Tax Articles

The Argument for a "No Change" Tax Audit

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Partner   +632 8403-2001 loc. 140 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

A tax assessment has always been part and parcel of doing business in the Philippines. Dreaded as it may be for taxpayers, it is an essential and integral procedure to determine whether taxpayers are indeed properly declaring their income and taxes.

Once the tax authorities conclude their examination, taxpayers would be confronted with two (2) choices: either to accept the assessment of the BIR and pay the deficiency taxes or to disagree with the findings and exhaust all possible remedies to challenge the assessment. While it is true that taxpayers are indeed faced with these two (2) different choices, a closer look would show that both of these “choices” actually spring from the same source: the issuance of a deficiency tax assessment.

That is the regular course of things. If a Letter of Authority is issued, a deficiency tax assessment is bound to follow suit. Only the amount of supposed deficiency taxes would be determined in the audit. But should that always be the case? Should taxpayers always have to face alleged deficiency tax liabilities during tax audit?

I say it does not need to nor does it have to be that way.

A highly functioning tax administration should be able to not only identify the misdeclarations of taxpayers but also acknowledge when taxpayers have properly and faithfully performed their civic duty. The issuance of a Letter of Authority should not automatically mean that a deficiency tax assessment is coming.

In other jurisdictions, a tax audit may conclude to a “no change” tax audit. “No change” means that the taxpayer was able to substantiate and justify all the items, findings, and issues initially identified by the revenue officials. Since everything is substantiated and justified, there should be no adjustment to the tax liability of the taxpayer which would otherwise result in a deficiency tax assessment. In other words, being audited does not automatically result in being assessed for deficiency taxes.

With all the improvements that the BIR is touting, a “no change” tax audit may be one of the more progressive innovations it can adopt. It can even be argued that it will actually benefit the BIR in the long run.

Normally, tax audits are seen as ways for the BIR to generate more revenue from deficiency taxes owed by supposedly erring taxpayers. Since the BIR would be spending time and resources in tax audits, it is only but logical to think that there should be a return on these costs in the form of assessed deficiency taxes. Having a “no change” audit would then mean that the BIR would spend on the audit but not get anything in return.

While it may appear to be counter-productive, having a “no change” tax audit may actually help the BIR save on costs and make its assessments more efficient.

Having a “no change” tax audit would allow the BIR to identify taxpayers that are faithful and truthful in their respective tax declarations. These taxpayers may then be categorized as “low-risk” for taxpayer profiling purposes. Low-risk taxpayers may be given less priority when it comes to the selection of taxpayers to be audited. Identifying and removing the low-risk taxpayers from regular and recurring audits would free up the limited resources of the BIR and help it focus on medium and high-risk taxpayers. In the long run, it will enable a more accurate risk-based approach which will yield a higher return since the subject of the tax audits would predominantly target riskier and actually erring taxpayers.

This is in line with having a more responsive tax administration which leverages on a risk-based approach to maximize the results even with a limited resource.

The “no change” tax audit also has the potential to improve and encourage better tax compliance among taxpayers. It is lamentable that taxpayers who are very much compliant are oftentimes begrudgingly rewarded with regular and recurring tax audits. If taxpayers are constantly hounded by assessments whether they are faithful or not, then why even try at all?

Incentivizing compliant taxpayers with a low-risk profile with less tax audits would encourage them to maintain a tax compliant posture. On the other hand, those that are less compliant would finally have a good reason to exert effort to improve compliance. Compliant taxpayers result in a consistent flow of tax revenues which ultimately help in the goal of revenue collection by the BIR. It would also allow taxpayers to devote more time and effort to running their business which would otherwise have been spent in defending against questionable assessments.

The argument for a “no change” tax audit does not mean that revenue officials no longer assess when there is an actual deficiency tax due. It only asks for fairness. Assess when a taxpayer erred and acknowledge when a taxpayer did his tax obligations right.