Tax Articles

Correcting the Perspective on Tax Audits

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

Tax audits have been front and center of public discourse for the better part of the past few months. Aside from the perception that tax audits would always result in additional tax burden, the manner in which these tax audits are carried out has been the subject of such public discontent that Senate hearings have been called to tackle and resolve it. At times, taxpayers see tax audits as little more than an opportunity for the government to get additional taxes on top of what they already voluntarily paid.

However, is this really the case? Should tax audits primarily focus on more revenue generation?

Contrary to popular opinion, tax audits are not (and should never be) primarily intended for additional revenue generation. Although additional revenue generation is a by-product of a tax assessment, tax audits should be taken with the end goal of promoting proper tax compliance. It should serve the principal objective of deterrence against improper tax practices and become a tool to foster voluntary tax compliance.

Using tax audits as a way of encouraging tax compliance is not a unique concept. In fact, this is the standard in other jurisdictions. It is part of the best practices that organizations like the Organization for Economic Co-operation and Development (OECD) and institutions of higher learning recommend for adoption by tax authorities.

In these jurisdictions, tax audits are actively being used to shape taxpayer compliance behavior for the better. Tax audits are seen as being employed to achieve long-term effects that establish positive compliance norms for taxpayers rather than short-term and output-driven revenue collection performance.

The establishment of these norms are characterized, among others, by meaningful taxpayer education and communication, objectivity in the use of audit techniques, transparency in the process and sanctions for violations, and fairness in the results of tax audits. This tax compliance norm is likewise reinforced not only by delivering a message that non-compliant taxpayers are being detected; but rather that most taxpayers are honest and compliant. It is also interesting to note that OECD studies have found that tax audits as a deterrent is more effective where a strong social norm to comply exists.

It may be difficult for Philippine taxpayers to see it this way considering the recently publicized issues like the use of weaponized audit/verification instruments, the exertion of undue pressure and improper audit techniques, and the practice of issuing unreasonable and bloated assessments, to name a few.

Fortunately, the BIR’s recent overhaul of its audit policies and procedures appears to be a right step in reforming the public’s perception of what a tax audit is supposed to be. It should be noted, however, that even with new policies and procedures, the effectiveness of the BIR’s thrust for a better system still hinges on its ability to effectively implement the same.

Will it be able to rein in its revenue officers and actually implement a more professionalized audit system? Will the administration itself not compromise its own noble goals in the face of ever-increasing pressure to increase tax revenue collection?

To put things into perspective, in the BIR’s 2024 Annual Report, it was reported that collections from assessments, both preliminary and final, amounted to P0.071 Trillion (or P71 Billion). That is a big amount by any standard. However, it amounts to just 2.50% of the total collections of the BIR for 2024. An overwhelming majority of the total collections (at 97.19%) came from voluntary payments or those from the regular voluntary tax compliance of taxpayers.

This means that a far greater amount may be collected if focus would be shifted to improving tax compliance rather than simply running after taxpayers using biased audit policies and procedures.

I hope the BIR becomes successful in its drive to better itself and its service. The more conducive an environment the BIR fosters, the more that taxpayers would be inclined to properly comply with their tax obligations.