Guidelines for Selecting Taxpayers 1988 Returns for Detailed Audit

August 1, 1990 REVENUE MEMORANDUM ORDER NO. 36-90 SUBJECT : Guidelines for Selecting Taxpayers 1988 Returns for Detailed Audit TO : All Internal Revenue Officers and Others Concerned A. Background 1. It has been the practice of heads of tax audit units to assign income and other internal revenue tax returns indiscriminately to revenue officers (RO's) for audit without taking into account their workloads and skills and the potential to enhance voluntary compliance among taxpayers. As a result, audits are conducted haphazardly and are grossly ineffective in enhancing voluntary compliance. B. Examination Policy 2. Pursuant to the medium term Tax Administration Program it shall be the policy of the Bureau of Internal Revenue to examine internal revenue tax returns on a prioritized or limited basis only but the examination should be thorough and extensive. Within the framework and limitations of available resources for audit of returns, the Bureau will adopt and implement an effective method to achieve the most productive use of these resources through selection of tax returns most in need of audit. C. Objective 3. This revenue memorandum order prescribes initial and general guidelines for selecting taxpayers whose tax returns for 1988 will be subjected to detailed field audit. Since the development and formulation of a fully rationalized and more sophisticated selection criteria takes time, the general guidelines prescribed herein shall constitute an initial implementation phase of such program and will serve as a means to redirect and reorient the attitudes of field operations officers towards the primary objective of selective tax audits which is to enhance voluntary compliance. 4. The objective of the selective or prioritized audit program is to create an impact on the taxpayers in general (particularly on those who may be in the last priority for audit) that will compel them to declare voluntarily their correct tax liability due to the awareness that if their tax returns are selected in the future for thorough audit and it will be found that they have willfully underdeclared their taxable base they will be subjected to the civil and criminal sanctions. It is therefore desirable that the selection should not be hastily done; on the other hand it should be made carefully by a thorough analysis, evaluation and comparison of the tax returns filed within the jurisdiction of the revenue district officer. D. Responsibility of Revenue District Officers and Chiefs of Assessment Branches 5. All Revenue District Officers (RDO's) and Chiefs, Assessment Branches are hereby tasked to select and prioritize returns for detailed audit and shall be responsible for strict observance of the guidelines prescribed in this revenue memorandum order. Revenue district officers should know the general extent of compliance with the revenue laws by taxpayers under their jurisdiction. They are expected to be able to pinpoint particular persons who are not correctly declaring their taxable base. 6. Although at present, no criteria or hard and fast rule can be prescribed for the selection of a return, detailed audit of returns selected by the RDO and the Chief, Assessment Branch, must result in optimization of the performance rating determined under RMO No. 9-90. A Revenue District Officer who fails to exercise sound judgment in administering the selection and assignment process assumes the risk of obtaining a low rank in the performance measurement . E. Procedure for selection of taxpayers for thorough audit. 7. Returns for detailed audit may be selected and prioritized by the (a) Commissioner; (b) Revenue District Officer and (c) the Chief, Assessment Branch, under the guidelines prescribed herein. 8. The Commissioner may select returns which should be given priority and subjected to detailed audit and assign the same to the: 8.1 Special Operations Service 8.2 Intelligence & Investigation Office 8.3 Special audit teams or groups 8.4 Revenue officers in any of the various audit/investigation units under the coordinated examination program. 9. Selection process at the RDO and Assessment Branch level shall be undertaken by segregating and setting aside the maximum number of returns as provided below. For purposes of this RMO, the term "Revenue Officer" ("RO") means a Revenue Officer I and Revenue Officer II who is appointed to a position as such to perform assessment function. 9.1. The maximum number of taxpayers to be selected and segregated by the RDOs in the Revenue District Office shall not exceed 30 taxpayers for each Revenue Officer (RO) assigned in the revenue district office as of August 30, 1990. 9.2 The maximum number of taxpayers to be selected and segregated by the Chief, Assessment Branch shall not exceed 90 taxpayers for each RO assigned in the Office Audit Section as of August 30, 1990. 9.3 Refundable 1988 income tax returns which are subject to field or office audit shall not be taken into account in determining the maximum number of returns to be selected under paragraphs 9.1 and 9.2 above. 9.4 The returns selected under Sections 9.1 and 9.2 above shall be assigned to the ROs in accordance with the procedures prescribed in Section (F) of this RMO. 9.5 The Chief, Assessment Branch, shall forward all 1988 income tax returns subject to field audit to the respective revenue district offices except those covered in the paragraph 10. 10. Taxpayers who have not availed of the privileges under Revenue Memorandum Circular Nos. 23-89; 29-89 and 44-89, and who have not been selected under RMO 30-90 or other directive by the Commissioner may be selected, taking into account relevant factors, such as but not limited to, the following: 10.1 The line of business of the taxpayer. The RDO may select a representative sample from each line or category of business within his jurisdiction. For example, he may choose some taxpayers from each of the business services, such as manufacturing, trading, or service sector or one from each of the subclassifications of the major business categories, such as hardware and general merchandising under the trading sector. 10.2 Static declaration of taxable base. The Revenue District Officer may also make a comparative analysis of the amount of gross income or revenue declared by a taxpayer for the past taxable years. A taxpayer whose taxable base is not significantly increasing despite brisk business or one whose reported sales declaration is not comparable to others engaged in similar business or economic activity one whose reformed sales declaration is not comparable to others engaged in similar business or economic activity under similar circumstances may be singled out for selective and prioritized audit. 10.3 Geographical factors The RDO may select the tax return of a particular person in a municipality for detailed audit and if circumstances warrant, for criminal prosecution in order to create an impact among the taxpayers in that locality. 10.4 Results of surveillance. If a taxpayer was subjected to surveillance for VAT or other internal revenue tax purposes and the results of the surveillance strongly indicate that the taxpayer has underdeclared his sales or gross receipts for 1988, his tax returns may be selected for detailed priority audit. 10.5 Other factors. The above factors are not all inclusive. Accordingly, the Revenue District Officer and the Chief, Assessment Branch, shall consider other factors which in his best judgment and discretion are relevant in attaining the objectives and purposes of this revenue memorandum order. 11. Refundable income tax returns which are subject to office and field audits and pre-audit, in the case of refundable corporate income tax returns, shall, in addition to the taxpayers selected in a manner as prescribed above, be included in the cases to be selected and listed. However, refundable income tax returns of individuals deriving pure compensation income which are subject only to pre-audit shall not be listed. 12. The RDO shall accomplish Annex "A" prescribed in Section "H" after completing the selection process. Thereafter all tax returns not selected for audit shall be returned to the Assessment Branch for future reference with an accompanying transmittal list containing the following information: name of taxpayer; gross income per tax returns; income tax due, if any, per income tax return. The Selective Audit Committee referred to in section "G" shall be furnished with a copy of the list. F. Procedure for assignment to RO's of returns selected by the RDO. 13. After Annex "A" has been prepared and submitted to the concerned revenue officials, the returns of the taxpayers selected under the preceding paragraphs shall constitute a pool from which returns may be assigned by the RDO and the Chief, Assessment Branch, to the qualified ROs taking into consideration the requirements enumerated hereunder, pertinent provisions of RMO 10-90, 18-90 and other related issuances. 14. All refundable income tax returns shall first be assigned for audit prior to the other selected (non-refundable) tax returns. 15. In no case shall the total number of cases, including refundable returns, for original audit by a RO exceed ten for field audit and thirty for office audit. 16. The policies under RMO 37-90 and other issuances pertaining to replenishment of cases shall be strictly complied with. G. Random audit of returns not selected. 17. Tax returns not selected for thorough audit by the revenue district officer shall after computerized selection by the RISSI or upon recommendation by the Selective Audit Committee to be created under a separate revenue special order, and upon order of the Commissioner, be subject to random detailed audit by the Special Operations Service, Intelligence and Investigation Office or a group of ROs assigned to undertake a special audit project. H. Monitoring and reporting 18. The RDO and the Chief, Assessment Branch, shall, in a form prescribed therefor (Annex "A") prepare a List of Taxpayers Selected for Detailed Audit for which Letters of Authority (L/As) will be issued. The list shall be prepared in triplicate to be submitted and distributed as follows within forty-five (45) days from the approval of this RMO: 18.1 Original - to the Assistant Commissioner, Assessment Service. 18.2 Duplicate - to the Regional Director for listings prepared by the RDOs and to the Assistant Regional Director for listings prepared by Chief, Assessment Branch. 18.3 Triplicate - to be retained by the RDO/Chief, Assessment Branch who prepared the list. 19. The RDO shall comply relevant information pertaining to the results of the investigation which may be utilized as a basis in the selective audit process for subsequent years. 20. All L/As issued shall continue to be monitored to the Chief Management Information and Data Control Systems Division, in accordance with guidelines prescribed in Revenue Memorandum Order Nos. 4-89 and 12-89. I. Management Audit 21. The performance of the RDOs and ROs shall be measured in accordance with the criteria prescribed in Revenue Memorandum Order No. 9-90. 22. Compliance with this Revenue Memorandum Order will be monitored by the Office of the Assistant Commissioner, Assessment Service which will conduct management audit of revenue district offices and assessment branches from time to time. J. Tax returns covered 23. This RMO applies to: 23.1 Internal revenue tax returns other than VAT return, for CY 1988 or any FY which ended on or between July 31, 1988 and June 30, 1989. 23.2 VAT returns filed for quarters up to the taxable quarter which ended December 31, 1988 in the case of Category A taxpayers; up to the taxable quarter which ended January 31, 1989, in the case of Category B taxpayers; and up to the taxable quarter which ended February 28, 1989 in the case of Category C taxpayers. K. Unauthorized audits of 1988 returns 24. Any audit of 1988 returns during the suspension period, other than under an L/A duly signed by the Commissioner or Deputy Commissioner, shall be considered as unauthorized or invalid audit and the taxpayers involved shall be subjected to a thorough audit by the Intelligence and Investigation Office. L. Repealing Clause 25. The provisions of RMO 2-89 limiting the audit workload to 20 cases per RO year and other issuances inconsistent herewith are hereby amended or revoked accordingly. aisa dc M. Referral of Queries 26. Any queries and/or communication pertaining to this Revenue Memorandum Order shall be referred to the Selective Audit Committee, Room 1106, BIR, National Office Building. N. Effectivity 27. This Revenue Memorandum Order shall take effect immediately. (SGD.) JOSE U. ONG Commissioner of Internal Revenue