What makes or breaks a tax case

ANYONE who likes mainstream pop music knows that the chorus often makes the song. The chorus is the high point, with the most unforgettable lines and the catchiest beat. A song may or may not have a third or a fourth verse or even a coda. But a chorus is a must.

Having been in the tax practice for several years, I have come to observe that tax cases with the Bureau of Internal Revenue (BIR) often follow the pattern of songs. Like songs with lines and verses, each relating to its message, a tax investigation has several parts, and when taken as a whole, the exercise is aimed at determining whether the taxpayer has unpaid taxes and whether the government has the right to assess and collect the same.

First, an investigation takes place where tax issues are identified and addressed. The taxpayer and the BIR examiners go through the process of discussing the tax treatment of income and expenses, discussing laws and jurisprudence, reconciling tax discrepancies and submitting supporting documents. In every stage of the tax investigation, the substantive and procedural due process rules must come into play: the BIR is required to send a Preliminary Notice Assessment, to which a taxpayer is given 15 days to reply and submit documents; in case of a disagreement as to the taxes assessed, the BIR shall send a Final Letter of Demand (FLD) or a Final Assessment Notice (FAN) within the three (3) -year period prescribed for the assessment of taxes. 

The taxpayer must contest the FLD or FAN in a timely manner by filing a request for reconsideration or a request for reinvestigation; otherwise, tax assessments become final and executory. The BIR may or may not act on the protest by issuing a Final Decision on Disputed Assessment (FDDA), and the taxpayer may or may elevate the case to the Court of Tax Appeals (CTA).

Where it is established that the BIR duly served a FLD or FAN, what makes or breaks the tax case is the filing or non-filing of the protest letter. The filing of the protest to the FLD or FAN is the most crucial remedy in the pursuit of a taxpayer’s defense. In countless cases decided by the courts, the validity of the tax assessments were upheld not because the government had a basis to assess and collect the taxes, but because the taxpayer failed to dispute the assessment and collection of the taxes within the period and by the manner prescribed by law.

Section 228 of the National Internal Revenue Code (NIRC) of 1997 provides that the tax assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment, and within 60 days from the filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. In a recent decision, the CTA held that the tax assessment does not become final and executory although the taxpayer chose to submit the protest without supporting documents, since the lack of documentation will only matter when the BIR evaluates the merits of the said protest (CTA Case No. 8185, Third Division, December 3, 2014).

The filing of the protest letter should not only be made; it must also be clearly established. Last week, the CTA dismissed an appeal filed by a taxpayer on the final decision of the BIR, citing lack of jurisdiction. In this case, the facts show that the BIR issued a FAN against the taxpayer, and later, a FDDA. The petitioner filed an appeal on the FDDA with the Commissioner of Internal Revenue. The CTA held that although the petitioner made allegations that it filed a protest letter, no proof was presented. For having failed to file a protest to the FAN within the given period, the FAN attained finality (CTA Case No. 8891, Third Division, February 2, 2015).

Under Revenue Regulation (RR) No. 18-2013, which implements Section 228 of the NIRC, the protest letter should now indicate the nature of the protest, i.e., request for reconsideration or request for reinvestigation, specifying the newly discovered evidence to be presented in case of reinvestigation, the date of the assessment notice, the applicable laws, rules and regulations, and jurisprudence on which the protest is based; otherwise, the protest shall be considered void and without force and effect. The additional requirements laid down in RR No. 18-2013 only highlight how important the exercise of this remedy is.

The two cases and the new regulation cited above illustrate how the filing (and non-filing) of the protest letter can make or break the tax case.

To relate all of these to our song analogy, I would say the protest letter is definitely the chorus. A bad chorus can still make for an enjoyable song, although its ultimate meaning may be difficult to understand. On the other hand, a song without a chorus may have no point at all.

Jean Ross Abenasa-Miso

Let’s Talk Tax

Punongbayan and Araullo