Prescribing Additional Guidelines Governing the Rules on Assessment of National Internal Revenue Taxes covered by a Letter Notice (LN) issued under the RELIEF System as defined in Revenue Memorandum Order (RMO) No. 30-2003 and other data matching processes

October 23, 2003 REVENUE MEMORANDUM ORDER NO. 42-03 SUBJECT : Prescribing Additional Guidelines Governing the Rules on Assessment of National Internal Revenue Taxes covered by a Letter Notice (LN) issued under the RELIEF System as defined in Revenue Memorandum Order (RMO) No. 30-2003 and other data matching processes. TO : All Internal Revenue Officers and Others Concerned I. Objective This RMO is issued to supplement the procedures and guidelines in handling assessments against taxpayers covered by Letter Notices (LNs) issued under the RELIEF System defined in RMO 30-2003 and other data matching processes intended to intensify the Bureau's enforcement efforts through the " no-contact-audit approach ". II. Policies 1. Sec 6(A) of the Tax Code provides, among others, that "after a return has been filed as required under the pertinent provisions of the said Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax", and that "the tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative . 2. In order to intensify enforcement, the power of the Commissioner to authorize any examination of taxpayer and the assessment of the correct amount of tax is hereby ordered done through the so-called " no-contact-audit-approach ". 3. The " no-contact-audit approach " includes the process of computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic Purchases, and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding Taxes. 4. Even without conducting a detailed examination of taxpayer's books and records, the computerized/manual matching of sales and purchases/expenses will reveal discrepancies which shall be communicated to the concerned taxpayer through the issuance of Letter Notice (LN) by the Commissioner. 5. LNs being served by the Bureau upon taxpayers found to have under-declared their sales or over claimed their purchases/expenses can be considered notice of audit or investigation in so far as the amendment of any return is concerned which is the subject of such LN. A taxpayer is therefore disqualified from amending his return once an LN is served upon him. III. Guidelines The following guidelines shall be observed in handling computation of tax payment/assessments of taxpayers covered by LNs: 1. As provided for under RMO 30-2003, taxpayers with under-declared sales and over-claimed purchases shall be notified of such findings of discrepancy through the issuance of Letter Notices (LNs) herein attached as Annex "A" and Annex "B" . The LNs shall be generated automatically together with the Details of Taxpayer's Customer'/Supplier' Records (DTCS) by the BIR computer system. The same shall be forwarded to the RDO/LTDO/LTAID for service to taxpayers concerned. 2. Letter Notices (LNs) under the Relief System shall cover only the tax indicated therein on a given particular period or quarter. ( e.g. VAT liabilities for 3rd qtr 2002) 3. However, taxpayers who will be issued LNs may voluntarily pay the tax indicated in the LN and likewise pay the resulting deficiency income or other taxes as a result of such under or over declaration of sales or purchases/expenses as the case may be. The computation of the deficiency tax(es) should be based on herein Annex "C" . 4. The issuance of an LN will not preclude the Commissioner from issuing a Letter of Authority covering the comprehensive audit of a taxpayer's tax liability and is not a waiver of the Commissioner's right to look into the reasonableness of taxpayer's operating and administrative expenses. 5. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer, thus, the procedures defined in RR 12-99 should likewise be observed. 6. The concerned taxpayer will be given an opportunity to reconcile the discrepancy. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the LN, the RDO/LTDO/LTAID shall issue a follow-up letter giving the taxpayer ten (10) days to response. If despite the additional ten (10) days, taxpayer still fails to respond, the RDO/LTDO/LTAID shall indorse the case with least possible delay to the Assessment Division of the Region or the appropriate office authorized to review report of investigation, for the issuance of a Preliminary Assessment Notice and Final Assessment Notice, as the case may be, following the guidelines and procedures provided by RR 12-99. 7. In preparing assessments against taxpayers covered by LNs, the RDO/LTDO/LTAID should prepare the computations in accordance with herein Annex "C" . Any revenue issuance which is inconsistent herewith shall be considered repealed, amended, or modified accordingly. DTEIaC (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue ANNEX A Form No. LN-S Quezon City LN No. ____________ TIN: ______________ Date: ______________ ____________________ ____________________ ____________________ Dear Mr./Mrs. A partial tally resulting from computerized matching conducted by the Bureau on the purchases by your customers against the sales declared in your tax returns disclosed the following discrepancy for the _____________________ Quarter CY/FY _______. Per Summary List of Purchases submitted by your customers ___________ Sales per Tax Return ___________ Discrepancy in Sales (under-declaration) ___________ Percentage (%) of Discrepancy ___________ In line with the Bureaus policy of affording taxpayers the opportunity to reconcile such discrepancy, you are hereby invited to the Bureau, _________________________________________ (address of RDO/LTDO/LTAID) __________________________ on ________________ (date to be set by RDO/LTDO/LTAID, which should not be more than fifteen (15) from the receipt of the LN) _______________________________ from 8:00 am to 12:00 noon, to validate these findings, and to present any documentary evidence you may have to reconcile these variances. Should you agree with the findings of discrepancy stated above, you are hereby directed to pay the basic VAT due on the total adjusted tax base, plus corresponding interests and penalties, the computation of which is shown in Annex A attached hereto, using BIR Form 0611A. However, if you should settle and pay your tax liabilities within fifteen (15) days from receipt hereof, you have an option to request for an abatement of said penalties pursuant to the provision of Section 204 of the Tax Code of 1997. Settlement and payment of your tax liability beyond said period shall remove much of the basis for any such abatement. You are likewise encouraged to voluntarily settle the resulting deficiency income tax as a consequence of the above discrepancy, if such is not yet declared in your quarterly income tax return. The herein payment shall be considered an advance payment of deficiency tax and therefore, without prejudice to any additional assessment that might be made by the appropriate BIR Office or subsequent issuance of a notice of investigation covering a comprehensive audit of your books of accounts. If, however, you have already paid the taxes due before the receipt of this letter, submit proof of such payment to the undersigned, Attention: ______________________________ RDO/Chief or RDO/LTDO/LTAID who served the LN ____________________, at the soonest time possible. Furthermore, upon payment of the taxes resulting from the aforesaid under-declaration/discrepancy, submit a photocopy of the Validated BIR Forms 0611A to the same office. IDSETA Should you fail to make a correct disclosure of sales and pay the corresponding taxes due thereon within the deadline set above, we will be constrained to fully enforce the provisions of the National Internal Revenue Code of 1997 (Tax Code) which, provides, among others that under-declaration of sales, receipts and income is a ground for administrative, civil and /or criminal action. Furthermore, Sec 115 of the Tax Code empowers the Commissioner or his authorized representative to suspend business operations and temporarily close the business of any VAT-registered taxpayer found understating its sales or receipts by thirty (30%) or more of his corrected taxable sales/receipts for the taxable quarter. On the other hand, should you fail to respond to the herein LN within fifteen (15) days from receipt hereof, you shall be considered in default, in which case the RDO/LTDO/LTAID shall endorse the case for the appropriate review and issuance of Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) as the case may be. You may call the BIR Hotlines at ____________________________ (telephone number of the RDO/LTAID/LTDO) __________, ____________ for further information. We trust that this matter will merit your preferential attention. Very truly yours, GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Received by: ______________________ Signature over Printed Name Date: ___________________________ ANNEX B Form No. LN-P Quezon City LN No. ____________ TIN: ______________ Date: _____________ ____________________ ____________________ ____________________ Dear Mr./Mrs. A partial tally resulting from computerized matching conducted by the Bureau on the sales by your suppliers against the domestic purchases declared in your tax returns disclosed the following discrepancy for the ________________ Quarter CY/FY _______. Per Summary List of Sales submitted by your suppliers ___________ Domestic Purchases per Tax Return ___________ Discrepancy in Domestic Purchases (under-declaration) ___________ Percentage (%) of Discrepancy ___________ In line with the Bureaus policy of affording taxpayers the opportunity to reconcile such discrepancy, you are hereby invited to the Bureau, ________________________________ (address of RDO/LTDO/LTAID) ____________________ on _____________ (date to be set by RDO/LTDO/LTAID, which should not be more than fifteen (15) from the receipt of the LN) ________________________________ from 8:00 am to 12:00 noon, to validate these findings, and to present any documentary evidence you may have to reconcile these variances. Should you agree with the findings of discrepancy stated above, you are hereby directed to pay the basic VAT due on the total adjusted tax base, plus corresponding interests and penalties, the computation of which is shown in Annex A attached hereto, using BIR Form 0611A. However, if you should settle and pay your tax liabilities within fifteen (15) days from receipt hereof, you have an option to request for an abatement of said penalties pursuant to the provision of Section 204 of the Tax Code of 1997. Settlement and payment of your tax liability beyond said period shall remove much of the basis for any such abatement. You are likewise encouraged to voluntarily settle the resulting deficiency income tax as a consequence of the above discrepancy, if such is not yet declared in your quarterly income tax return. IDTSEH The herein payment shall be considered an advance payment of deficiency tax and therefore, without prejudice to any additional assessment that might be made by the appropriate BIR Office or subsequent issuance of a notice of investigation covering a comprehensive audit of your books of accounts. If, however, you have already paid the taxes due before the receipt of this letter, submit proof of such payment to the undersigned, Attention: _________________________ RDO/Chief or RDO/LTDO/LTAID who served the LN ___________________, at the soonest time possible. Furthermore, upon payment of the taxes resulting from the aforesaid under-declaration/discrepancy, submit a photocopy of the Validated BIR Forms 0611A to the same office. Should you fail to make a correct disclosure of sales and purchases and pay the corresponding taxes due thereon within the deadline set above, we will be constrained to fully enforce the provisions of the National Internal Revenue Code of 1997 (Tax Code) which, among others, provides that under-declaration of sales, receipts and income is a ground for administrative, civil and /or criminal action. Furthermore, Sec 115 of the Tax Code empowers the Commissioner or his authorized representative to suspend business operations and temporarily close the business of any VAT-registered taxpayer found understating its sales or receipts by thirty (30%) or more of his corrected taxable sales/receipts for the taxable quarter. On the other hand, should you fail to respond to the herein LN within fifteen (15) days from receipt hereof, you shall be considered in default, in which case the RDO/LTDO/LTAID shall endorse the case for the appropriate review and issuance of Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) as the case may be. You may call the BIR Hotlines at ________________________________________ (telephone number of the RDO/LTAID/LTDO)__________, ____________ for further information. We trust that this matter will merit your preferential attention. Very truly yours, GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Received by: ______________________ Signature over Printed Name Date: ___________________________ Annex C BIR Form No. 2112-A Computation Sheet Under Third Party Information Program Covered by a Letter Notice Pursuant to RMO 30-2003 BIR Form No. 2112-B Computation Sheet Under Third Party Information Program Covered by a Letter Notice Pursuant to RMO 30-2003