Prescribing a Short Audit for the Value-Added Tax Liabilities of Taxpayers with Reported Zero-rated Sales and Exempt Sales under the Jurisdiction of the Large Taxpayers Service and the Regional Offices

October 20, 2005 REVENUE MEMORANDUM ORDER NO. 27-05 SUBJECT : Prescribing a Short Audit for the Value-Added Tax Liabilities of Taxpayers with Reported Zero-rated Sales and Exempt Sales under the Jurisdiction of the Large Taxpayers Service and the Regional Offices TO : All Revenue Officials, Officers and Others Concerned I. Objectives 1. To enhance voluntary compliance of taxpayers through the immediate audit of Value-Added Tax (VAT) Returns with reported zero-rated sales and exempt sales; 2. To collect additional revenue from short audit of VAT 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. This Order shall cover VAT liabilities of taxpayers with zero-rated sales and exempt sales for the taxable year 2004 and the first semester of taxable year 2005. The audit shall focus on checking the correctness of the reported zero-rated sales and exempt sales and the related input taxes thereto. 2. The top priority for audit under this program shall come from the following selected industries: 2.1 Telecommunication companies 2.2 Manufacturing (Flour, Softdrinks, Sugar, Cement and Plastic) 2.3 Logistics Providers (Arrastre, Stevedoring, Freight, Trucking and Courier Services) 2.4 Construction III. Policies and Procedures 1. The Revenue District Offices (RDOs) and investigating divisions/offices of the Large Taxpayers Service (LTS) Large Taxpayers Audit and Investigation Division (LTAID) I, LTAID II, LTDO Makati and LTDO Cebu shall conduct the short audit of VAT liabilities as prescribed in this Order. DEcTIS 2. The Regional Director/OIC-LTS shall ensure that the tax returns to be audited/investigated under this program are not among those being audited under the regular audit program or other programs initiated by the Commissioner. 3. The initial list of taxpayers to be audited shall be the list generated by the Information Systems Group (ISG) which shall be provided to the Regional Director/OIC-LTS, copy furnished the Assistant Commissioner-Assessment Service (ACIR-AS), for issuance of the corresponding LAs/ANs. Subsequently, the RDOs and investigating divisions/offices of the LTS may identify additional taxpayers not yet included in the list provided by the ISG. 4. The list of taxpayers identified for audit by the RDO and investigating divisions/offices of the LTS shall be submitted to the respective Regional Director/OIC-LTS on or before October 25, 2005 for approval. Copies of the approved list shall be submitted, on or before October 28, 2005, by the Regional Director/OIC-LTS to the Deputy Commissioner-Operations Group (DCIR-OG), copy to furnished the Assistant Commissioner-Assessment Service (ACIR-AS), for recording and monitoring purposes. LAs/ANs may already be issued by the Regional Director/OIC-LTS once the list of taxpayers chosen to be audited has been approved. The Commissioner may, however, order or recommend the cancellation of the LA/AN, if upon evaluation by the Assessment Service and review by the DCIR-OG of the submitted list, it is found out that a violation of this RMO has been committed. 5. Only Revenue Officers-Assessment Group shall be authorized to conduct audit and investigation of tax cases, whether in a principal or assisting capacity. 6. The number of LAs/ANs for the short audit of VAT liabilities to be handled by a Revenue Officer shall not exceed ten (10) cases at any one time, subject to replenishment after the submission of the report of investigation of each case. 7. LAs/ANs shall be issued only when the duplicate copy of VAT returns for all the months/quarters of year 2004 and first semester of 2005 covered by the LA/AN is attached thereto. The tax returns should be retrieved from within the Bureau, and not from the taxpayers. 8. ROs shall strictly follow the applicable audit procedures and techniques provided for under Revenue Audit Memorandum Order No. 1-2000 and shall comply with the reporting requirements prescribed under RMO No. 53-98. 9. Where applicable, the RO 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. 10. Audits of all cases covered by LAs/ANs pursuant hereof shall be completed, and corresponding reports thereon shall be submitted by the RO within 30 days from issuance of the LAs/ANs: ASaTHc In case the report cannot be rendered within the prescribed period due to constraints attributable to the taxpayer, the RO may request for the revalidation of the LA/AN for the same period. 11. Only one revalidation of the LA/AN shall be allowed provided the RO shall render a progress report on the case duly noted by the GS and approved by the head of the investigating division/office. The previously issued LA/AN shall be stamped "Revalidated on ______________" and shall be signed by the Regional Director/OIC-LTS. 12. BIR Forms 0500 Series shall be accomplished completely and accurately for all reports of investigation in accordance with the prescribed reporting requirements under RMO No. 53-98. 13. The Assessment Division/LTS Review Team 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/LTS Review Team discover certain additional deficiency taxes as a result of their audit review or find that the taxpayers are excessively assessed or require compliance with certain procedures or submission of additional necessary documents, the dockets of the case shall be returned to the originating investigating office for appropriate action. The reviewing officer shall, in no case, be allowed to make any adjustment to the audit reports submitted by the investigating office. 14. 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 RMO 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 No. 12-99. 15. The Regional Director/OIC-LTS shall maintain a register of all LAs/ANs issued. All issuances, revalidations, cancellations, case closures, assessments and other matters in relation to LAs should be entered in the LA/AN Register. Entries in the register must be complete and updated at all times. Where the LA Monitoring System has been rolled out, the LA/AN should be encoded into the system, which should be utilized as to the functionalities available. IV. REPORTING REQUIREMENTS In order to monitor LAs issued under this Short Audit Program, the following reports, per Annexes "A" to "E" hereof, shall be prepared and submitted to the Assessment Service, not later than the 10th day of each month: Report Name Office Responsible a. Monthly List of Letters of Regional Office/OIC-LTS Authority Issued b. Monthly Status of Letters of Revenue District Office/ Authority Issued LTAID I, LTAID II, LTDO Makati & LTDO Cebu c. Monthly Report of Closed Revenue District Office/ VAT Cases/Dockets LTAID I, LTAID II, LTDO Makati & LTDO Cebu d. Monthly Inventory of Revenue District Office/ Pending VAT Cases/ LTAID I, LTAID II, LTDO Dockets Makati & LTDO Cebu e. Assessments and Collections Revenue District Office/ from the Conduct of Short LTAID I, LTAID II, LTDO Audit of VAT Cases Makati & LTDO Cebu In addition, a Progress Report on short audit cases shall be prepared by the RDO/LT investigating divisions/LT district offices every two (2) weeks until such time that the dockets of these cases are submitted to the Assessment Division/LTS Review Team 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 following month for the 2nd half of the previous month. AcTHCE The above reports are to be prepared distinctly and separately from the regular reports on audit/investigation cases to determine the effectiveness of the Short Audit Program. V. Repealing Clause This Order supersedes all revenue issuances or portions thereof inconsistent herewith. VI. Effectivity This Order shall take effect immediately. (SGD.) JOSE MARIO C. BUAG OIC Commissioner of Internal Revenue ANNEX A Monthly List of Letters of Authority Issued ANNEX B Monthly Status of Letters of Authority Issued ANNEX C Monthly Report of Closed VAT Cases/Dockets ANNEX D Monthly Inventory of Pending VAT Cases/Dockets ANNEX E Assessments and Collections from the Conduct of Short Audit of VAT Cases