. 15. BIR Forms 1717 for Non-ITS RDOs and Forms 0500 Series for ITS RDOs shall be accomplished completely and accurately for all reports of investigation in accordance with the prescribed reporting requirements under RMO No. 53-98. 16. The Assessment Division shall review all dockets covered by LAs/ANs prior to the issuance of a preliminary/final assessment notice, termination letter, confirmation letter, and tax credit certificate or refund check. In case the reviewers in the Assessment Division discover certain additional deficiency taxes as a result of their audit review or find that the taxpayers are excessively assessed, the docket of the case shall be returned to the originating investigation office for appropriate action. The reviewing officer shall, in no case, be allowed to make any adjustments to the audit reports submitted by the investigating offices. 17. The preparation, approval and release of Assessment Notices and Demand Letters as well as the preparation of BIR Form 40.00 shall be in accordance with the provisions of Revenue Memorandum Order No. 37-94, as amended by Revenue Memorandum Order No. 36-99. All protests on assessments shall be evaluated and acted upon in accordance with the provisions of Revenue Regulations Nos. 12-85 and 12-99. cdll IV. REPORTING REQUIREMENTS In order to monitor LAs issued by the RDOs under the Short-Term Audit Program, the following reports shall be prepared and submitted to the Assessment Service not later than the 10th day of the month: Office Responsible Reference a. Monthly List of Letters of Regional Office Annex C Authority Issued on Short- Term Audit b. Monthly Status of Letters of Revenue District Office Annex D Authority Issued on Short- Term Audit Cases c. Monthly Report of Closed Revenue District Office Annex E Short-Term Audit Cases/Dockets d. Monthly Inventory of Revenue District Office Annex F Pending Short-Term Audit Cases/Dockets e. Assessments and Collections Revenue District Office Annex G from the Conduct of Short- Term Audit All other reports prescribed under Revenue Memorandum Order No. 67-99 shall be accomplished by the concerned Offices/Divisions. Information to be reported therein shall cover results of investigation on cases under the regular and short-term audit. LibLex In addition to the above-mentioned reports, a Progress Report on Short-Term Audit Cases shall be prepared by the Revenue District Officer every two (2) weeks until such time that the dockets of these cases are submitted to the Assessment Division for review. The Progress Report shall be in the form of a memorandum stating the progress of the audit, substantial findings on each case, amount of potential assessments, problems/issues encountered and recommendations. This shall be submitted to the Office of the Commissioner, copy furnished the ACIR, AS not later than the 20th day of the month to cover the first half of the month and not later than the 5th day of the month for the 2nd half of the previous month. V. REPEALING CLAUSE All issuances inconsistent herewith are hereby modified or repealed accordingly. VI. EFFECTIVITY This Order shall take effect immediately. (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue ANNEX A Statistical Report on Tax Payment of Taxpayers by Type of Industry and Taxpayer Classification ANNEX B List of Taxpayers Recommended for Short-Term Audit ANNEX C Monthly List of Letters of Authority Issued on Short-Term Audit ANNEX D Monthly Status of Letters of Authority Issued on Short-Term Audit Cases ANNEX E Monthly Report of Closed Short-Term Audit Cases/Dockets ANNEX F Monthly Inventory of Pending Short-Term Audit Cases/Dockets ANNEX G Assessments and Collections from the Conduct of Short-Term Audit