lecture on remedies

Lecture notes on Remedies (part 1)

Lecture notes Tax 1 (2015-16) Associate Dean L.K. GRUBA

Remedies of the Taxpayer �  Before Payment of Tax ( but after payment under self-

assesment) �  Administrative remedies

�  Protest against assessment �  Compromise �  Redemption of property after sale at public auction

�  Judicial Remedies �  Ordinary Civil action �  Filing of Petition before the CTA

�  After payment of Tax �  Administrative Remedies

�  Claim for refund or tax credit

�  Judicial Remedies �  Filing of Petition before the CTA


Remedies of the government

�  Administrative Remedies �  To make deficiency assessments within 3 or 10 years �  To enforce deficiency assessments and collect taxes within 5 years �  To effect distraint of personal property �  To effect levy on real property �  To pursue judicial proceeding to collect �  To compromise abate or cancel taxes �  To enforce tax liens �  To enforce statutory penal provisions �  To enforce forfeiture or property

�  Judicial Remedies �  File civil or criminal case


Assessment

�  An assessment contains not only a computation of tax liabilities but also a demand for payment within a prescribed period


Kinds of assessments �  Self assessment

�  Deficiency assessment

�  Jeopardy assessment

�  Disputed assessment


Difference between Tax delinquency and tax deficiency �  Tax Deficiency –

�  Refers to the amount by which the tax imposed or required to be paid exceeds the amount shown in the taxpayer’s return and/or paid by him.

�  Tax Delinquency – �  failure to pay the tax due on any return required to be

filed, or tax due for which no return is required �  Subject to administrative penalties such as 25%

surcharge, interest anad compromise penalty, �  Can be immediately collected thru administrative action,

like, issuance of distraint and levy and or thru judicial filing of action to colelct


When is an assessment made

�  Section 203 and Section 222 of the NIRC �  Provide for a statute of limitation on the assessment

and collection of internal revenue taxes in order to safe guard the interest of the taxpayer against unreasonable investigation �  Meaning of unreasonable investigation �  Law on prescription a remedial measure –

�  The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer ( Phil Journalsits, Inc. vs CIR 447 SCRA 214, 2004)


Rule on Prescription �  When the tax law itself is silent on prescription or

when return is not required to be filed the tax is imprescriptible

�  In computing the legal periods, the administrative Code of 1987 is followed and not the civil code, /this is according to the case of CIR vs Primetown , 531 SCRA 436, 2007 . A year is composed of 12 months;the number of days is irrelevant.


Reckoning period �  The 3 year period shall be counted after the last day

prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period

�  a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed.

�  a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.


Effect of Filing an Amended Return

�  The reckoning shall be from the time the amended return is filed.


Extension of Period to Assess

�  Only upon written agreement between the CIR and the taxpayer executed before the expiration of the 3 year period (Section 222(b), NIRC)

�  Waiver must be signed by the taxpayer himself or his duly authorized representative. In case of corp. By responsible officials, duly authorized and notarized authority.


Suspension of Running of Statute of Limitations

�  1. When the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court – during such period and for 60 days thereafter

�  2. When taxpayer request for reinvestigation which is granted by the CIR

�  3. When taxpayer can not be located in the address given by him in the return

�  4. When the warrant of distraint or levy is duly served and no property is located

�  5. when taxpayer is out of the country


Principle of the application of the Statute of Limitations

�  benefit both the Government and the taxpayer. it intends to afford protection to the taxpayer against unreasonable investigation. [CIR v. Philippine Global Communication, Inc., GR No. 167146, 31 Oct. 2006.]


Requisites for a Assessment

�  the taxpayer shall be informed in writing of the law and the facts on which the assessment is made

�  There is a demand for payment


Ungab vs Cusi �  In Ungab v. Cusi, the Supreme Court held that an

assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax.


Fortune Tobacco case �  Fortune’s situation is factually different, since the

registered wholesale price of the goods, approved by the BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and unless and until the BIR has made a final determination of what is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution. [CIR v. Court of Appeals, GR No. 119322, 4 June 1996.]


Adamson Case v. Court of Appeals

�  The issue was whether the filing of the criminal complaints by the DOJ was premature for lack of a formal assessment. The Supreme Court held that when fraudulent tax returns are involved, Section 222(a) of the 1997 Tax Code says that “a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years from discovery of the falsity, fraud or omission.”

�  An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the tax. Here, the Supreme Court said, “[a]rguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud.” The Supreme Court likewise confirmed the applicability of and upheld the decision in Ungab v. Cusi. [Adamson v. Court of Appeals, GR No. 120935, 21 May 2009.]


Ungab case vs Adamson case vs Fortune Tobacco Case

�  Reconciling these three cases together, it appears that the general rule still is that a gross disparity in the taxes due and the amounts actually declared by the taxpayer gives cause for the CIR to pursue his/its criminal prosecution for filing a fraudulent tax return, regardless of whether a deficiency assessment has been made.


�  What are the instances when an assessment may be required? �  (1) when the taxable period of a taxpayer is

terminated by the CIR for reasons such as when the taxpayer is retiring his/her business subject to tax [Section 6(D) of the 1997 Tax Code];

�  (2) when a tax deficiency is found by the CIR after the taxpayer files his/her return [Section 56(B) of the 1997 Tax Code]; and

�  (3) when a corporation contemplates dissolution or reorganization [Section 52(C) of the 1997 Tax Code].


Meaning of Best Evidence Obtainable

�  The CIR may use the best evidence obtainable to issue an assessment under the following circumstances (Section 6 (B), NIRC) �  The records requested from the taxpayer are not

forthcoming either because the records are lost or the taxpayer refuses to submit such records

�  The records submitted are false, incomplete or erroneous (RMC 23-00)


Rule on Receipt of Assessment

�  an assessment is deemed to have been made within the three-year prescriptive period if notice to that effect was released, mailed, or sent by the CIR to the taxpayer within said period.

�  Receipt by the taxpayer within the prescriptive period is not necessary. The taxpayer should actually receive, even beyond the prescriptive period, the assessment notice which was timely released, mailed, or sent.

�  While a mailed letter is deemed received by the addressee in the ordinary course of mail, this is still merely a disputable presumption subject to controversion,

�  a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.” In Barcelon, Roxas Securities, Inc. v. CIR,


Extension of Period to Assess

�  Only upon written agreement between the CIR and the taxpayer executed before the expiration of the 3 year period (Section 222(b), NIRC)

�  Waiver must be signed by the taxpayer himself or his duly authorized representative. In case of corp. By responsible officials, duly authorized and notarized authority.


Rule in case of amended return

�  If the amended return is substantially different from the original return, the prescriptive period shall be counted from the filing of the amended return ( CIR vs Phoenix Assurance 14 SCRA 52, 1965)


Suspension of Running of Statute of Limitations

�  1. When the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court – during such period and for 60 days thereafter

�  2. When taxpayer request for reinvestigation which is granted by the CIR

�  3. When taxpayer can not be located in the address given by him in the return

�  4. When the warrant of distraint or levy is duly served and no property is located

�  5. when taxpayer is out of the country


Requisites for Valid Assessment

�  the taxpayer shall be informed in writing of the law and the facts on which the assessment is made

�  There is a demand to pay


Meaning of Best Evidence Obtainable

�  The CIR may use the best evidence obtainable to issue an assessment under the following circumstances (Section 6 (B), NIRC) �  The records requested from the taxpayer are not

forthcoming either because the records are lost or the taxpayer refuses to submit such records

�  The records submitted are false, incomplete or erroneous (RMC 23-00)


Prima Facie Evidence of a False or Fraudulent Return

�  1. Substantial understatement of taxable sales, income etc. by 30%

�  2. Substantial overstatement of deductions by more than 30%


Assessment Process �  Tax Audit

�  In a tax audit , revenue officers examine the books of account and other accounting records of the taxpayers to determine the correct tax liability , on the strength of a Letter of Authority �  A letter of Authority (LOA) 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..– valid for 120 days but can be extended – LOA should cover a taxable period not exceeding one taxable year.

�  A letter Notice (LN) is a discrepancy notice issued by the CIR after conducting data matching processes, informing the taxpayer of findings of discrepancy,e.g. undeclared sales or overclaimed purchases.

�  Notice the findings of the audit and the taxpayer is given 15 days to explain his side ( RR 18-13 has since removed this as part of the process


Preliminary assessment notice (PAN)

�  A PAN is the communication issued by the BIR informing a taxpayer of its findings after audit. The PAN shall be in writing and shall show in detail the facts and the law, rules and regulations or jurisprudence on which the assessment is based.


Instances when PAN is not necessary

�  Finding of deficiency tax is a result of mathematical error in the computation of tax appearing on the face of the return

�  Discrepancy is determined between tax withheld and the amount actually remitted by the withholding agent

�  A taxpayer who opted to claim a refund was determined to have carried over the succeeding tax liabilities

�  Excise tax has not been paid

�  An article locally purchased or imported by an exempt person has been sold, traded or transferred to non exempt person


Formal letter of Demand (FLD) and/or Final Assessment

Notice (FAN) �  A FLD/FAN is a formal letter of demand where a

declaration of deficiency taxes is issued to a taxpayer who fails to respond to a PAN within 15 days from receipt of the PAN, or whose reply to the PAN is found to be without merit.

�  The FLD/FAN shall be issued by the CIR or his duly authorized rep. and shall state the facts and the law, the rules and regulations or jurisprudence on which the assessment is based , Otherwise the assessment is void (RMC 18-13)


BIR’s action on the protest to the FAN

�  The CIR either: �  Denies the protest to the FAN,

�  The nomenclature of the BIR’s denial of the protest to the FAN could vary. It may be called a Final Decision on a Disputed Assessment (FDDA) ( RMC 18-13)

�  A final demand letter for payment of delinquent taxes may be considered a decision on a disputed assessment

�  Does not act on such protest


REMEDIES UNDER THE NIRC A. Assessment and Collection: The Return was not false or fraudulent

Date return was filed, or last day required by law for filing, if filed before the last day

* (NIRC, Section 203)

3 years Last day to collect (By Judicial proceeding

only) *(NIRC, Section 222 (d) & CIR v. Phil. Global Communications, inc., GR No. 167146, Oct

31, 2006) Date return was filed, or last day required by

law for filing, if filed before the last day

*(NIRC, Section 203)

3 years Last day to assess

5 years

Last day to collect either by: [a] Summary proceedings; or [b] Judicial proceedings * (NIRC Section 222 (d))


Assessment and Collection: The return was false or fraudulent

Date of discovery of the falsity, fraud or omission

*(NIRC, Section 222 (a))

10 years Last day to collect (By judicial proceedings

only) *(NIRC, Section 222 (a) & CIR v. Phil. Global C

Communications, Inc., GR No. 167146, Oct. 31, 2006 Date of discovery of the falsity, fraud or omission

* (NIRC, Section 222 (a))

10 years Last day to assess

5 years

Last day to collect either by: [a] Summary proceedings; or [b] Judicial procedings * (NIRC, Section 222 (c))


Remedy against an assessment where the BIR did not decide within 180 days

Receipt of Letter of Authority (Tax Audit starts)

(No more need for notice of informal conference )

* (RR 18-2013)

Pre-assessment notice *(NIRC, Section 228(e) & RR 18-

2013 Section 2))

Assessment and demand *(NIRC, Section 228 (e) & RR 18-2013

Section 2)) Submit Support Docs – if

request for reinvestigation

* (NIRC, Section 228(e) &RR

18-2013 Section 2))

Respond *(NIRC, Sec. 228(e) & RR 18-2013 Sec. 2))

Protest *(NIRC, Sec 228 (e) & RR 18-2013 Sec. 2))

A

15 days 30 days 60 days

No decision by the BIR *(NIRC, Section 228 (e) & RR 18-2-13 Section 2))

Appeal to CTA

Decision of CTA Div.


Decision of en banc

Motion for Recon.

Appeal to CTA

en banc

Appeal to SC

180 days *(NIRC,

Section 228 (e) & RR 18-2013

Section 2))

30 days *(NIRC,

Section 228 (e) & RR 18-2013

Section 2))

15 days *(A.M.

No. 05-11- 07-CTA,

Rule 8, Sec. 3 (b))

15 days *(A.M.

No. 05-11- 07-CTA, Rule 8,

Sec. 3 (c))

15 days *Rules of

Court, Rule 45)

A


Remedy against an assessment where the BIR decide within 180 days

Receipt of Letter of Authority ( Tax audit starts)No more need for

notice of informal Conference * (RR 18-2013)

Pre-assessment notice *(NIRC, Section 228(e) & RR 18-

2013 Section 2))

Assessment and demand *(NIRC, Section 228 (e) & RR 18-2013

Section 2)) Submit Support Docs – if

request for reinvestigation

* (NIRC, Section 228(e) &RR

18-2013 Section 2))

Respond *(NIRC, Sec. 228(e) & RR 18-2013 Sec. 2))

Protest *(NIRC, Sec 228 (e) & RR 18-2013 Sec. 2))

A

15 days 30 days 60 days

Decision of the BIR



Decision of en banc

Motion for Recon.

Appeal to CTA

en banc

Appeal to SC

30 days *(NIRC,

Section 228 (e) & RR 18-2013

Section 2))

15 days *(A.M.

No. 05-11- 07-CTA,

Rule 8, Sec. 3 (b))

15 days *(A.M.

No. 05-11- 07-CTA, Rule 8,

Sec. 3 (c))

15 days *Rules of

Court, Rule 45)

A Appeal to CTA


Additions to Basic Tax �  Civil Penalties –

�  Penalty : 25% �  Failure to file any return and pay tax on the date prescribed �  Wrong filing of the return �  Failure to pay deficiency tax with in the time prescribed for the payment in the notice

of assessment

�  Penalty – 50% �  Willful neglect to file the return within the period prescribed �  False or fraudulent return is willfully made,

�  Interest �  Deficiency interest – 20% per annum �  Delinquency interest – 20% per annum

�  Compromise penalties


Tax delinquency vs tax deficiency

�  Tax Delinquency – when (a) the self assessed tax per return filed by the taxpayer on the prescribed date was not paid at all or was only partially paid, or (b) the deficiency taxes assessed by the BIR become final and executory.- can be collected immediately by issuance of a warrant; collection by administrative remedy or through the regular court.

�  Tax deficiency on the other hand means : (a) the amount by which the tax imposed by law as determined by the Commissioner exceeds the amount as shown as the tax by the taxpayer upon his return, or (b) if no amount is shown as the tax by the taxpayer upon his return , or if no return is made, then the amount by which the tax as determined by the Commissioner exceeds the amount previously assessed as deficiency. Has to go through the process of protest. Judicial Remedy is through the CTA.


Tax delinquency vs tax deficiency

�  Delinquent tax – subject to administrative penalties, such as 25% surcharge, interest and compromise penalty.

�  Deficiency tax is not subject to 25% surcharge, although subject to interest and compromise penalty


Compromise �  Cases which maybe compromised

�  Delinquent accounts

�  Cases under Administrative protest after issuance of the FAN

�  Civil tax cases being disputed before the courts �  Collection cases filed in courts; and �  Criminal violations, other than those already filed in

court or those involving tax fraud.


�  EXCEPTIONS: 1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold; 2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative; 3. Criminal violations already filed in court; 4. Delinquent accounts with duly approved schedule of installment payments;

�  Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis;

�  6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and

�  7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.


Instances when the CIR may compromise taxes

�  Doubtful validity of the assessment

�  Financial incapacity


�  1. Doubtful validity of the assessment. - The offer to compromise a delinquent account or disputed assessment under these Regulations on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that:

�  (a) The delinquent account or disputed

�  assessment is one resulting from a jeopardy assessment (For this purpose, “jeopardy assessment” shall refer to a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return); or

�  (b) The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; or

�  (c) The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis; or

�  (d) The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; or


�  The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis; or

�  (f) The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the National Internal Revenue Code of 1997; or (g) Assessments made based on the “Best Evidence Obtainable Rule” and there is reason to believe that the same can be disputed by sufficient and competent evidence; or

�  (h) The assessment was issued within the prescriptive period for assessment as extended by the taxpayer’s execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic; or

�  (i) The assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the Bureau, but for which the Supreme Court has not decided upon with finality.


�  Financial incapacity. - The offer to compromise based on financial incapacity may be accepted upon showing that: (a) The corporation ceased operation or is already dissolved.

�  Provided, that tax liabilities corresponding to the Subscription Receivable or Assets distributed/distributable to the stockholders representing return of capital at the time of cessation of operation or dissolution of business shall not be considered for compromise; or

�  (b) The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, provided that amounts payable or due to stockholders other than business-related transactions which are properly includible in the regular “accounts payable” are by fiction of law considered as part of capital and not liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or

�  (c) The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business- related transactions) from total assets (net


�  prepaid expenses, deferred charges, pre- operating expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements, provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; or

�  (d) The taxpayer is a compensation income earner with no other source of income and the family’s gross monthly compensation income does not exceed the levels of compensation income provided for under Sec. 4.1.1 of these Regulations,

�  and it appears that the taxpayer possesses no other leviable or distrainable assets, other than his family home; or (e) The taxpayer has been declared by any competent tribunal/authority/body/government agency as bankrupt or insolvent.


�  The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and

�  For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. Where the basic tax involved exceeds One million pesos (P1,000.000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners.


Cases that may NOT be subject of Compromise

�  Withholding tax cases, unless applicant taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold;

�  Criminal tax fraud cases

�  Criminal violations already filed in court

�  Delinquent accounts with duly approved schedule of isntallments payments

�  Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision

�  Cases which become final and executoty after final judgment

�  Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer


Abatement �  The diminution or decrease in the amount of tax

imposed , such that to abate is to nullify or reduce in value or amount.


I Instances when the CIR may abate or cancel tax liability

�  The tax or any portion thereof appears to be

unjustly or excessively assessed; or

�  The administration and collection costs involved do not justify the collection of the amount due


Reinvestigation vs Reconsideration

�  Reinvestigation – a plea for re-evaluation of an assessment on the basis of newly discovered or additional evidence that the taxpayers intends to present in the reinvestigation; involves a question of fact or law or both

�  Reconsideration – a plea for re evaluation of the assessment on the basis of existing records without need of additional evidence; involves a question of fact or law or both


Reinvestigation vs Reconsideration

�  The main difference is in the records or evidence to be examined by internal revenue officers, whether there are existing records or newly discovered or additional evidence.

�  A re evaluation of existing records which results from a request for reconsideration does not toll the running of the prescriptive period for the collection of an assessed tax; reinvestigation however suspend the running of the statute of limitation


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