Audit Program for 1994

April 11, 1994 REVENUE MEMORANDUM ORDER NO. 26-94 (amended by RMO 17-95) SUBJECT : Audit Program for 1994 TO : All Internal Revenue Officers and Others Concerned A. Background As early as 1981, the BIR recognized that it has limited resources and cannot therefore examine all tax returns. The goal was to audit or investigate limited tax returns with greater revenue potential. But because of lack of computerized data to select tax returns for audit, it prescribed in Revenue Memorandum Order (RMO) 21-81 dated July 6, 1981 that the bases for selective audit shall be: (a) sector/industry approach; (b) income level approach; and (c) others. Since then, there were some issuances by the BIR prescribing guidelines for the selection of tax returns for detailed audit. The last RMO issued on this matter was RMO 36-90 dated August 14, 1990. Pursuant to said Order, it will be the policy of the BIR to examine tax returns on a prioritized or limited basis only. However, the examination should be thorough and extensive. Since the development and formulation of a fully rationalized and more sophisticated selection criteria takes time, the general guidelines prescribed to be used were: (a) the line of business of the taxpayer; (b) static declaration of taxable base; (c) geographical factors; (d) results of surveillance; and (e) other factors. The present tax administration recognizes that the BIR has not improved substantially in terms of its computer capability and has, therefore, to manually select returns for examination in the meanwhile. Moreover, we have to address the equity aspect in the selection of cases for detailed audit as provided for in the mission statement of the BIR "to enforce internal revenue laws with impartiality, courtesy and consistency." B. Objectives of 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 to 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 reporting of income regardless of source; (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. aisa dc C. Selection and Audit Policies 1. It will be the policy of the BIR to audit internal revenue tax returns on a limited basis only but the audit should be thorough and extensive. It will provide a system under which audit of tax returns shall be competently and skillfully undertaken, coherently planned and prudently coordinated. 2. In the selection of tax returns for audit, the tax administration must ensure that some minimum level of audit coverage applies to all types of taxpayers even when enforcement yields are thereby reduced. 3. Selection of tax cases for audit will be done equitably. It is essential, however, that internal revenue laws will be enforced vigilantly and vigorously against those who intentionally disregard their responsibilities in order to guarantee that all taxpayers pay their fair share. 4. In determining the work load of every revenue officer, cases involving capital gains tax from sale or exchange of real property or shares of stocks, and reported cases protested by the taxpayer and thus under reinvestigation or reconsideration by the revenue officer shall not be counted at this time. 5. The number of tax cases handled by each revenue officer involving old pending cases (cases with one year or less before prescription), tax refund/credit cases, and cases under reinvestigation should not exceed 25 percent of his total number of tax cases at any time during the year. This will ensure that these cases will be given top priority by the revenue officers in conducting their audit activities during the year. 6. Initial workload determination for every revenue officer will be a minimum of 10 cases and a maximum workload of 30 cases. Each Letter of Authority is counted as one case. (See Section E.) 7. The proportion between individual and corporate taxpayers shall be as follows: 60 percent individual and 40 percent corporate. For example, if the annual audit work plan for a district office for 1994 is 600, 60 percent of 600, or 360 cases, must be individual taxpayers and 40 percent of 600, or 240 cases, must be corporate taxpayers. 8. All tax audits, including verification of claims for tax credits and refund, shall be covered by Letters of Authority, except the following: a. Capital gains tax returns for transactions involving sale or transfer of real property and/or shares of stocks; b. Protested cases; and c. Tax credit/refund cases of individuals of purely compensation income where the amount of the credit or refund does not exceed P10,000. 9. No Letter of Authority shall be issued unless the duplicate copy of the tax return of the taxpayer for the taxable year covered by the Letter of Authority is attached thereto. If the tax return of a taxpayer cannot be located by the revenue district office, a certification to this effect should be issued and attached to the Letter of Authority. 10. Package audit system procedures will be followed, regardless of the amount of gross sales/receipts of the taxpayers. For large taxpayers, more than one revenue officer may be assigned to conduct the audit, in which case, the principal revenue officer will be assigned the Letter of Authority. acd 11. One Letter of Authority will be issued for each taxable year. No Letter of Authority may be revalidated without an attached progress report from the revenue officer(s) conducting the audit. 12. Taxpayers may not be examined by the same revenue officer for the taxable year following the taxable year under audit, except in fraud cases and policy cases assigned by the Commissioner or Deputy Commissioners to be handled by district revenue officers. 13. Joint and coordinated examinations shall be undertaken by and between revenue officers of different districts in complicated tax cases, estate tax cases where the real properties are located in more than one regional/district office, large taxpayers, multinational companies, etc. Specific procedures regarding joint and coordinated audits will be issued in a separate RMO. D. 1994 Audit Work Plan The audit work plan for 1994 for each revenue district office (RDO) is computed based on rates developed from data submitted under RMO 31-93. The national average of 15 cases per revenue officer or the actual rate for the RDO, whichever is higher, was used to compute the 1994 work plan for each RDO. This plan represents the minimum number of audits that should be completed in 1994 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 represent the amount of 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 30 cases specified in C.6 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. cd i The rate was multiplied by the number of revenue officers in Assessment activities to compute the RDO's audit plan. Grade IV revenue officers were excluded. For RDOs that were split due to the redistricting process, the number of revenue officers was allocated between the two new RDOs based on the percentages developed by Information Systems Operations Service. Thus, an RDO with 20 revenue officers and a rate of 30 will have an annual work plan of 600 cases (20 x 30) for 1994. The RDO must complete 600 cases in order to accomplish the annual work. However, the work plan may be exceeded provided written authorization is secured from the Assessment Service. (The work plan for all RDOs is shown in Annex B.) E. Issuance of Letters of Authority and Assignment of Tax Cases All Letters of Authority will be issued and approved by the Revenue District Officer. Letters of Authority will be issued only for tax returns which correspond with the selection criteria outlined below. Issuance of Letters of Authority by Revenue District Officers inconsistent with these instructions will result in disciplinary action. In this regard, 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 Revenue Regional Directors may recommend replacements to the Commissioner for Revenue District Officers removed for non-compliance with this RMO. cd In the assignment of cases, the RDO will comply with the following instructions in selecting the tax returns to be audited. The selection criteria are listed in order of priority. Lower priority tax returns will not be audited until all higher priority audits are completed. 1. Determine the number of pending cases of each revenue officer and classify them into: (a) old pending cases (1990 and prior years) (PPY); (b) tax credit/refund cases (TCR); (c) other pending cases (1991 and later years) (OPY); and (d) reinvestigation cases (REV). 2. If the revenue officer has 30 pending cases at the beginning of the year, no additional Letters of Authority will be issued to the revenue officer, except as a replacement for reported tax cases, unless no additional work can be accomplished on the pending inventory. 3. If the revenue officer has less than 30 pending cases, additional cases may be assigned to the revenue officer but the total number will not exceed 30 cases. 4. Unassigned tax cases may be assigned to revenue officers only when the following types of cases have been completed: (a) devolved cases from the National Office; (b) prescribed pending cases; and (c) reinvestigations. acd 5. Unassigned tax cases will be distributed and assigned to revenue officers in accordance with the instructions listed below. The most current taxable year filed should be assigned for audit. No audits of taxable year 1991 returns will be initiated after June 30, 1994. No audits of taxable year 1992 returns will be initiated after December 31, 1994. 5.1 Mandatory (in order of priority) 5.1.1 Tax credit/refund cases arising from erroneously or illegally collected/paid taxes greater than P10,000 (TCR); 5.1.2 Taxpayers selected for tax audit based on third party information (TPI); 5.1.3 Individuals (self-employed and/or professional) with gross income/receipts of P5 million or above (MIN); and 5.1.4 Corporations, including partnerships, with gross assets of P50 million or above (MCO). 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. 5.2 Priority Target Population for 1994 If the criteria in 5.1 above does not provide sufficient workload for the RDO to accomplish the audit work plan, the following industries have been identified for audit. All Letters of Authority to be issued will come from the top 10 percent (Priority Target Population - Top 10 percent or PTT) or bottom 10 percent (Priority Target Population - Bottom 10 percent of PTB) in terms of gross sales or receipts of the following industries/sectors which have been identified to be low compliance areas: Industry NEDA Classification Codes a. Transportation Services 7110 through 7199 b. Wholesale Trade 6110 through 6190 c. Personal & Household Services 9711 through 9790 d. Retail Trade 6210 through 6290 e. Agricultural Crops Production 1110 through 1199 Thereafter, tax returns without substantial change in gross sales/receipts will be selected. For this purpose, the term "substantial" 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). casia If the desired number cannot be met following the above guidelines, the Revenue District Officer may select the top 10 percent or the bottom 10 percent in terms of gross sales or receipts from the following industries/sectors: Industry NEDA Classification Codes a. Restaurants & Hotels 9810 and 9820 b. Construction 5011 through 5030 c. Business Services 8511 through 8590 d. Real Estate 8410 through 8499 e. Non-Metallic Mining 2210 through 2299 5.3 Revenue District Officer Discretion (RDO) Because Revenue District Officers are presumed to know the taxpayers who are not complying with their tax obligations in their respective districts, they are given the privilege 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. F. Deviation from Policy Since this RMO cannot cover all possible situations of revenue district offices throughout the country, deviations from these policies may be allowed but only upon prior written authorization by the Assistant Commissioner (Assessment Service) as recommended by the Revenue Regional Director. G. Reporting Requirements In order that uniform information will be submitted by RDOs, monthly reports are required using BIR Form No. 19.71, containing the total number of dockets closed during the month segregated by tax year, type of tax and Audit Work Plan Selection Codes. Form 19.71 will be submitted 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. The consolidated report, together with the analyses of relevant data, will be submitted by the Assessment Service to the Commissioner not later than the end of the same month. H. Repealing Clause RMO 36-90, Guidelines for Selecting Taxpayers 1988 Returns for Detailed Audit, dated August 14, 1990, certain provisions of RMO 37-90, Additional and/or Revised Policy Guidelines for Examination of Returns and Issuance of Letters of Authority to Audit, dated August 14, 1990, certain provisions of RMO 10-89, General Policy Guidelines for Examination, Audit Jurisdiction, and Issuance of Letters of Authority to Audit, dated January 31, 1989, and other orders and issuances, inconsistent with these instructions are hereby modified or repealed accordingly. I. Effectivity This Order shall take effect immediately. Liwayway Vinzons-Chato Commissioner ANNEX A Instructions for BIR Form 19.71 1. BIR Form 19.71 will be completed monthly by revenue district offices in triplicate. The form is a district-wide summary of the cases/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 region; one copy will be retained by the revenue district office. The form will be completed and forwarded to the national office and regional office by the 10th day of the month following the reporting period. 2. BIR Form 19.71 is divided into four sections: * income tax - individuals including withholding returns * income tax - corporations & partnerships including withholding returns * value-added tax, other percentage taxes, and documentary stamp tax * other taxes The sections on income tax returns also include withholding tax investigations. Each Letter of Authority issued is counted as one audit. If the Letter of Authority was issued for more than one type of tax, only one tax type will be counted based on the following priority: * income tax (including withholding tax) * value-added tax * other taxes For example, if a Letter of Authority was issued for income tax and other percentage taxes, the case would be counted as an income tax case. If the Letter of Authority was issued for income tax and value-added tax, the case would be counted as an income tax case. 3. Specific instructions for BIR Form 19.71. 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 1994, 1993, 1992, and 1990 will be shown on separate lines. Data for tax years 1989 and prior years will be combined and entered on a 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 (i.e. group supervisor or Chief, Assessment Unit). The data in this column should match the total of the data in Columns 4a and 4b of BIR 19.64S. acd 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 and the in the Revenue Memorandum Order describing the annual audit work plan. Enter the total cases/dockets closed based on the selection code in each of the applicable columns. Column 3a - Enter the number of pending prescribed years (PPY) cases closed during the month in this column. For 1994, these are tax years 1990 and prior pending in inventory as of January 1, 1994. Column 3b - Enter the number of tax refund/TCC (TCR) cases closed during the month in this column. Column 3c - Enter the number of other pending cases closed (OPY) cases closed during the month in this column. For 1994, these are tax years 1991 and later pending in inventory as of January 1, 1994. Column 3d - Enter the number of mandatory individual return (MIN) audits that were closed during the month. For 1994, MIN audits are individual returns with more than P5,000,000 in gross income. Column 3e - Enter the number of mandatory corporate return (MCO) audits that were closed during the month. For 1994, MCO audits are corporate returns with P50,000,000 or more in assets. cd i Column 3f - Enter the number third party information (TPI) audits that were closed during the month. Column 3g - Enter the number of priority target population audits closed during the month that were in the top ten percent of the target population (PTT). The priority target populations are outlined in the RMO for the Audit Program for 1994. The top ten percent is based on gross income/gross sales. Column 3h - Enter the number of priority target population audits closed during the month that were in bottom ten percent of the target population (PTB). The priority target populations are outlined in the RMO for the Audit Program for 1994. The bottom ten percent is based on gross income/gross sales. Column 3i - Enter the number of priority population audits closed during the month that had no change in gross income/gross sales compared to the previous year (PTN). The priority target populations are outlined in the RMO for the Audit Program for 1994. No change in gross income/gross sales is defined as a change of 20 percent or less compared to the previous year. This applies to changes that are positive or negative. Column 3j - Enter the number of audits closed during the month that were selected on the recommendation of the Revenue District Officer (RDO). Total audits selected in this category can not exceed ten (10) percent of the Annual Audit Work Plan. Column 4 - Enter the number of other cases/dockets closed that are not included in the Annual Audit Work Plan. These cases include: acd * reinvestigations (REV) (Column 4a) * capital gains tax from sale or exchange of real property or shares of stocks (Column 4b) Note: The sum of Columns 3 and Columns 4 should equal Column 2 . Approval - The revenue district officer or his delegate will review BIR Form 19.71 for completeness and accuracy, including comparing the data in Column 2 with the data in Column 4 of BIR 19.64S. The approving official will sign the Form 19.71 certifying its correctness. The title and BIR employee number of the approving official will be entered in addition to the date the form was approved. BIR Form 19.71 must be submitted to the national office and regional office by the 10th day following the end of the month . 4. The data on this form will be periodically checked for accuracy by BIR employees from the national office and the regional office. Timeliness of submission and accuracy of this form and all other BIR management information reports will be considered during the performance evaluation of revenue district officers. ANNEX B 1994 Audit Plan by Revenue District Office Updated: 03/25/94 Number Revenue of 1994 Revenue District Office Region Revenue Workload Audit Number Name Number Officers Factor Plan RR #1 - Baguio City 1 Laoag City 1 13 15 195 2 Vigan, Ilocos Sur 1 7 31 217 3 San Fernando, La Union 1 17 15 255 4 Calasio, West Pangasinan 1 12.75 22 281 5 Alaminos, West Pangasinan 1 4.25 22 94 6 Urdaneta, East Pangasinan 1 10 15 150 Revenue Region Total 1,192 RR #2 - Cordillera Administrative Region 7 Bangued, Abra 2 2 26 52 8 Baguio City 2 8.45 15 127 9 La Trinidad, Benguet 2 4.55 15 68 10 Bontoc, Mt. Province 2 1 19 19 11 Tabuk, Kalinga-Apayao 2 4 15 60 12 Lagawe, Ifugao 2 3 15 45 Revenue Region Total 371 RR #3 - Tuguegarao, Cagayan 13 Tuguegarao, Cagayan 3 16 15 240 14 Bayombong, Nueva Vizcaya 3 7 22 154 15 Ilagan, Isabela 3 21 18 378 16 Cabarroguis, Quirino 3 3 15 45 Revenue Region Total 817 RR #4 - San Fernando, Pampanga 17 Tarlac, Tarlac 4 19 17 323 18 Olongapo City 4 6.5 15 98 19 Iba, Zambales 4 6.5 15 98 20 Balanga, Bataan 4 10 26 260 21 San Fernando, Pampanga 4 40 15 600 22 Baler, Aurora 4 4 15 60 23 Cabanatuan City 4 25 15 375 Revenue Region Total 1,814 RR #5 - Valenzuela 24 Valenzuela 5 48 15 720 25 Malolos, Bulacan 5 32 15 480 26 Malabon - Navotas 5 33 20 660 27 Caloocan City 5 52 15 780 28 Novaliches 5 43.6 18 785 Revenue Region Total 3,425 RR #6 - Manila 29 San Nicolas-Tondo 6 69 19 1,311 30 Binondo 6 61.8 15 927 31 Santa Cruz 6 41.2 15 618 32 Quiapo-Sampaloc-San Miguel 6 43 28 1,204 33 Intramuros-Ermita-Malate 6 67.2 15 1,008 34 Paco-Pandacan-Santa Ana 6 28.8 15 432 35 Romblon 6 2 15 30 36 Puerto Princesa 6 4 19 76 37 San Jose, Occidental Mindoro 6 3 57 171 Revenue Region Total 5,777 RR #7 - Quezon City 38 North Quezon City 7 65.4 18 1,177 39 South Quezon City 7 49.05 28 1,373 40 Cubao 7 59.95 15 899 41 Mandaluyong 7 45.6 15 684 42 San Juan 7 30.4 15 456 43 Pasig 7 25.5 15 383 44 Taguig-Pateros 7 25.5 15 383 45 Marikina 7 21.45 15 322 46 Cainta-Taytay 7 17.55 15 263 Revenue Region Total 5,940 RR #8 - Makati 47 East Makati 8 33 17 561 48 West Makati 8 45 15 675 49 North Makati 8 33 17 561 50 South Makati 8 45 15 675 51 Pasay City 8 32 16 512 52 Paraaque 8 33 15 495 53 Las Pias-Muntinlupa 8 22 15 330 54 Trece Martinez City 8 16 15 240 Revenue Region Total 4,049 RR #9 - San Pablo City 55 San Pablo City 9 18 35 630 56 Calamba, Laguna 9 15 16 240 57 San Pedro, Laguna 9 15 16 240 58 Batangas City 9 14 15 210 59 Lipa City 9 8 19 152 60 Lucena City 9 16 16 256 61 Gumaca, Quezon 9 8 15 120 62 Boac, Marinduque 9 3 15 45 63 Calapan, Oriental Mindoro 9 6 42 252 Revenue Region Total 2,145 RR #10 - Legazpi City 64 Daet, Camarines Norte 10 8 31 248 65 Naga City 10 14 42 588 66 Iriga City 10 7 31 217 67 Legazpi City 10 10 55 550 68 Sorsogon, Sorsogon 10 5 49 245 69 Virac, Catanduanes 10 6 16 96 70 Masbate, Masbate 10 6 16 96 Revenue Region Total 2,040 RR #11 - Iloilo City 71 Kalibo, Aklan 11 6 15 90 72 Roxas City 11 7 15 105 73 San Jose, Antique 11 4 18 72 74 Iloilo City 11 14.4 15 216 75 Barotac Nuevo, Iloilo 11 9.6 15 144 Revenue Region Total 627 RR #12 - Bacolod City 76 Victorias, Negros Occ. 12 7 15 105 77 Bacolod City 12 30 15 450 78 Binalbagan, Negros Occ. 12 8 15 120 79 Dumaguete City 12 7 15 105 Revenue Region Total 780 RR #13 - Cebu City 80 Mandaue City 13 23 15 345 81 Cebu City 13 46.5 15 698 82 Cebu City South 13 15.5 15 233 83 Talisay, Cebu 13 6 15 90 84 Tagbilaran City 13 9 15 135 Revenue Region Total 1,501 RR #14 - Tacloban City 85 Catarman Northern Samar 14 4 15 60 86 Borongan, Eastern Samar 14 1 40 40 87 Catbalogan, Western Samar 14 7 15 105 88 Tacloban City 14 14 15 210 89 Ormoc City 14 8 15 120 90 Maasin, Southern Leyte 14 4 15 60 Revenue Region Total 595 RR # 15 - Zamboanga City 91 Dipolog City 15 6 15 90 92 Pagadian City 15 10 34 340 93 Zamboanga City 15 16 23 368 94 Isabela, Basilan 15 5 17 85 95 Jolo, Sulo 15 3 27 81 96 Bongao, Tawi-Tawi 15 4 15 60 Revenue Region Total 1,024 RR # 16 - Cagayan de Oro City 97 Gingoog City 16 7 15 105 98 Cagayan de Oro City 16 18 18 324 99 Malaybalay, Bukidnon 16 7 21 147 100 Ozamis City 16 10 28 280 101 Iligan City 16 15 34 510 102 Marawi City 16 5 15 75 Revenue Region Total 1,441 RR #17 - Butuan City 103 Butuan City 17 13 23 229 104 Bayugan, Agusan del Sur 17 8 16 128 105 Surigao City 17 7 17 119 106 Tandag, Surigao del Sur 17 8 17 136 Revenue Region Total 682 RR #18 - Cotabato City 107 Cotabato City 18 12 29 348 108 Kidapawan, North Cotabato 18 8 21 168 109 Tacurong, Sultan Kudarat 18 9 28 252 110 General Santos 18 10.8 17 184 111 Koronadal, South Cotabato 18 13.2 17 224 Revenue Region Total 1,176 RR #19 - Davao City 112 Tagum, Davao del Norte 19 12 17 204 113 Davao City 19 38 21 798 114 Mati, Davao Oriental 19 6 21 126 115 Digos, Davao del Sur 19 8 21 168 Revenue Region Total 1,296