Year 2000 Enforcement Service Audit Program

September 20, 2000 REVENUE MEMORANDUM ORDER NO. 49-00 SUBJECT : Year 2000 Enforcement Service Audit Program TO : All Internal Revenue Officers Concerned I. OBJECTIVES This Order is issued to: 1. Provide the framework for the audit of cases under the Enforcement Service; 2. To ensure proper development of fraud cases preparatory to filing of civil and/or criminal cases against taxpayers committing fraud; 3. Prescribe rules, policies, guidelines and procedures in the audit/examination and disposition of tax fraud cases; 4. Prescribe policies, guidelines and procedures in the audit of policy cases; 5. Lay down the ground work for the formulation of industry audit standards and procedures; and 6. Provide the basis for the establishment of the industry profile. II. TAX FRAUD CASES 1. Coverage . This Audit Program shall cover the examination/audit of taxpayers for any taxable year/s, quarter/s, or taxable period/s where prima facie evidence of fraud was established/discovered in year 2000 and until this Order is in full force and effect. The examination/audit or re-examination shall include all internal revenue taxes on, any of the following: a. Cases covered under Sec. 248 (B) NIRC (prima facie evidence of false or fraudulent returns) b. Cases covered by confidential information filed by informers; DSAICa c. Tax Fraud cases developed by the Tax Fraud Division (TFD) or the Special Investigation Division (SID) and those elevated to the former by Regional Offices; d. Cases referred by the Enforcement Service to the SID; e. Cases referred by the Commissioner to the TFD/SID emanating from, but not limited to, the following: 1. Office of the President 2. The Legislative Branch of the Government (The Senate and the House of Representatives); 3. The different Departments of the Executive Branch of the Government 2. Preliminary Investigation . Before a taxpayer will be subjected to a formal audit, a preliminary investigation must first be conducted to determine the existence of prima facie evidence of fraud. The Chief, TFD/SID shall assign the case for preliminary investigation to Revenue Officers (RO) who may follow-up leads and obtain information necessary to strengthen the fraud case. However, the RO shall have no direct or indirect contact with the subject taxpayer until the regular Letter of Authority to investigate shall have been issued by the Commissioner/Regional Director. The RO shall report his recommendations whether or not formal audit/investigation is warranted within thirty (30) days from the time the case is assigned for preliminary investigation. Except for cases directly assigned by the Commissioner for investigation by the TFD, no formal audit/investigation shall commence without a preliminary investigation conducted thereon. If after conducting the preliminary investigation the prima facie existence of fraud cannot be established, but a potential deficiency tax assessment exists, the case shall be referred to the Office having regular audit jurisdiction over the taxpayer for appropriate action. 3. Tax Fraud Committee . For cases recommended for investigation by the Tax Fraud Division, the approval and issuance of Letter of Authority shall be the prerogative of the Commissioner. For cases recommended for investigation by the Special Investigation Division, the approval shall be made by the Regional Tax Fraud Committee constituted for the purpose and the issuance of the Letter of Authority shall be done by the Regional Director. The Regional Tax Fraud Committee (RTFC) in each Region shall be composed of the following: Chairman Regional Director Members 1. Chief - Special Investigation Division 2. RDO having jurisdiction over the taxpayer 3. Chief - Assessment Division 4. Chief - Legal Division The Regional Tax Fraud Committee shall convene regularly twice a month, or as often as the need arises at the call of the Chairman, to evaluate all requests for the issuance of Letters of Authority and reports on cases not recommended for criminal prosecution and may call upon any revenue official or employee concerned for further inquiry. 4. Letter of Authority . In every case where formal audit/investigation is warranted, a Letter of Authority (LA)/Audit Notice (AN) to be signed by the Commissioner (for cases recommended by the TFD) or the Regional Director (for cases recommended by the RTFC) shall be issued for each taxpayer subject to audit. This L/A authorizing the TFD to conduct fraud audit shall supersede and have precedence over any L/A issued for the same taxpayer covering the same taxable period/s. Thereafter, a copy of the L/A shall be immediately furnished the Large Taxpayer Service, Excise Tax Service, Revenue District Offices and/or the SID of the Revenue Region having jurisdiction over the taxpayer who, upon receipt thereof must transmit within ten (10) days to the TFD or SID, as the case may be, all the documents in their possession relative thereto and must withdraw and cancel any previously issued L/A pertaining thereto. In case the newly issued L/A will vest upon the TFD or SID jurisdiction to investigation the taxpayer for two consecutive years (the previous year being covered by another LA), but the previous year's findings did not result to fraud, whether civil or criminal, investigation shall still be pursued under the new L/A. Provided, that, if in the course of the investigation, fraud could not be established with the required quantum of evidence, the case shall be immediately transmitted to the Office having jurisdiction of the taxpayer for continuation of investigation. Likewise, if TFD or SID acquired jurisdiction to investigate on grounds other than a registered confidential information but there was already an on-going investigation by other BIR investigating office, the case shall be transmitted to the latter for consolidation of the investigation. aIEDAC 5. Workload and Reassignment of Cases 5.1 Revenue Officers of the TFD and the SID shall not be covered by the minimum/maximum workload requirement imposed upon Revenue District Offices and other investigation Divisions of the National Office; 5.2 Re-assignment of cases and/or audit personnel . The Assistant Commissioner of the Enforcement Service shall have the authority to utilize all revenue officers, intelligence officers and special investigators within the Service or in the special Investigation Division of the Revenue Regions, if there are reasonable or justifiable grounds as determined by the Commissioner, in order to meet the objectives set forth under this audit program. III. POLICY CASES 1. Coverage . This Audit Program shall cover the examination of the 1999 income, value-added, percentage, withholding and other internal revenue tax liabilities of selected taxpayers falling within the following industries: a. Chemical and Chemical Products b. Food and Beverage c. Such other lines of industry and/or cases as may be assigned by the Commissioner For Income Tax purposes, taxable year 1999 shall also cover returns filed on a fiscal year basis ending on or before June 30, 9000. 2. Selection Criteria 2.1 Except for cases as may be assigned by the Commissioner, the audit candidates shall be selected on the basis of the Philippine Standard Industrial Code (PSIC) of the industries covered by this Order using the selection criteria stated below. The PSIC numbers for the industries targeted for audit are: Industry PSIC Food and Beverage 1511 to 1599 Chemical and Chemical Products 2411 to 2432 2.2 Taxpayers shall be classified into four (4) categories based on their gross sales / revenues. 2.3. The 1998 gross sales/revenues appearing in the Business Profiles 1999-2000 books (First 7,000 Corporation and Next 5,000 Corporation) prepared and issued by the Securities and Exchange Commission shall be used in the selection process. 2.4 The number of audit candidates per PSIC to be selected from each category shall be: Gross Sales/Revenue No. of Audit Candidates Per PSIC Over P500 Million 1 Over P100 Million to P500 Million 3 Over P20 Million to P 100 Million 3 P20 Million and Below 1 Total 8 2.5 The selection of taxpayers to be audited shall be based on their ranking in each of the categories mentioned in item 2.4 herein. Taxpayers falling in the first spot shall be picked for the Over 500 Million category while the first three slots shall be considered for the Over 100 Million to 500 Million and Over 20 Million to 100 Million categories. For the 20 Million and below, the audit candidate shall be the taxpayer occupying the top spot. Example: Gross Sales/ No. of Audit Candidates per PSIC Revenue PSIC No. 1512 PSIC No. 1513 Ranking Over P500 M 1 1 No. 1 Taxpayer Over P100 M to P500 M 3 3 Nos. 1, 2 & 3 Taxpayer Over P20 M to P100 M 3 3 Nos. 1, 2 & 3 Taxpayer P20 M and Below 1 1 No. 1 Taxpayer 2.6 Taxpayers who incurred a net loss for taxable year 1998 will be excluded from the list of audit candidates. In this case, the taxpayer next in line who made a profit for that year shall be the audit candidate. Except for fraud cases, all cases falling under this Section shall be automatically excluded from the coverage of the Year 2000 Audit Program for Revenue District Offices (RDOs) and Assessment Division of the Regional Offices and the investigating Divisions of the National Office. cHITCS 3. Audit Policies and Guidelines 3.1 Letters of Authority . One (1) Letter of Authority/Audit Notice shall be issued by the Commissioner for each taxpayer subject to audit. Letters of Authority (LAs)/Audit Notice (AIN) shall be issued only when a copy of the tax return for the taxable period/s covered by the LA/AN is attached thereto. For this, the Revenue District Officers, Revenue Data Center (RDC) Heads and all other Revenue Officials concerned shall forward the tax returns of taxpayers selected for audit by virtue of this Order within ten (10) days from request of the Assistant Commissioner, Enforcement Service. 3.2 The Chief of the Policy Cases Division shall draw the list of taxpayers to be audited on the basis of the criteria for selection stated in this Order and submit the same to the Assistant Commissioner of the Enforcement Service for pre-approval using the format prescribed under Annex "A" hereof. The list shall thereafter be submitted by the Assistant Commissioner, Enforcement Service to the Commissioner for his final approval. 3.3 The workload of each Revenue Officer shall in no case exceed ten (10) cases at any given time, subject to replenishment after the submission of the report of investigation of each case. 4. INDUSTRY PROFILE In the establishment of the industry profile under the Policy Cases Division, all Revenue District Officers and other Revenue Officials concerned are directed to give the Revenue Officers assigned to do the job access to their files and records upon written authorization from the Assistant Commissioner, Enforcement Service. 5. INDUSTRY AUDIT MANUAL A Revenue Audit Memorandum Order shall be prepared upon completion of each industry audit by the Policy Cases Division prior to the issuance of the Audit Program on Policy Cases for the year 2001. This audit manual shall serve as a guide in future audits by the Assessment Units in the RDOs and other investigating units in the National Office. IV. PROVISIONS COMMON TO THE AUDIT OF TAX FRAUD AND POLICY CASES 1. Audit Procedures and Techniques . In general, Revenue Officers shall follow the audit procedures and techniques provided under Revenue Audit Memorandum Order No. 1-99, 1-2000 and 2-2000. However, for tax fraud cases, Revenue Officers may adopt such audit procedures and techniques as may be required by the peculiarities of each case. 2. Collection Of Deficiency Taxes 2.1 Execution of Agreement Form . In cases where the taxpayer agrees to the audit findings or some items in the audit findings, he shall be required to execute an Agreement Form specifying the kind of tax, the nature of findings and the amount involved. The Agreement Form shall then be submitted to the Assistant Commissioner, Enforcement Service or the Regional Director for the SID for approval before any deficiency taxes are paid. 2.2 Payment of Deficiency Taxes . Within three (3) working days from the approval of the Agreement Form, the deficiency taxes shall then be paid using BIR Form No. 0605 to any Authorized Agent Bank (AAB) within the jurisdiction of the RDO where the taxpayer's principal business is located or at the National Office in case the taxpayer is classified as a large taxpayer or excise taxpayer. Within three (3) working days from the payment of the deficiency taxes, the taxpayer shall present the receipt evidencing payment/BIR Form No. 0605 to the Enforcement Service or the Regional Director (for the SID) and submit a copy of the same for attachment to the docket of the case as proof that the tax liability has actually been paid. 2.3 Use of BIR Form No. 0605 The following procedures on the use of BIR Form No. 0605 for purposes of paying deficiency taxes shall be followed: 2.3.1 For payment of deficiency taxes at the Division level (TFD, PCD, SID) prior to issuance of Preliminary Assessment Notice (PAN)/Final Assessment Notice (FAN); i. BIR Form No. 0605 shall be signed by the Division Chief and not by the taxpayer or his authorized agent. aSTECA ii. The Division Chief shall ensure that all necessary information on BIR Form No. 0605 are filled up, especially Section 17 Manner of Payment and that the box corresponding to "Preliminary/Final Assessment/Deficiency Tax" is marked with an X. iii. The Division Chief shall sign BIR Form No. 0605 for payment of taxes found after audit/investigation only upon submission by the ROs of the corresponding report of investigation. iv. The phrase " interest computed until ____________" under Part II Computation of Tax of BIR Form No. 0605 shall be indicated. v. For monitoring and conduct of BIR Form No. 0605 used in the payment of deficiency taxes, the Division Chief shall sequentially number the said form indicating the following information with corresponding digits on the upper right hand portion of the form: a. Name of Office 3 digits b. Month 2 digits c. Day 2 digits d. Year 2 digits e. Sequence number 6 digits, which shall start from 000001 and continue sequentially regardless of month and day. f. Regional Office Number - for SID only i.e. RR7 for Quezon City SID Example: The first BIR 0605 signed by the Chief, Tax Fraud Division on October 22, 2000 shall be numbered as follows: TFD - 10-22-00-000001 If issued by SID, Quezon City the BIR Form 0605 shall be numbered as follows: SID - 10-22-00-000001-RR7 vi. The Division Chief shall maintain a logbook on all BIR Form 0605 signed and issued to taxpayers. The following information shall be indicated in the logbook: a. BIR Form 0605 number b. Name and address of taxpayer c. LA/TVN number d. Date issued e. Type of tax f. Amount of deficiency tax(es) paid g. Signature of taxpayer/representative 2.3.2 For payment of deficiency taxes with issued PAN/FAN after review and approval by the Commissioner or Regional Director, respectively: 1. BIR Form No. 0605 shall be signed by the taxpayer or his authorized representative. 2. A photocopy of the proof of the assessment, either PAN or FAN, shall be attached by the taxpayer to BIR Form No. 0605. 3. The taxpayer shall be required to fill up all necessary information on BIR Form No. 0605, especially information on Section 17 Manner of Payment and to mark the box corresponding to "Preliminary/Final Assessment/Deficiency Tax" with an X. 4. No. AABs shall accept payment for deficiency taxes without the required proof of assessment, which is the PAN/FAN. 2.3.3 Monitoring of BIR Form No. 0605 i. The Division Chief Shall secure that the policies and procedures in the use of BIR Form No. 0605 provided herein are strictly observed by all concerned. ii. The Division Chief shall compare the validated BIR Form No. 0605 furnished by the Authorized Agent Banks (AABs) with the BIR Form No. 0605 issued by him. For BIR Form No. 0605 used with issued PAN/FAN, the Division Chief must determine whether this was validly issued. iii. AABs who accept BIR Form No. 0605 in payment of deficiency taxes not in conformity with the provisions provided herein shall be reported to the Assistant Commissioner (ACIR), Collection Service by the concerned Division Chief, copy furnished ACIR, Enforcement Service. DSEIcT 3. Audit Reports 1. Audit Reports . The audit reports shall conform with the guidelines prescribed under existing audit manuals. The procedures prescribed under Revenue Memorandum Order No. 62-99 in the review and reporting of cases shall also be complied with. Audit reports for tax fraud and policy cases shall be reviewed by the Assistant Commissioner, Enforcement Service and shall be subject to the approval of the Commissioner. Audit reports for SID cases shall be reviewed by the Assessment Division and shall be approved by the Regional Director. 4. Reporting Requirements . For the proper monitoring of audit activities, the submission of the following reports are hereby prescribed: 4.1 For Revenue Officers a. Monthly progress report of audit/investigation (Annex "B"); b. Monthly Report on Pending Inventory of Cases/Dockets (Annex "C"). The foregoing reports shall be submitted to the Group Supervisor not later than the 5th day of the following month. 4.2 For Group Supervisors a. Consolidated progress reports of all cases/dockets submitted by Revenue Officers (Annex "D"); b. Consolidated report of Pending Inventory of Cases/Dockets (Annex "E"). The foregoing reports shall be submitted to the Chief of the investigating division not later than the 10th day of the following month. 4.3 For Division Chief a. Monthly List of LAs/ANs Issued (Annex "F") This report shall state the name of the taxpayer, LA/AN number, date of issue of the LA/AN and the taxable period covered. b. Monthly Status of LAs/ANs Issued and Acted Upon (Annex "G") This report reflects any reassignment, loss, cancellation, or spoilage of LAs/ANs, referrals to other Offices, and reporting of cases covered by LAs/ANs during the particular month. Cases still pending audit or investigation as of the end of the month and/or terminated cases where no official reports thereon have yet been rendered and duly transmitted to the Office of the Regional Director or Enforcement Service shall not be included in this report. c. Monthly Summary of Assessment and Collection Activities (Annex "H") This report contains detailed information on the results of the audit/investigation conducted per case and per tax type. This report also reflects the summary of the number of tax cases acted upon and closed during the given month and dockets returned by the Office of the Regional Director or Enforcement Service for compliance of certain reporting requirements. Only cases/dockets actually transmitted for review to the Office of the Regional Director or Enforcement Service as of the end of each month shall be included in this report. d. Monthly Inventory of Pending Cases/Dockets (Annex "I") This is a summary of the Revenue Officer's Monthly Report of Pending Inventory which were accomplished individually by Revenue Officers for both original investigation and reinvestigation cases. It reflects the number of pending cases per tax year, the inventory of pending cases at the beginning of each month, the number of returned dockets, the number of closed/reported cases, and the total number of pending inventory as of the end of the month covered by the report. In addition to these information, this report shall show an aging analysis in number of months of the pending cases/dockets. These reports shall be submitted to the Assistant Commissioner, Enforcement Service not later than the 15th day of the following month. In the case of the SID, the reports shall be submitted to their respective Regional Directors not later than the 7th day of the following month who shall in turn submit the same to the Assistant Commissioner, Enforcement Service within the time frame herein provided. ScaHDT 4.4 For Assistant Commissioner, Enforcement Service a. Monthly List of LAs/Audit Notices issued; b. Monthly Status Report of all LAs/Audit Notices Issued; c. Monthly Summary of Cases/Dockets received for review, returned to the Policy Cases Division, referred to other offices and forwarded to the Commissioner for final evaluation and approval; d. Monthly Summary of Taxes Assessed/Collected (Annex "J"); e. Monthly Inventory of Pending Cases/Dockets The foregoing reports shall be submitted to the Commissioner not later than the 20th day of the following month. V. VIOLATIONS AND PENALTIES Violation of any provision of this Order or any unauthorized deviations from the foregoing policies and instructions shall be dealt with accordingly. The Assistant Commissioner, Enforcement Service or the Regional Director, through the Assistant Commissioner, Enforcement Service, shall report any violation to the Inspection Service, for appropriate action. In this regard, the Assistant Commissioner, Inspection Service, may recommend to the Commissioner of Internal Revenue the transfer, reassignment, or relief of any Revenue Officer/Official found to have violated any of the provisions prescribed in this Order. VI. EFFECTIVITY This Order shall take effect immediately and shall remain in force until a new Audit Program is issued.. (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue ANNEX A List of Taxpayers Selected for Audit ANNEX B Monthly Progress Report of Audit/Investigation ANNEX C Monthly Progress Report on Pending/Inventory of Cases/Dockets ANNEX D Consolidated Progress Report of Cases/Dockets ANNEX E Consolidated Report of Pending Inventory of Cases/Dockets ANNEX F Monthly List of Letters of Authority Issued ANNEX G Monthly Status of Letters of Authority Issued and Acted Upon ANNEX H Monthly Summary of Assessment and Collection Activities ANNEX I Monthly Inventory of Pending Cases/Dockets ANNEX J Monthly Summary of Assessment and Collection for Policy Cases