Guidelines for Development of Tax Fraud Cases

September 9, 1993 REVENUE MEMORANDUM ORDER NO. 44-93 SUBJECT : Guidelines for Development of Tax Fraud Cases TO : All Regional Directors; Revenue District Officers; Chiefs, Special Investigation Branches (SIBs); Chief, Prosecution Division; Chief, IIO; and Others 1. BACKGROUND President Fidel V. Ramos, during the 89th BIR Anniversary last July 30, 1993, directed the nineteen (19) Revenue Regions (thru their respective Special Investigation Branches) and 97 Revenue District Offices to develop at least one tax fraud case against taxpayer(s) in their respective jurisdictions. The objective of the tax fraud program is not to generate the needed revenue directly from the investigation but to prosecute persons who failed to declare or undeclared their taxable base and to collect whatever deficiency tax is due from such persons. The general impact of this program is to enhance and maximize voluntary compliance as a consequence of which revenue collections will increase. cdt 2. COVERAGE For purpose of this Program, a criminal tax case to be developed must be limited to - 2.1 categorical findings of nondeclaration or underdeclaration of taxable gross receipts, sales or income; and 2.2 the taxable years 1986 to 1992. The criminal tax case should be developed with the objective of gathering evidence to support a conviction under Sections 253 and 254 of the National Internal Revenue Code. 3. PROCEDURE 3.1 Approach in development of cases. - In developing these cases, the RDO and SIB should resort to investigation approaches other than those involving the issuance of letters of authority (LAs) to audit the books of accounts and records. These can involve such process as the technique of accessing third party records, discreet surveillance operations, use of data available within the BIR (such as summary records of purchases/sales submitted with the VAT returns, income tax returns, withholding tax returns, other information returns, etc.). 3.2 The revenue officers, competently and professionally supervised by the Revenue District Officers and the Chief, Special Investigation Branches, should undertake preliminary data gathering activities, the results of which are to be compared with the declarations of the taxpayer's tax return. In other words, information should be gathered first from sources external to the taxpayer's records. Internal records and documents of the BIR, such as tax returns, previous audit reports and all other relevant documents should be retrieved, thoroughly analyzed and carefully evaluated. Immediately issuing a letter of authority and merely going over the taxpayer's accounting records without preliminary findings that are indicative of underdeclaration or nondeclaration will not yield desired results. On the other hand, it has been demonstrated from investigation of certain cases thru the "access thru records" approach that a strong tax fraud case can be developed without first issuing a letter of authority. 3.3 Letters of authority for purposes of this Revenue Memorandum Order should therefor be issued only (as an exception to RMO No. 31-93 dated June 1, 1993) after the following procedures have been complied with: cd 3.3.1 A taxpayer to be investigated has been identified and indicated in the progress report on tax fraud cases (Annex "A"). 3.3.1.1 The President, in his 89th BIR Anniversary Speech said: "I am sure that Directors and Revenue District Officers know very well who the tax evaders are in their jurisdiction but we have yet to see a tax fraud case developed based upon a finding of deliberate, willful underdeclaration of taxable gross receipts, sales or earnings." 3.3.1.2 In the light of the above Presidential observation and for purposes of this Revenue Memorandum Order, each Revenue District Officer should know or is presumed to know who the taxpayers in his revenue district are likely to have been committing tax evasion through underdeclaration of taxable gross receipts, sales and earnings. He should therefore require, preliminary analysis of existing records, such as tax returns, dockets and other relevant documents for the purpose of identifying who will be considered for investigation. 3.3.1.3 Data gathering activity should first be pursued to determine all possible sources of income of a person who will be considered as a potential subject of tax fraud investigation. If possible, data should be gathered from the amount of purchases and/or sales made by the taxpayer to be considered and, if the preliminary evaluation warrants, selected for investigation. 3.3.1.4 The RDO and the Chief, SIB should likewise select potential withholding agents who are likely or are known to have failed to remit the amount of taxes withheld by them. 3.3.1.5 The Regional Director, the RDO and the Chief, SIB, must see to it that a thorough analysis of external information gathered (e.g. thru access to records approach) is strongly indicative of tax fraud. 3.4 The RDO and the Chief, SIB, should submit to the Regional Director a report of the preliminary findings of his revenue officers for analysis and evaluation. Issuance of a letter of authority should be approved by the Regional Director only when the preliminary findings indicate a convincing evidence that a strong case of fraud and a deficiency tax determination exists. 3.5 A final report of investigation duly approved by the Regional Director should be forwarded to the Legal Service for further evaluation in accordance with the procedures prescribed by the Department of Justice for criminal tax prosecution. 4. ROLE OF THE LEGAL SERVICE, IIO AND SIB The SIB and RDO may, if necessary, request for assistance, guidance or advice from the Legal Service and IIO in developing and evaluating document of a tax fraud case preparatory to the submission of these cases to the courts. All dockets of the cases developed shall be forwarded to the Legal Service, thru the Regional Director, pursuant to RMO ____, not later than December 15, 1993. The Legal Service will evaluate said cases. If warranted, the filing of tax evasion cases in the courts should be made not later than January 31, 1994. The Legal Service will also be responsible for monitoring and ensuring the compliance by all Regional Directors, Revenue District Officers and Chiefs of SIBs with the requirements of this Order. 5. PROGRESS AND FINAL REPORTS The Regional Directors must submit progress reports on tax fraud cases (Annex "A") for the month of September, not later than October 10, 1993 and for the month of October, not later than November 10, 1993, to the Commissioner of Internal Revenue. The two Deputy Commissioners and the Assistant Commissioner (Legal Service) should be furnished each with a copy of the said reports. 6. REPEALING CLAUSE All RMOs and all other revenue issuances or provisions thereof inconsistent herewith are hereby revoked or amended accordingly. 7. PERFORMANCE EVALUATION Failure to comply with the requirements prescribed herein will indicate lack of exercise of prudent judgment, sound discretion and unfamiliarity of the RDO with the characteristic compliance pattern of the taxpayers within his jurisdiction. The degree of compliance with Revenue Memorandum Order shall be one of the criteria for performance evaluation of the Regional Director, Revenue District Officer and the Chief, Special Investigation Branch. Any revenue official concerned who fails to comply satisfactorily with this Order will be subject to the necessary sanctions by the Commissioner of Internal Revenue. cd (Sgd.) LIWAYWAY VINZONS-CHATO Commissioner ANNEX A MEMORANDUM FOR: The Commissioner Re: Progress Report on Tax Fraud Case(s) for the Month of ___________, 1993 Pursuant to RMO No. _______, submitted herewith is the progress report on tax fraud case(s) developed. 1. Background of tax fraud cases (Include name, address, year covered, number of L/A if any was issued, kind of tax, BIR offices and revenue officers developing the case, and information on any L/A issued for the purpose) 2. Nature of Violations 3. Evidences Gathered 4. Determination of Deficiency Taxes 5. Others ______________________________ Regional Director cc: Deputy Commissioners Assistant Commissioner, Legal Service