Mission of the Audit Divisions in the National Office

October 7, 1983 REVENUE MEMORANDUM ORDER NO. 31-83 SUBJECT : Mission of the Audit Divisions in the National Office 1. BACKGROUND In order to implement the provisions of Executive Order No. 608, this Revenue Memorandum Order re-states the mission of the audit divisions of the National Office and prescribes general guidelines for: * Grouping of examiners in the National Office; * Allocation of workloads and assignment of tax returns; * Coordinated examination of taxpayers who come under more than one sectoral or industry classification; * Industry classification; * Compilation of data from audit and investigation designed to accomplish the objectives stated herein. 2. MISSION OF THE AUDIT DIVISIONS UNDER THE SECTOR OPERATIONS OFFICE 2.1 The audit divisions under the Sector Operations Office were organized primarily with the following fundamental objectives. 2.1/1 To perform staff advisory and consultative functions relating to the package audit system along the lines-of-industry approach to investigation. 2.1/2 To develop, formulate, and recommend audit guidelines, techniques and procedures and work programs for determining the correct internal revenue tax liabilities due from corporate, as well as other enterprises, engaged in a particular line of industry. 2.1/3 To recommend necessary tax legislations and regulations in the light of their operations and experiences which will serve as inputs to tax planning and research efforts. 2.1/4 To develop audit data bank for computerization as reference by revenue examiners in the performance of their audit duties. 2.1/5 To establish industry profile and standards as a basis for a more effective tax law enforcement and administration. 2.2 To attain the above objectives the audit divisions shall - 2.2/1 Examine selected internal revenue tax returns of taxpayers engaged in a line of industry or business to be identified on the basis of examination cycles designed to cover major industry categories over a period of years. 2.2/2 Gather data internally from the Bureau of Internal Revenue and externally from other government offices, agencies and from other private sources for purposes of developing industry profile, statistics, and audit data bank. 2.2/3 Perform quality and thorough audit, the scope of which shall be such that the result thereof shall guarantee, not only optimum tax assessment and collection, but also the adequacy of data and information required to attain the above objectives. 3. EXAMINATION GROUPS 3.1/1 In order to rationalize allocation of audit and investigation workload, groupings of revenue examiners into sections in the Audit Divisions of the National Office should be alphabetically designated as Group "A", Group "B", Group "C", etc., instead of designating the same under the present system by descriptive nomenclature such as "Chemical & Coal Products Section," "Multinational Companies Section," "Transfer Tax Section," etc. 3.1/2 Authorities to investigate internal revenue tax cases should be assigned to examiners in accordance with the following guidelines - 3.1/21 Subject to the requirements or exigencies of the coordinated examination program, to the extent that it is feasible, all revenue examiners should be assigned equal number of internal revenue tax returns for audit and investigation, including inventory of pending cases. 3.1/22 If the Chief of Section or Chief of Division has reason to believe that a particular revenue examiner is not qualified to audit a number of returns equal to that assigned to other examiners in the Division, he should indicate such reasons in a memorandum to the Revenue Service Chief, Sector Operations Office, for evaluation. 3.1/3 Chiefs of Audit Divisions may restructure the groups of examiners in their respective divisions and may recommend designation of chiefs of section to supervise new or additional groups, the composition of which shall not be less than four (4) but not more than seven (7), excluding the chief of section, for each group. 4. COORDINATED EXAMINATION PROGRAM 4.1 A coordinated examination program shall be employed in cases where a taxpayer comes under more than one sectoral classification and the audit thereof comes under the functional jurisdiction of two or more audit divisions. Accordingly, under the coordinated examination program, the audit should be carefully planned and should involve more than one examiner from two or more divisions having functional audit jurisdiction over the same case. (Annex "A". Coordinated Examination Program.) 4.2 A coordinated program shall be conducted jointly by revenue examiners of the various audit divisions concerned in the following cases - 4.2/1 BOI registered industries. 4.2/11 Examiners in the Investment Incentives Division (IID) and from the other audit divisions under which a taxpayer enjoying tax incentive privileges is listed for line of industry examination, as well as examiners assigned in a revenue district office in cases of taxpayers not listed for investigation by the audit divisions, shall conduct a joint investigation of the taxpayer. The examiners of IID shall confine their audit to the accounts involving investment incentives and the examiners under the other audit divisions or revenue district offices shall confine their audit to the other accounts. 4.2/12 The Chief, Investment Incentives Division, may submit a selective list of taxpayers who are under the primary audit jurisdiction of the revenue district offices for joint investigation. 4.2/2 Contractors. - Revenue examiners from the Investment Incentives Division, Service and Miscellaneous Tax Division, and International Operations Division shall conduct joint investigation of taxpayers engaged in construction industry. 4.2/3 Other Cases. - Taxpayers engaged in multi-line businesses or industries, the examination of each of which line comes under the jurisdiction of different divisions shall be audited and investigated jointly by examiners from the various audit divisions concerned. 4.3 The authority to investigate shall be issued by the audit division having primary audit jurisdiction over the taxpayer. 4.4 An audit division has primary audit jurisdiction over a taxpayer if the taxpayer is engaged in a line of business/industry and is listed under the said division in Annex "B" (List of Taxpayers Subject to Investigation by the National Office). The examiners designated in the letter of authority to investigate shall simultaneously conduct the audit and shall submit their reports of investigation to their respective division chiefs who in turn will forward the report to the chief of the division having primary audit jurisdiction. 5. INDUSTRY SECTORS TO BE INVESTIGATED 5.1 Beginning with the taxable year 1982, the following lines of industry shall be investigated by the audit divisions of the National Office - 5.1/1 Agriculture & National Resources Division Forestry Mining Special Project - Fishing 5.1/2 Financing, Real Estate & Transfer Taxes Div . Real Estate & Transfer Taxes Banks & Financing Institutions 5.1/3 Government and Tax Exempt Corporations Rural Banks NACIDA 5.1/4 Investment Incentives Division Automotive Industry 5.1/5 International Operations Division International Carriers Multinational Corporations 5.1/6 Manufacturing Division I Food Industry Chemicals 5.1/7 Manufacturing Division II Basic Metal Textile, Wearing Apparel, and Leather Industries 5.1/8 Service & Miscellaneous Tax Division Contractors Trading Public Utilities - Special Project with COA 5.2 The Investment Incentives Division and the International Operations Division shall have functional audit jurisdiction over the accounts of taxpayers enjoying tax incentives and multinational, respectively, the scope of which is defined in Annex "A". acd 5.3 The list of taxpayers selected for investigation by the national office audit divisions is embodied in Annex "B". 6. DATA TO BE COMPILED AND REPORTED 6.1 Revenue profile - A taxpayer's statistical report prescribed for each sector of industry or line of business must be accomplished by the revenue examiners. The duly accomplished taxpayer's statistical reports should be attached to the examiner's report of investigation (Annex "C", Form for Taxpayer's Statistical Report). 6.2 Discrepancy analysis reports - A discrepancy analysis and evaluation sheet is also prescribed for classifying and evaluating discrepancy patterns for each industry. (Annex "D", Discrepancy Analysis Report.) 6.3 Description of the accounting system - A description of the accounting system employed by the taxpayer should be embodied in a separate memorandum to be attached to the report. 7. AUDIT TECHNIQUES AND GUIDELINES; REGULATIONS 7.1 Each examiner shall submit at least two audit techniques or procedures which is peculiar and exclusively applicable to the particular line of industry. 7.2 The audit technique shall be such that when applied will effectively establish the veracity of the taxpayer's declaration or will lead to the detection of undeclared/understated income or taxable base. 7.3 Each audit division shall recommend revenue regulations applicable to the industry or business sector which comes under its jurisdiction. 8. EFFECTIVITY This Revenue Memorandum Order takes effect immediately. RUBEN B. ANCHETA Acting Commissioner