How to avoid huge BIR tax assessments

It has never been a secret that aside from the taxpayers’ regular voluntary tax remittances, a sizeable chunk of the Bureau of Internal Revenue’s (BIR) revenue collections comes from tax assessments. Hence, it is not surprising that the BIR is currently bolstering its prosecution team to run after possible tax evaders -- corporations, known personalities, and businessmen, among others. Remember that for the year 2013, the BIR’s target collection is P1.25 trillion. This target is 18% higher than last year’s.
  
In a recent news report, the BIR collected P244.1 billion in the first quarter of 2013. Subsequently, for the month of April, the BIR collected P148.99 billion. Since we are nearing the closing of May, the BIR now has only seven more months to meet the P1.25 trillion targets.

So, the pressure is continuously on. And the taxpayers are obviously feeling it.

The taxpayers, particularly the corporate ones, are anxious on how the pressure will continue to translate to BIR’s listings of tax findings in each tax assessment case. It is not uncommon that the BIR’s initial list of assessment findings would start at P400 million, P700 million, a billion or even more. And this is only for one taxable year! That’s why, owners of businesses who see this initial list might have a silly thought of jumping out of the window from the 30th floor! And then, they may begin by saying -- what’s the sense of putting up a business if they have to pay tax deficiencies whose amount is even greater than the net worth of the business itself?

Well, to the taxpayers -- relax…

There is actually no need to worry about BIR audits, if the taxpayer is prepared for it.

How?

While it is true that it is difficult to predict the approach that the BIR examiner will use in each tax assessment case, at least there are common sources of findings which the taxpayers may consider in preparing for a BIR audit.

Here are some basic pointers:

Don’t wait for the BIR audit before starting to reconcile. Most of the BIR’s findings result from comparison of certain amounts per books as against the amounts per tax returns or per related alphalist. An example of this is the comparison of the amounts of sales and expenses per books as against those per other BIR references -- income tax returns, value-added tax (VAT) returns, withholding tax returns, and summary list/alphalist, among others.

The general practice among taxpayers is to wait for the BIR examiner to present a discrepancy before the taxpayer starts to reconcile. Most of the time, this will take a long process, particularly if the employee who is knowledgeable about the related transactions has already resigned. The reconciliation process could even take a number of years, and for all we know, after the reconciliation process is exhausted and there are still remaining unreconciled items, the amount due from these deficiency items have already doubled due to interest penalty. Note that the interest rate on tax deficiency is 20% per year.

To the taxpayers -- formulate a system of periodic reconciliation which will depend on the accounting system and pertinent record keeping procedures.

Maintain adequate documentation. One of the more common BIR findings is the alleged lack of adequate documentation supporting a transaction. This is true, particularly, when the BIR examiner is evaluating a major transaction that has a significant tax impact. In this connection, there could be questions on the nature of the transaction and the applicable withholding tax rates, or there could be a BIR challenge on the deductibility of the related expense for income tax purposes.

Hence, if the taxpayer does not have in its files the pertinent documents, then, it will be difficult to address the inquiries of the BIR examiners, and the BIR may come up with an assessment.

To the taxpayers -- be keen on maintaining a dequate documentation to support transactions.

Secure withholding tax certificates from customers. Another common BIR finding is the missing withholding tax certificates. These certificates are the taxpayer’s proof of tax credits against its total income tax due for a year. Hence, if these certificates are not secured from the customers, then, the taxpayer’s claim for tax credits may fail, and the consequent assessment might be inevitable.

To the taxpayers -- ensure that all the withholding tax certificates are properly secured from its customers.

The above pointers are just basic and general ones. There are definitely numerous and more specific preventive measures that could be adopted by the taxpayers, on a case to case basis, to avoid huge tax assessments. Some can be performed by the taxpayers themselves, while others can be done with the assistance of their tax consultants.

In summary, while the BIR is pressured to intensify its assessment and collection efforts to meet its revenue target, the taxpayers, conversely, should be thoroughly prepared for any BIR examination in the future. Remember -- the BIR’s yearly target keeps on increasing. 


Olivier D. Aznar
Let's Talk Tax
Punongbayan and Araullo