By: Atty. Bounteous M. Servito
The COVID-19 pandemic did not prevent the Bureau of Internal Revenue (“BIR”) from issuing assessment notices and collecting taxes in order to boost government revenues and fund government programs. Each taxpayer must therefore know his rights under the law vis-à-vis the power of the tax authorities to (i) issue assessments and (ii) collect internal revenue taxes.
In this article, we will discuss the limitations in the exercise of the Bureau of Internal Revenue’s power to assess and collect internal revenue taxes as provided by existing laws, tax regulations and jurisprudence.
Section 2 of the National Internal Revenue Code of 1997 (“NIRC”) provides that the BIR has the power and duty to assess and collect all internal revenue taxes, fees, and charges, and enforce all forfeiture, penalties, and fines connected with the assessment and collection of all internal revenue taxes, fees, and charges, among others:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. – The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws.
Such broad powers and authority however, are subject to the limitations provided by the 1987 Philippine Constitution, particularly the due process clause. The Constitution expressly provides:
SECTION 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.
In Pepsi-Cola Bottling Co. of the Philippines v. Municipality of Tanauan, Leyte, the Supreme Court (SC) emphasized that even if the State has the power to collect and assess taxes, the due process requirement is indispensable:
This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are provided. Due process is usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. (Emphasis supplied)
An assessment, as defined by the Supreme Court in Tupaz v. Ulep, contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. The ultimate purpose of an assessment is to ascertain the amount that each taxpayer has to pay. It is a notice to the effect that the amount therein stated is due with a demand for payment thereof.
The Supreme Court further explained in SMI-ED Philippines Technology, Inc. v. CIR that an assessment is the determination of amounts due from a person obligated to make payments. In the context of national internal revenue collection, it refers to the determination of the taxes due from a taxpayer under the NIRC.
Deficiency assessments are issued by the BIR if, after the conduct of an audit or investigation of the of the taxpayer, the BIR, through the authorized Revenue Officer, finds that the tax return contains an under-declaration of income or over-deduction of expenses, or that the taxpayer did not file a tax return at all.
The basic requirements of a valid assessment are: (a) it must be in writing and signed by the BIR, (b) it contains the law and facts on which the assessment is based, (c) it contains a demand for payment within the prescribed period, and (d) it is served upon and received by the taxpayer. Satisfaction of these requirements would inevitably inform taxpayers of their liabilities, determine the period for the taxpayers to protest, and ascertain the prescription of government claim.
Procedure in the Issuance of Assessments
The NIRC expressly provides that the Commissioner of Internal Revenue (“CIR”) or his duly authorized representative has the power to examine tax returns and determine the corresponding tax due thereon:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due. After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax, notwithstanding any law requiring the prior authorization of any government agency or instrumentality: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative.
Any return, statement of declaration filed in any office authorized to receive the same shall not be withdrawn: Provided, That within three (3) years from the date of such filing, the same may be modified, changed, or amended: Provided, further, That no notice for audit or investigation of such return, statement or declaration has in the meantime been actually served upon the taxpayer.
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Although the CIR or his/her duly authorized representative has the power to issue assessments however, these cannot be issued arbitrarily. The NIRC, Revenue Regulations and several BIR Issuances provide the proper procedure in issuing assessments to make them complaint with the due process clause. Section 228 of the NIRC states:
SEC. 228. Protesting of Assessment. – When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings:
The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. (Emphasis supplied)
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. (Emphasis supplied)
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.
Revenue Regulations (RR) No. 12-99 which implements Section 228 of the NIRC, provides for the due process requirements in the issuance of a deficiency tax assessment. RR 12-99 was further amended by Revenue Regulations Nos. 18-2013, 7-2018, and 22-2020.
Below, we shall discuss the procedures in the issuance of tax assessments:
- Issuance of a Letter of Authority
The first step in the assessment process is the issuance of a Letter of Authority (LOA). It is an official document that empowers a Revenue Officer to examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order to determine the taxpayer’s correct internal revenue tax liabilities.
The LOA must be served within thirty (30) days from the date of its issuance; otherwise, it shall become void. After the 30-day period, the taxpayer shall have the right to refuse the service of the LOA, unless it is revalidated. The LOA can be revalidated through the issuance of a new LOA. Revalidation can be done only once if it was issued by the Regional Office and twice if issued by the National Office. Only one LOA should be issued for each taxable year under audit to include specific internal revenue tax liabilities. A LOA issued for “unverified prior years” is void.
In Commissioner of Internal Revenue v. Sony Philippines, Inc., the Supreme Court had the occasion to stress that there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity.
2. Tax Audit of the Taxpayer
In a tax audit, revenue officers examine the books of accounts and other accounting records of the taxpayers to determine their correct tax liabilities. A Revenue Officer has only one hundred and twenty (120) days from the date of receipt of the LOA to conduct the audit and submit the required report of investigation. If the Revenue Officer finds that there are no deficiency taxes, the audit ends. If there are deficiency taxes, the Revenue Officer shall submit his report to the Revenue District Office (RDO) and the case will be endorsed to the Revenue Regional Office (RRO) or the CIR.
A taxpayer’s books of accounts, as a general rule, shall be subjected to examination and inspection only once in a taxable year. The recognized exceptions however to this rule are (a) when the CIR determines that fraud, irregularities, or mistakes were committed by the taxpayer; (b) when the taxpayer himself requests a re-investigation or re-examination of his books of accounts; (c) when there is a need to verify compliance with withholding and other internal revenue tax requirements; (d) when there is a need to verify capital gains tax liabilities of the taxpayer; and (e) when the CIR chooses to exercise his/her power to obtain information relative to the examination of other taxpayers.
3. Issuance of Notice of Discrepancy
Revenue Regulations No. 22-20 (RR No. 22-20) amended Section 3 of RR No. 12-99, as amended by RR No. 18-2013, and RR No. 7-2018, by providing the preparation of a Notice of Discrepancy instead of a Notice of Informal Conference.
RR No. 22-20 provides that if a taxpayer is found to be liable for deficiency tax or taxes by the Revenue Officer, he/she shall be informed through a Notice of Discrepancy which would fully afford him/her an opportunity to present and explain his side.
The discussion on the noted discrepancies shall not exceed thirty (30) days from receipt by the taxpayer of the Notice of Discrepancy. Here, the taxpayer is given an opportunity to present his side and explain the discrepancies noted by the examiner and submit documents to support the cancellation of the said discrepancies. The taxpayer’s opportunity to submit all necessary documents that support his/her explanation shall likewise be within such 30-day period.
4.Issuance of Preliminary Assessment Notice
According to RR No. 22-2020, if the taxpayer is still found liable for deficiency taxes, and he or she refuses to pay or disagrees with the findings of the examiner, the investigating office shall endorse the case to the reviewing office and approving official in the National Office or the Revenue Regional Office for the issuance of a deficiency tax assessment in the form of a Preliminary Assessment Notice (“PAN”) within ten (10) days from the conclusion of the discussions on the Notice of Discrepancy.
The Supreme Court stressed in CIR v. Metro Star Superama, Inc. that:
Indeed Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations – that taxpayers should be able to present their case and adduce supporting evidence.
The Supreme Court added that the foregoing has been confirmed by R.R. No. 12-99, as amended, thus:
From the provision quoted above (referring to RR No. 12-99), it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the “due process requirement in the issuance of a deficiency tax assessment,” the absence of which renders nugatory any assessment made by the tax authorities.
There are however exceptions to the general rule that there must be a PAN issued by the BIR before issuing a Formal Letter of Demand (FLD)/ Final Assessment Notice (FAN). These instances are when:
- The finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or
- A discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
- A taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
- The excise tax due on excisable articles has not been paid; or
- An article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to a non-exempt person.
In the above-cited cases, an FLD/FAN shall be issued outright.
The taxpayer must respond to the PAN within fifteen (15) days from his date of receipt of the PAN. Otherwise, he shall be considered in default and an FLD/FAN shall be issued calling for the payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. If the taxpayer responds and disagrees with the findings of deficiency tax or taxes, FLD/FAN shall be issued within fifteen (15) days from filing/submission of the taxpayer’s response, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties.
Note that the failure to file a reply to the PAN will not bar the taxpayer from protesting the FLD/FAN because PAN is not the final assessment which can be protested as contemplated under the NIRC.
- Issuance of Formal Letter of Demand and/or Formal Assessment Notice
The BIR, through the CIR or his authorized representative then issues an FLD/FAN which is a formal letter of demand for the payment of deficiency taxes of a taxpayer.
As mentioned above, the FLD/FAN must (a) be in writing and signed by the BIR, (b) contain the law and facts on which the assessment was based, (c) contain a demand for payment within the prescribed period, and (d) be served upon and received by the taxpayer. 
2. Disputed Assessment
The taxpayer may file a protest against the FLD/FAN within thirty (30) days from receipt of the FLD/FAN through a request for reconsideration or a request for reinvestigation.
A request for reconsideration refers to a plea of re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may raise a question of fact or law, or both. On the other hand, a request for reinvestigation refers to a plea of re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both.
For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents within sixty (60) days from filing of protest; otherwise, the assessment shall become final. On the other hand, the sixty (60)-day period does not apply to requests for reconsideration.
If the taxpayer fails to file a protest within the thirty (30)-day period, the assessment shall become final and executory. No request for reconsideration or reinvestigation shall be entertained when the assessment is final, executory, and demandable.
3. Final Decision on Disputed Assessment
The BIR, through the CIR or his duly authorized representative, shall issue the Final Decision on Disputed Assessment (FDDA) which shall indicate the facts, the applicable law, rules and regulations or jurisprudence on which it is based, otherwise, the FDDA shall be void.
The FDDA must also indicate that it is the CIR or his duly authorized representative’s final decision.
Clearly from the foregoing, despite being granted broad powers under the NIRC regarding its power to assess and collect taxes, the BIR needs to comply with the procedural requirements set by law. The Supreme Court in CIR v. Pascor Realty Development Corporation explained the importance of issuing an assessment, and what a valid assessment entails:
To start with, an assessment must be sent to and received by a taxpayer and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum (now 12%), or such higher rates as may be prescribed by rules and regulations, is to be collected from the date prescribed for its payment until the full payment.
The issuance of an assessment is vital in determining, the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon.
Moreover, the Supreme Court ruled consistently in several cases that failure to comply with the procedural requirements and due process undoubtedly renders the assessment void. Such was its ruling in CIR v. Metro Star Superama, Inc where the CIR failed to discharge its duty and present any evidence to show that Metro Star received the PAN, in CIR v. Benipayo where the SC ruled in favor of Benipayo when he claimed that the penalty was based on “mere presumptions and conclusions, devoid of findings of fact of the alleged fraudulent practices, in CIR v. Mindanao Sanitarium and Hospital, Inc. where the SC in a Resolution, upheld the decision of the Court of Tax Appeals (“CTA”) that a valid assessment contains not only a computation of tax liabilities but also a demand for payment within the prescribed period, and in CIR v. United Salvage and Towage (Phils.) where the SC emphasized the mandatory nature of the requirements laid down in Section 228 of the NIRC, as amended.
In Medicard Philippines, Inc. v. CIR, the Supreme Court held that the absence of a LOA violated Medicard’s right to due process, hence the assessment against Medicard shall be void. Citing Section 6 of the NIRC, the Supreme Court held:
Based on the afore-quoted provision (referring to Section 6 of the NIRC), it is clear that unless authorized by the CIR himself or by his duly authorized representative, through a(n) LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do with the LOA. These are simply methods of examining the taxpayer in order to arrive at the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives, other tax agents may not validly conduct any of these kinds of examinations without prior authority. (Emphasis supplied)
In this case, the BIR merely issued a Letter Notice (LN) upon finding some discrepancies between Medicard’s Income Tax Returns and VAT Returns. After the issuance of the LN, the BIR issued a PAN and thereafter a FAN. The Supreme Court held:
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity. (Emphasis supplied)
The Supreme Court added that:
Due process demands, as recognized under RMO No. 32-2005, that after an LN has serve(d) its purpose, the revenue officer should have properly secured LOA before proceeding with the further examination and assessment of the petitioner.
Thus, a LOA is cannot be dispensed with in order for an assessment to be valid.
Proper Service PAN/FLD/FAN and the FDDA
Section 3 of RR No. 12-99, as amended, provides for the following modes of service:
- Personal service by delivering personally a copy of the notice to the party at his registered or known address or wherever he may be found. A known address shall mean a place other than the registered address where business activities of the party are conducted or his place of residence.
- Substituted service can be resorted to when the party is not present at the registered or known address. The modes of substituted service were discussed in detail in Section 3 of RR 12-99, as amended.
- Service by mail is done by sending a copy of the notice by registered mail to the registered or known address of the party with instruction to the Postmaster to return the mail to the sender after ten (10) days, if undelivered. A copy of the notice may also be sent through reputable professional courier service. If no registry or reputable professional courier service is available in the locality of the addressee, service may be done by ordinary mail.
The server shall accomplish the bottom portion of the notice. He shall also make a written report under oath before a Notary Public or any person authorized to administer oath under Section 14 of the NIRC, as amended, setting forth the manner, place and date of service, the name of the person/barangay official/professional courier service company who received the same and such other relevant information. The registry receipt issued by the post office or the official receipt issued by the professional courier company containing sufficiently identifiable details of the transaction shall constitute sufficient proof of mailing and shall be attached to the case docket.
In various cases, the Supreme Court held that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the taxpayer.
With respect to service of assessments via mail, the Supreme Court held that the facts to be proven to raise the presumption of receipt by the taxpayer are as follows: (a) the letter was properly addressed with postage prepaid, and (b) it was mailed. Once these facts are proven, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. The Supreme Court held that the registry receipt or the registry return card proves the fact of mailing.
Issuance of Warrant of Distraint and/or Levy
Revenue Memorandum Order (RMO) No. 42-2010 provides that upon issuance of the Final Decision on Disputed Assessment or upon filing of a Petitioner for Review before the CTA, warrants of distraint and/or levy shall be immediately issued, to wit:
Upon issuance by the Commissioner or its authorized representatives of the final decision on the disputed assessment against the taxpayer or upon filing of a Petitioner for Review before the Court of Tax Appeals in Division or En Banc of its decision upholding the assessment, Warrants of Distraint and Garnishment, and/or Levy shall forthwith be immediately issued and served pursuant to the provisions of Revenue Memorandum Order No. 39-2007 and other rules, regulations, and issuances of the Bureau of Internal Revenue when applicable.
The warrant of distraint will be issued by the CIR or his duly authorized representative when the amount involved is more than P1 Million. It will be issued by the Revenue District Officer when the amount involved is P1 Million or less.
The taxpayer however is not left without an option – by way of exception, pursuant to Section 11 of Republic Act No. 1125 as amended, the Court of Tax Appeals has jurisdiction to suspend the collection of taxes when in its opinion, the collection by the Bureau of Internal Revenue may jeopardize the interest of the government and/or the taxpayer. In such a case however, the CTA shall require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount being assessed.
The foregoing was confirmed in Spouses Pacquiao v. Court of Tax Appeals where the Supreme Court held that:
Section 11 of R.A. No. 1125, as amended by R.A. No. 9282, embodies the rule that an appeal to the CTA from the decision of the CIR will not suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law. When, in the view of the CTA, the collection may jeopardize the interest of the Government and/or the taxpayer, it may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond.
The Supreme Court added that the CTA has even the power to dispense with the cash deposit or bond requirement whenever the methods employed by the CIR in the collection of the tax jeopardizes the interests of a taxpayer for being patently in violation of the law. The Supreme Court however held that the determination of whether the methods employed by the CIR in its assessment, jeopardized the interests of a taxpayer is a question of fact that calls for the reception of evidence which would serve as basis for the issuance by the CTA of an injunctive writ. The Supreme Court thus mandated the CTA to conduct a preliminary hearing for the purpose and issued some guidelines to resolve the issue on whether petitioners in this case would be required to post a bond. The Supreme Court said that the CTA may look into whether the FLD was irregular and whether the FDDA and the Warrant of Distraint and/or Levy were properly issued.
In CIR v. United Parcel Service Co., the CTA En Banc cancelled a warrant of distraint and/or levy because of the BIR’s failure to serve the FDDA. Again, the Court held that if the taxpayer denies receipt of an assessment or an FDDA, the burden of proving receipt of such notice is shifted to the BIR.
 PHIL. CONST. Art. III, Section 1
 G.R. No. L-31156, February 27, 1976
 G.R. No. 127777, October 1, 1999
 G.R. No. 175410, November 12, 2014
 Sec. 56(B), R.A. 8424 or the NIRC
 Sec. 228, NIRC
 CIR v. Pascor Realty, G.R. No. 128315 June 29, 1999
 Sec. 6, NIRC
 Sec. 13, NIRC
 Bureau of Internal Revenue, Updated Handbook on Audit Procedures and Techniques Volume I (Revisions – Year 2000), Revenue Audit Memorandum Order No. 01-00 [RAMO No. 01-00], Sec. VIII.C.2.3 (March 17, 2000)
 RMO No. 38-88
 RMO No. 57-2016
 G.R. No. 178697, November 17, 2010
 DOF Order No. 006-99
 Secs. 5 and 235, NIRC.
 G.R. No. 185371, December 8, 2010
 Sec. 3.1.2, RR No. 18-2013
 Sec. 228, NIRC
 RR No. 12-99, as amended by RR No. 18-2013
 Sec. 228, NIRC
 CIR v. Pascor Realty, G.R. No. 128315 June 29, 1999
 Section 3, RR No. 12-99, as amended
 Royal Bank of Scotland (Philippines)m Inc. v. CIT, CTA EB No. 446, October 23, 2009
 Sec. 2, RR No. 18-2013
 G.R. No. 128315 June 29, 1999
 G.R. No. 185371, December 8, 2010
 G.R. No. L-13656, January 31, 1962
 CTA EB No. 1147, October 5, 2012
 G.R. No. 197515, July 2, 2014
 G.R. No. 222743,
 Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965, CIR v. Metro Star Superama, Inc., G.R. No. 185371, December 8, 2010
 Sec. 207(a), NIRC
 G.R. No. 213394, April 6, 2016
 CTA EB Case No. 721 (CTA Case No. 7667)