• As of September 11, 2014, the BIR, under the

administration of Commissioner Kim Henares, has filed a

total of 292 tax evasion cases against individuals and

responsible officers of corporations.

• This is pursuant to the Run After Tax Evaders (RATE)

Program of the BIR.

• Normally, the BIR files tax evasion cases every other

Thursday in order to increase awareness of the public on

the consequences of not paying the right amount of

taxes.

• Those convicted of tax evasion may be liable to both

criminal and civil penalties as imposed under the Tax

Code. This would mean that the convicted tax evader

may be sentenced by the Court to imprisonment.

• Based on the recent practices of the BIR, the complaint

for tax evasion will also include the accountant who

audited the financial statements.

• Most of the tax fraud cases filed by the BIR are

developed through the following means:

a. Confidential informants who provide documents

and information to the BIR;

b. Electronic matching with information provided by

third parties;

c. High profile cases (e.g., Mikey Arroyo, Chief

Justice Corona, Napoles, etc.); and

d. Discovery of fraud practices during regular audit.

• A BIR audit or assessment is not necessary for the BIR

to file a criminal complaint for tax evasion.

• In CIR v. Pascor Realty Corp. and other subsequent

cases, the Court explained that as a general rule, an

assessment is not necessary before a criminal charge

can be filed. A criminal charge needs to be supported

only by a prima facie evidence. An assessment is not

necessary to establish prima facie evidence.

• A criminal complaint is not instituted to demand payment,

but to penalize the taxpayer for violation of the Tax Code.

• Thus, there are several instances where the BIR already filed a tax evasion case against the taxpayer even before conducting an actual audit of the books of the taxpayer. On the part of the taxpayer, they normally raise as an issue the violation of due process by the BIR for not conducting an audit before filing the case.

• The filing of a criminal complaint by the BIR with the DOJ does not necessarily mean that a criminal case will automatically be filed in Court. The DOJ will have to evaluate the documents provided by the BIR and the allegations in the complaint to determine if there is probable cause to file a criminal case in Court.

• The most common provisions used by the BIR when

filing tax evasion cases are Sections 254 and 255 of the

Tax Code.

a. Section 254 – attempt by a taxpayer to evade or

defeat tax

b. Section 255 – failure of a taxpayer to file returns,

supply correct and accurate information and pay the

tax.

Negligence, whether slight or gross, is not

equivalent to fraud with intent to evade the tax

contemplated by the law. Fraud must amount to

INTENTIONAL wrong-doing with the sole

object of avoiding the tax. (People of the

Philippines vs. Judy Anne Santos, CTA Criminal

Case No.O-012, January 16, 2013)

FRAUD – in its general sense, “is deemed to

comprise anything calculated to deceive, including

all acts, omissions, and concealment involving a

breach of legal or equitable duty, trust or confidence

justly reposed, resulting in the damage to another, or

by which an undue and unconscionable advantage is

taken of another.” (CIR v. Estate of Benigno Toda Jr., G.R. No.

147188, September 14, 2004)

Tax Evasion connotes the integration of three (3) factors:

1. The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due;

2. An accompanying state of mind which is described as being “evil,” in “bad faith,” “willful,” or “deliberate and not accidental”; and

3. A course of action or failure of action which is unlawful. (CIR v. Estate of Benigno Toda Jr., G.R. No. 147188, September 14, 2004)

Tax Evasion – is a

scheme used

outside of those

lawful means and

when availed of, it

usually subjects the

taxpayer to further

or additional civil or

criminal liabilities.

The willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be presumed. The fraud contemplated by law is actual and constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. (Commissioner of Internal Revenue v. Japan Air Lines, Inc., et al G.R. No. 60714, October 4, 1991)

However, it is well-settled that mere

understatement of a tax is not itself

proof of fraud for the purpose of tax

evasion. (People of the Philippines vs. Judy

Anne Santos, CTA Criminal Case No.O-012,

January 16, 2013.)

The intention to minimize taxes, when used in the context of fraud, must be proven by CLEAR AND CONVINCING EVIDENCE amounting to more than mere preponderance. Mere understatement of tax in itself does not prove fraud. (Yutivo Sons Hardware Co. v. CTA, G.R. No. L-13203. January 28, 1961)

For example, in the following cases, the Court ruled that

the taxpayer did not commit tax fraud even though the tax

paid is less than that required by law:

1. People v. Judy Anne Santos (CTA Case – January

2013) – The CTA held that while the BIR was able to

prove that the income declared in the tax return is

understated, it was not able to prove that the

understatement was done intentionally or willfully by the

taxpayer.

For example, in the following cases, the Court ruled that the taxpayer did not commit tax fraud even though the tax paid is less than that required by law:

2. CIR v. Javier (SC Case – July 1991) – The taxpayer received money from the bank by mistake. He did not declare the amount received as income in his tax return. However, it was indicated in the return that “taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject to litigation”. The SC held that the taxpayer did not file a fraudulent return. Mistake of law is not equivalent to fraud.

• Examples of schemes used to commit tax fraud are:

a. Simulated transactions

b. Use of offshore accounts

c. Substantial understatement of sales/income –

more than 30%.

d. Substantial overstatement of expenses – more

than 30%

FACTS: A corporation authorized its

President to sell the Company building

together with the two lands on which it is

situated for not less than ₱90M. The

President sold the property to Mr. A for

₱100M. Mr. A then sold the property within

the same day to another corporation for

₱200M.

RULING: The Supreme Court held that, it is obvious that the objective of the sale to Mr. A was to reduce the amount of tax to be paid especially that the transfer from him to the other corporation would then be subject to only 5% individual capital gains tax, and not the 35% corporate income tax. Mr. A’s purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Mr. A never controlled the property and did not enjoy the normal benefits and burdens of ownership. (CIR v. Estate of Benigno Toda Jr., G.R. No. 147188, September 14, 2004)

• In some tax fraud cases, the BIR uses the “Networth Method” in determining the undeclared income of the taxpayer. This method is basically an extension of the accounting principle “Asset – Liabilities = Net Worth”.

• Another method being used by the BIR is the “Expenditure Method”. This method proceeds on the theory that where the amount of money which a taxpayer spends during a given year exceeds his reported income, and the source of such money is otherwise unexplained, it may be inferred that such expenditure represents unreported income.

• The “Networth Method” and “Expenditure

Method” are considered indirect methods.

In order for the BIR to use these methods,

certain circumstances must be present.

For example: (1) the taxpayer’s accounting

records are inadequate; (2) the taxpayer

refuses to present his accounting records.

The following civil penalties may be imposed

in cases of tax evasion:

a. Surcharge (50%)

b. Interest (20%)

• Deficiency Interest

• Delinquency Interest

Attempt to evade or defeat tax (Sec. 254)

– Fine of not less than ₱30,000 but not more

than ₱100,000;

– Imprisonment of not less than two (2) years

but not more than four (4) years; and

– Other penalties provided by law.

Failure to file pay any tax, make a return,

keep any record, or supply correct and

accurate information, or withhold or

remit taxes withheld, or refund taxes

withheld on compensation (Sec. 255)

– Fine of not less than ₱10,000;

– Imprisonment of not less than one (1) year but

not more than ten (10) years; and

– Other penalties provided by law.

Any person who attempts to make it appear that he has in fact filed a return or statement and subsequently withdraws the same after securing the official receiving seal or stamp (Sec. 255)

– Fine of not less than ₱10,000 but not more than ₱20,000

– Imprisonment of not less than one (1) year but not more than three (3) years

– Other penalties provided by law

Penal liabilities for making false entries, records or reports, or using falsified or fake accountable forms, for each act:

– Fine of not less than ₱50,000 but not more than ₱100,000

– Imprisonment of not less than two (2) years but not more than six (6) years

– If a Certified Public Accountant (CPA), his certificate as such shall be automatically revoked or cancelled upon conviction.

– In case of foreigners, he shall be immediately deported, without deportation hearing, after serving sentence.

Financial Officer or Independent CPA – Wilfully falsifies any report

– Certifies misstated financial statements

Any person not being an independent CPA or financial officer who:

– Examines and audit books of accounts of taxpayers

– Offers to sign and certify financial statements without audit

– Offers the use of accounting records not in conformity with the requirements of the law

– Knowingly makes any false entries in the books of account

– Keeps two (2) or more sets of such records or books of accounts

– Commits any act or omission in violation of the law

– Fails to keep the books of accounts in a native language, English or Spanish

– Wilfully attempts to evade or defeat any tax imposed by law

In cases of (1) fraudulent returns; (2)

false returns with intent to evade tax;

and (3) failure to file a return, the period

within which to assess tax is ten (10)

years from discovery of the fraud,

falsification or omission, as the case

may be.

Fraud cases cannot be the subject of a

compromise as mandated by Sec. 204

of the Tax Code.

Well-settled is the rule that an acquittal for failure to prove all elements of the offense beyond reasonable doubt does not include the extinguishment of the civil liability.

In case of acquittal, the accused may still be adjudged civilly liable. xxx (People of the Philippines vs. Judy Anne Santos, CTA Criminal Case No.O-012, January 16, 2013)

Tax Avoidance – is the tax saving

device within the means sanctioned by

law. This method should be used by the

taxpayer in good faith and at arm’s

length. (CIR v. Estate of Benigno Toda

Jr., G.R. No. 147188, September 14,

2004)

Some examples of tax avoidance practices:

• Employee vs. Independent Consultant - employees are not allowed any deduction while an independent consultant are entitled to deductions.

• Reclassifying certain employee benefits to de minimis benefits.

• Use of optional standard deduction when it would be more beneficial than itemized deduction.

• Tax-free transfers under Section 40(C)(2) of the Tax Code.

• Availing of tax incentives and exemptions under the Tax Code and special laws.

• Reports can be made by phone, by mail or

by personally reporting the matter to the

nearest BIR Office located nationwide.

• An informer’s reward amounting to ten

percent (10%) of the surcharges, revenues

or fees recovered and/or fine or penalty

imposed and collected, or ₱1,000,000.00

per case, whichever is lower.

• The Foreign Account Tax Compliance Act (FATCA)

became effective on March 2010 with the objective of

improving tax compliance by U.S. taxpayers that has

foreign accounts by requiring certain reportorial

requirements.

• The FATCA requires certain U.S. taxpayers (generally

U.S. citizens and residents) that has financial accounts

and assets located outside the U.S. to report these

assets to the Internal Revenue Service (IRS). Taxpayers

should use Form 8938. The FATCA reporting is in

addition to other reportorial requirements.

Source:http://www.irs.gov/Businesses/Corporations/Foreign

- Account-Tax-Compliance-Act-FATCA

• Generally, if the total value of the assets is US$50,000

and below at the end of the tax year, there is no

reporting requirement, unless the total value was more

than US$75,000 at any time during the year.

• However, for certain types of taxpayers, the threshold for the

reporting requirement may be higher. This include married

individual filing a joint income tax return (the threshold

doubles) and taxpayers residing in a foreign country

(threshold becomes US$200,000).

• Failure to comply with the requirements will result in

US$10,000 penalty (becomes US$50,000 for continued non-

compliance). In case there is substantial understatement of

income, additional 40% penalty.

• FATCA also requires certain foreign financial institutions (FFIs)

to report to the IRS information about financial accounts and

assets owned by U.S. taxpayers or by foreign entities in which

U.S. taxpayers hold a substantial ownership interest.

• The FFIs include not only banks, but also other financial

institutions, such as investment entities, brokers, and certain

insurance companies.

• FFIs that do not comply with the registration and reportorial

requirements of FATCA will be subject to 30% withholding tax

on U.S. sourced payments made to the FFIs.

The obligations of the FFIs under the FATCA includes:

1. Implement procedures for the identification of its

account holders.

2. Report to the IRS annually its account holders who

are U.S. persons or entities with substantial U.S.

ownership.

3. For payment of U.S. sourced income, the FFIs are

required to withhold 30% and remit the same to the

IRS.