Prescribing an Office Audit Program in the Assessment Division of Revenue Regional Offices

July 26, 2000 REVENUE MEMORANDUM ORDER NO. 36-00 SUBJECT : Prescribing an Office Audit Program in the Assessment Division of Revenue Regional 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 engaged in small-scale business; 2. To collect additional revenue from small cases not covered by the Annual Audit Program in Revenue District Offices (RDO); and 3. To effectively monitor the accomplishments of the investigating unit in the Regional Assessment Divisions. II. COVERAGE 1. The Office Audit Program shall cover the audit of tax returns of individual and corporate taxpayers, estates and trusts within the Region covering taxable years 1997, 1998 and 1999, in accordance with the following order of priority: 1.1 Taxpayers engaged in business or in the practice of profession whose tax returns indicate low level of compliance where the gross sales/income is P3,000,000 or less for Revenue Regions Nos. 5, 6, 7, & 8 (Valenzuela, Manila, Quezon City and Makati) except taxpayers in RDO Nos. 35-Romblon, 36-Puerto Princesa & 37-San Jose, Occidental Mindoro and P1,000,000 and below for all other regions and the above-enumerated RDOs, as follows: 1.1.1 Break-even returns and returns showing net loss for at least two consecutive years (Selection Code; BEL). 1.1.2 Taxpayers whose tax due per return is less than 2% of the reported gross sales/income (Selection Code: LPR). TACEDI 1.1.3 Taxpayers with substantial reduction in gross sales/receipts/tax payments and/or substantial increase in cost of sales and expenses as defined in Section II.B.3 of RMO No. 24-2000 (Year 2000 Audit Program for Revenue District Offices) (Selection Code: SRS). 1.1.4 Taxpayers belonging to the industries categorized as "Other Priority" taxpayers as enumerated under Section II.B of RMO No. 24-2000 within the set threshold (Selection Code: PTL). 1.2 Such other cases that may be identified by top management from time to time within the set thresholds in Sec. II.1.1 hereof (Selection Code: NOM). 1.3 Taxpayers selected for audit by the Chief, Assessment Division which do not fall within the above guidelines but within the set thresholds, provided the tax returns have already been transmitted by the RDO (Selection Code: CAD). 1.4 Taxpayers selected for audit by the Chief, Assessment Division which do not fall within the above guidelines and exceeding the thresholds set in II.1.1 hereof, provided the tax returns have already been transmitted by the RDO and the Division can still effectively manage its overall workload inventory (Selection Code: OUT). 2. The following cases shall be excluded from the coverage of this Order: 2.1 Taxpayers selected for audit by the RDOs under the annual Audit Program; 2.2 Taxpayers under audit/investigation by the Special Investigation Divisions of Regional Offices, 2.3 Taxpayers falling under the jurisdiction of Large Taxpayers Service, Excise Taxpayers Service and other taxpayers/industries covered by the Audit Program of the Enforcement Service; and 2.4 Taxpayers who availed of the Economic Recovery Assistance Program (ERAP) for taxable year 1998 to the extent of the tax type availed of. III. AUDIT POLICIES AND GUIDELINES 1. Office Audit shall be conducted without field investigation and only- by Revenue Officers (Assessment) of the Office Audit Section (OAS) in the Assessment Division of Regional Offices. However, the Regional Director may request the conduct of office audit in Revenue District Offices which are located very far from the Regional Office for the convenience of the taxpayers. The request shall be subject to approval of the Assistant Commissioner, Assessment Service. 2. The Chief, Assessment Division shall draw lists of taxpayers selected for office audit following the format prescribed under Annex "A" hereof. There shall be one list for each taxable year which shall state in alphabetical order the name of the taxpayer, the amount of gross sales/receipts declared by the taxpayer, the selection code, the Philippine Standard Industrial Classification (PSIC) and the corresponding amount of income tax paid for the period. The Chief, Assessment Division shall submit the said lists to the Assistant Regional Director for review. The Assistant Regional Director shall see to it that only cases that match with the foregoing selection criteria are included in the lists, and that taxpayers selected under Sec. II.1.4 of this Order do not exceed the total number of taxpayers selected under the other priority criteria. The said lists shall, in turn, be forwarded to the Regional Director who shall recommend the lists to the Assistant Commissioner, Assessment Service for approval. 3. All office audit cases shall be covered by Office Audit Letters of Authority (OA-LOAs). The issuance of correspondence letter or any other similar orders for the purpose of office audit examination shall be strictly prohibited. TcEDHa 4. The policy on the simultaneous investigation of all tax liabilities of the taxpayer for the same taxable year shall be followed. One LA shall be issued for each taxable year under audit to include all internal revenue tax liabilities of the taxpayer. Accordingly, the LA shall state the specific year under audit and the indication of "unverified prior years" or similar statement in the LA shall not be allowed. 5. Only LAs with attached official duplicate copies of tax returns shall be signed by the Regional Director. 6. The initial workload of each Revenue Officer shall not exceed thirty (30) cases. In no case shall the number of cases handled by each Revenue Officer exceed 30 at any one time during the year, subject to replenishment after the submission of the report of investigation/closure of each case. However, pending cases as of the effectivity of this Order shall be counted as part of the initial workload of the Revenue Officer. 7. The same taxpayer shall not be allowed to be audited for the immediately succeeding taxable year, unless there is a valid written justification for the conduct thereof and subject to prior approval by the Assistant Commissioner, Assessment Service. 8. The same Revenue Officer/Group Supervisor shall not be allowed to audit the same taxpayer for the immediately succeeding audit period. 9. In case the taxpayer fails to respond to the Office Audit LA or if the LA is "returned to sender" by the Post Office, the RO shall immediately prepare a written report thereon to the Chief, Assessment Division. The concerned Chief, Assessment Division shall forward the said report to the Special Investigation Division in the Regional Office for appropriate action. 10. In auditing the tax returns and records of the taxpayers, the Revenue Officer shall apply the audit procedures and techniques under RAMO No. 2-95, as amended by RAMO Nos. 1-99 and 1-2000, and supplemented by RAMO No. 2-2000, except the procedures applicable to a field investigation. The Revenue Officer shall also comply with the reporting requirements prescribed under RMO No. 53-98. The Chief, Office Audit Section and the Chief of the Assessment Division shall see to it that substantial compliance with existing rules and regulations are observed by all Revenue Officers to ensure quality audit of tax returns. All reports of investigation shall satisfy all the requisites of a quality report to meet the approval of any reviewing office, both internal or external on a regular review or performance audit basis. At anytime, a post-audit evaluation may be conducted by the Committee on Audit Report Evaluation ( Revalida Committee ) in the National Office pursuant to RMO No. 5-89, as amended by RMO Nos. 34-95 and 42-95. 11. 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. 12. The report of investigation shall be submitted within sixty (60) days from the issuance of the LA. In case the report cannot be rendered within the prescribed period due to constraints attributable to the taxpayer, the Revenue Officer shall request for revalidation of the LA by preparing a progress report to be approved by the Chief, Assessment Division. The Chief, Assessment Division shall transmit the docket to the Regional Director for revalidation of the LA. The previously issued LA shall be stamped "Revalidated on ______" and shall be signed by the Regional Director. 13. Revenue Officer's Audit Reports (BIR Forms 0500 series as revised) shall be prepared for all reports of investigation. The same shall be the basis of assessment notices/demand letters, Audit Sheets, Payment Form (BIR Form 0605), and Termination Letters. 14. All reports of office audit shall be subject to final review and approval by the Regional Director. 15. Reports of investigation on closed and terminated office audit cases shall be submitted to the Regional Director for final approval within ten (10) days from the date of taxpayers' payment of the deficiency tax assessments. Reports of investigation on cases for assessment shall be submitted to the Regional Director at least six (6) months before the prescription date of the cases. 16. The Chief, Assessment Division shall sign the pre-assessment notices. However, prior to issuance of the pre-assessment notice, the report together with the docket shall be reviewed by the Review and Evaluation Section in the Assessment Division. 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 RMO No. 37-94, as amended by RMO No. 36-99. 18. All protests on assessment shall be evaluated by the Assessment Division in accordance with the provisions of Revenue Regulations No. 12-85 and 12-99. IaTSED IV. PROCEDURES The procedures outlined under Section IV of RMO No. 71-99 shall be strictly observed by all concerned. V. DEVIATIONS FROM POLICIES Deviations from these policies may be allowed but only upon prior written authorization from the Assistant Commissioner, Assessment Service as recommended by the Regional Director. VI. REPORTING REQUIREMENTS Reports prescribed under Section VI of RMO No. 71-99 shall be accomplished by the Regional Directors and Chiefs of the Assessment Divisions. For the Monthly Report of Closed Cases/Dockets (BIR Form No. 0603-A). the revised format per Annex "B" hereof shall be used. VII. VIOLATIONS Any unauthorized deviation from the foregoing policies and procedures and/or violation of any provision of this Order will result in the imposition of disciplinary action to the concerned revenue officers and officials and such shall be referred to the Internal Affairs Service for appropriate investigation. In this regard, the Assistant Commissioner, Assessment Service thru the Deputy Commissioner for Operations may recommend to the Commissioner the relief, re-assignment or transfer of any revenue official violating any of the provisions and instructions prescribed in this Order. VIII. REPEALING CLAUSE All other issuances inconsistent herewith are hereby modified or repealed accordingly. IX. EFFECTIVITY This Order shall take effect immediately upon approval. (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue ANNEX A List of Taxpayers Selected for Office Audit ANNEX B Monthly Report of Closed Cases/Dockets