BIR's visit to the doctor

THE BUREAU of Internal Revenue’s (BIR) collection target for 2013 is approximately P1.254 trillion. To meet this target, it has identified various priority programs aimed at plugging tax loopholes and increasing its revenue collections.

One of these priority programs is the Run After Tax Evaders (RATE) Program wherein the BIR is mandated to investigate criminal violations of the National Internal Revenue Code of 1997 (NIRC), and assist in the prosecution of criminal cases that will generate the maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax system.

The BIR has filed various cases against taxpayers under this RATE Program. Recently, a prominent doctor was charged by the BIR with tax evasion for allegedly failing to report the correct information in his tax returns from taxable years 2009 to 2011. The BIR filed a criminal complaint with the Department of Justice against the said doctor for (1) "willful attempt to evade tax;" (2) "deliberate failure to supply correct and accurate information" in his Income Tax Returns (ITR); and (3) "willful failure to file Value-Added Tax (VAT) returns for taxable years 2009, 2010 and 2011."

Based on the documents and information gathered from third-party sources, the BIR discovered that there was substantial under-declaration by the said doctor of his taxable income. Under Section 248 of the NIRC, failure to report sales, receipts or income by 30% constitutes prima facie evidence of fraud tantamount to tax evasion. In addition, the BIR noted that the doctor failed to register as a VAT taxpayer even if his income has already exceeded the VAT threshold of P1.5 million (now P1,919,500).

With this development, doctors and other professionals should be forewarned that the BIR is very serious in its campaign to go after individual taxpayers, especially the professionals such as but not limited to doctors, lawyers, accountants, engineers, architects, and real estate brokers. The BIR wants to expand its taxpayer database for this type of taxpayers because of their low tax compliance. In fact, pursuant to Revenue Memorandum Order (RMO) No. 4-2013, the audit priority targets of the BIR for 2013 include professionals and sole proprietorships whose (1) income tax due is less than P200,000 per annum; (2) gross revenue is 40% less than the previous year; (3) tax payment is 35% less than the previous year.

What then should be the lessons to the doctors and other professionals from this recent tax evasion case?

Firstly, these taxpayers should know their tax responsibilities -- the types of taxes that they need to register and pay to the BIR, the manner by which these taxes should be computed and reported, the due dates as well as the compliance requirements for filing of the applicable tax returns. In addition to the income tax, professionals in general, are subject to the business tax, either the VAT or 3% percentage tax). For doctors and medical practitioners in particular, there are procedural requirements with regard to the creditable withholding tax on professional fees (1) paid to them by hospitals and clinics, or (2) paid directly to them by patients who were "admitted and confined" to such hospitals or clinics, or (3) paid directly to them by health maintenance organizations (HMOs) or similar establishments.

Filing of the returns and payment of the taxes, however, is just the ultimate liability. Proper registration and correct documentation and recording of the revenues and expenses should be the first steps to correct compliance. In addition, there is the liability to withhold taxes on their employees as well as on certain expenses such as office rent, janitorial or security services, among others.

Tax rules and compliance requirements are very dynamic and complicated. Taxpayers may consider attending tax seminars or hiring tax consultants to orient them about their tax obligations, and also to update them on newly -issued tax rules and regulations.

An example of a recent tax update applicable to individual taxpayers is the mandatory disclosure requirement of other income in their ITR beginning taxable year 2013. Hence, individual taxpayers are advised to keep the pieces of evidence or records of their tax-exempt income and income which are subjected to final withholding tax in year 2013 to ensure compliance with the disclosure requirements.

Secondly, the professionals should also comply with the tax rules and regulations -- knowing the rules is not enough. Current tax practices should be reviewed, and if necessary, voluntarily pay any deficiency taxes. Likewise, taxpayers should be mindful that the BIR Commissioner is empowered by law to obtain information even from independent third parties to establish income made by the taxpayer during the years in question. In the case of that doctor who was charged with tax evasion, the BIR obtained information from the Philippine Health Insurance Corp. (PhilHealth), and such information was used by the BIR in computing his under-declared income.

Lastly, taxpayers should be aware that they are responsible for all information and representations contained in their ITR. Many court decisions have shown that the taxpayer cannot hide behind his accountant. They cannot blame their accountants or authorized representatives because it is presumed that the taxpayer has examined all the information in the tax returns before placing his or her signature therein.

The Supreme Court recently introduced the "Doctrine of Willful Blindness" in a landmark tax evasion case decided in year 2012. Under this doctrine, the taxpayer’s deliberate refusal or avoidance to verify the contents of his or her ITR and other documents constitutes "willful blindness" on his or her part. It is by reason of this doctrine that taxpayers cannot simply invoke reliance on mere representations of their accountants or authorized representatives in order to avoid liability for failure to pay the correct taxes.

As they say, "ignorance of the law excuses no one from compliance therewith." In order to be liable, it is enough that the taxpayer knows his or her obligation to file the required return and he has failed to comply thereto in the manner required by law.

Evidently, it is imperative for individual taxpayers like professionals to be knowledgeable with their tax obligations, to be compliant with tax rules and regulations, and to be responsible for all information reported in his or her ITR.

And as previously mentioned, the "Doctrine of Willful Blindness" is already part of our jurisprudence, and it can be used as a precedent for future tax evasion cases.

Stephen L. Yu
Let's Talk Tax
Punongbayan and Araullo