Tax Articles

Presumption of Regularity in the Conduct of Assessment Should be Abandoned

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Among the powers granted by the Tax Code to the Commissioner of Internal Revenue is the power to make assessment. That power, however, is not without limitation. There are procedures outlined by law and the tax bureau’s own issuances that need to be observed. The Courts had in fact declared in several cases that these procedures are part of the due process requirement in the conduct of examination and the issuance of assessment. Non-observance of these requirements would lead to the nullity of the resulting assessment.

Despite the effects, these procedures are often disregarded. A reference to the decisions of the Courts would show that several assessments issued against taxpayers are dismissed due to the non-observance of the due process requirements, some of which are mentioned below.

Revenue officers are not properly authorized. The authority to conduct examination and determine the correctness of tax payments is lodged with the Commissioner or through his duly authorized representative. Other than the Commissioner or his duly authorized representative, other revenue officers should be clothed with authority – that is, through a duly issued letter of authority (LOA). The implementing regulations and other revenue issuances mandate specific procedures in which letters of authority are to be issued and revenue officers are to be selected and authorized.

The Courts had consistently emphasized the reasons for proper authorization. Based on Court decisions, due process requires that taxpayers must have the right to know that the revenue officers are duly authorized to conduct the examination and assessment, and this requires that the LOAs must contain the names of the authorized revenue officers. Identifying the authorized revenue officers in the LOA is a jurisdictional requirement of a valid audit or investigation by the BIR, and therefore of a valid assessment.

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. In the absence of such an authority, the assessment or examination is a nullity.
Thus, unless authorized by the Commissioner himself or by his duly authorized representative, through an LOA, an examination of a taxpayer cannot ordinarily be undertaken.

It is undeniable though that examinations are being pursued without proper authority, intentional or not. This is evident by the number of assessment cases cancelled by the Courts without the proper authority of the revenue officers who conducted the examination or who recommended the issuance of deficiency tax assessments against taxpayers.

Failure to inform the taxpayer of the facts and the law on which the assessment is based. The law requires that the taxpayer shall be informed in writing of the law and of the facts on which the assessment is made. Otherwise the assessment shall be void.

Compliance with this requirement is outlined with more details in Revenue Regulations No. 12-99, and its amendments. Preliminary Assessment Notices need to show in detail the facts and law, rules and regulations, or jurisprudence on which the proposed assessment is based. Similarly, the Final Letter of Demand (FLD) must state the facts and law on which it is based. Otherwise, the FLD and the related Final Assessment Notices shall be void. Finally, the decision on a disputed assessment shall state the facts and law, rules and regulations, or jurisprudence on which the decision is based. Failure to do so would invalidate the Final Decision on Disputed Assessment.

Apparently, this requirement is not limited to facts and the law used as bases in computing the deficiency taxes. It covers as well the actions or responses on the submissions, explanations and other justifications made by the taxpayer in contesting the assessment. In G.R. Nos. 201398-99 and G.R. Nos. 201418-99 (which was followed by several other cases), the Court declared that the Tax Code and its implementing revenue regulations allow a taxpayer to file a reply or otherwise to submit comments or arguments with supporting documents at each stage in the assessment process. Due process requires the Bureau of Internal Revenue to consider the defenses and evidence submitted by the taxpayer and to render a decision based on these submissions. Failure to adhere to these requirements constitutes a denial of due process and taints the administrative proceedings with invalidity.

In other words, due process demands that the taxpayer’s defenses should be considered by the tax bureau in making its conclusions, and that the affected party be sufficiently informed of the reasons for its conclusions or decisions – whether acceptance or rejection. In exercising its power to assess, the tax bureau ought to give due consideration to the arguments and evidence submitted by the affected party. This “duty to give reason” allows the taxpayer to be made aware of the actions made on its submissions – including rejections. This notwithstanding, a lot of assessment cases had been dismissed for failure of the tax authority to properly inform the taxpayers of facts and the law on which the assessment is based – resulting in the nullity of the assessments.
These are just among the reasons why assessments issued by the tax authorities are cancelled due to failure on the part of the tax authority to follow the requirements provided by law and by its own rules. And this is not an isolated one. The numbers would show that there are irregularities (perhaps many are unintentional) in the conduct of examinations and issuance of deficiency tax assessments.

If government action does not conform with the standard it ought to follow, the presumption of regularity is destroyed and should not be invoked to justify that action. Perhaps, it’s time to abandon the “presumption of regularity” in the conduct of tax examination, which is often invoked by the tax bureau in justifying the (actions taken in) the exercise of its power to make assessment.