LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

PART 1 TAX REMEDIES

I. Overview
1. The basic purpose of remedies is to maintain equilibrium between the interest of the state and the taxpayer.
2. Remedies can be either administrative or judicial.
3. Administrative remedies involves assessment and collection, protest and refund.
4. Judicial remedies may either be a civil suit or criminal suit, appeal to CTA, injunction/ temporary restraining order, or criminal
suit against erring BIR officials.

5. Summary of Remedies
REMEDIES TO THE STATE COMMON REMEDIES REMEDIES TO THE TAXPAYER

1. ADMINISTRATIVE LEVEL (BIR)

Assessment Compromise Protest

Collection Abatement Refund

2. JUDICIAL LEVEL (Courts)

Civil Suit/Action Appeal to CTA

Criminal Suit/ Action TRO/ Injunction

Criminal Suit against erring BIR officials

II. Remedies Available to the Government

1. Administrative Remedies
a. Assessment
- Similar to audit
- It is a finding by the taxing authority that the taxpayer has not paid the correct taxes.
- An assessment contains not only a computation of tax liabilities but also a demand for payment within a prescribed
period. It also signals the time when penalties and interests begin to accrue against the taxpayer.
- Time of assessment (statute of limitation or prescriptive period) national internal revenue taxes shall be assessed
within 3 years:
After the due date for the filing of the return (a return filed before the due date shall be considered as filed on
such due date);
From the day the return was filed, where the return is filed beyond the due date; and
From the filing of the amended return, if the return was amended substantially.

- EXCEPTIONS - The 3-year prescriptive period of assessment is extended if:

False or fraudulent return with intent to evade the tax was filed - the assessment may be made within 10 years
from the discovery of the falsity or fraud;
No return is filed - assessment may be made within 10 years after the discovery of the failure or omission to
file the return; and
Before the expiration of the 3-year prescriptive period for assessment of the tax, both the taxpayer and the CIR
have agreed in writing (waiver) to its assessment after such time, the tax may be assessed within the period
agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.

- If the government tries to assess a tax beyond the prescriptive periods, the taxpayer may claim defense of
prescription of the right of the government to assess. The defense of prescription, however, is not jurisdictional and
must be raised seasonably, otherwise it is deemed waived.

- How are tax audits/investigations initiated?

Issuance of Electronic Letter of Authority (eLA), Tax Verfication Notice (TVN) and/or Letter of Notice (LN) is
considered as a notice of audit or investigation that prohibits amendment to any return covering period referred
to in the eLA, TVN and/or LN
RMO No. 62 2010 discontinued the manual issuance of Letter of Authority (LA) andTVNs
There must be a grant of authority before any revenue officer can conduct an examination or issue an
assessment. Thus, the BIR cannot extend its examination or assessment beyond the period covered by the Letter
of Authority (LA).
LA should cover a taxable period not exceeding one taxable year. The practice of issuing an LA covering audit of
unverified prior years is prohibited.

- Place of Examination
The primary place of examination is the taxpayers place of business.
The secondary place of examination is at the Office of the BIR
LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

Only duly authorized Revenue Office can audit

- Submission of documents
Use of best evidence available when:
i. The reports or records of the taxpayer are not available (i.e. lost or destroyed; unreasonably refuses to
submit records); or
ii. The reports and records submitted by the taxpayer are determined to be false, incomplete or erroneous or
cannot be understood. [Sec. 6(B), Tax Code]
- End of Audit/Investigation
Preparation of report of investigation showing preliminary findings
Notice of Informal Conference RR No. 18 -2013 removed the requirement for the issuance of a letter of informal
conference before a Preliminary Assessment Notice (PAN) is issued.

b. Collection
- Collection means enforcing the payment of tax. The following are the administrative collection remedies of the
government:
i. Summary proceedings
Distraint (actual or constructive)
Levy
Tax lien
Forfeiture
Suspension of business operations in violation of VAT
Enforcement of an administrative fine
ii. Judicial proceedings

- Time of collection (statute of limitation or prescriptive period):

i. Return filed was not false or fraudulent
Collection with prior assessment - within 5 years from the date of assessment, either by summary
proceedings of distraint and levy or by judicial proceedings.
Collection without prior assessment - within 3 years from the date of filing the return or from the last
day required by law for filing, if the return was filed on or before such last day, by judicial proceedings
only.
ii. Return filed was false or fraudulent with intent to evade the tax or no return is filed.
Collection with prior assessment - within 5 years from the date of assessment, either by summary
proceedings of distraint and levy or judicial proceedings.
Collection without prior assessment - within 10 years after the discovery of the falsity, fraud or omission
to file the return, by judicial proceedings only.

- Any internal revenue tax, which has been assessed within the period agreed upon by the taxpayer and the CIR, may
be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration
of the 5 years prescriptive period to collect. The period so agreed upon may e extended by subsequent written
agreement made before the expiration of the period previously agreed upon.
- If the government tries to collect by any of the above remedies beyond the prescriptive periods, the taxpayer may
claim defense of prescription of the right of the government to collect. The defense of prescription, however, is not
jurisdictional and must be raised seasonably, otherwise it is deemed waived

c. Distraint
- It is the seizure (taking) by the government of personal property (tangible of intangible) to enforce payment of taxes.

- It can either be actual distraint or constructive distraint.

-
ACTUAL DISTRAINT CONSTRUCTIVE DISTRAINT

Made only on the property of a delinquent Made on the property of any taxpayer, whether
taxpayer delinquent or not.

There is taking of possession. The taxpayer is merely prohibited from

disposing of his property.
LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

d. Levy:
- It is the seizure (taking) by the government of real property to enforce payment of taxes.

DISTRAINT LEVY

1. Personal Property 1. Real Property

2. Forfeiture by the government is not provided. 2. Forfeiture is authorized

3. The taxpayer is not given the right of redemption 3. The right of redemption is granted in case of real
with respect to the distrained personal property. property levied upon and sold or forfeited to the
government.

Levy Garnishment
1. As to subject matter Real property owned by and in Personal property owned by the
possession of the taxpayer. taxpayer but in the possession
of a third party.
2. As to disposition for Forfeited in favor of the government Purchased by the government
want of bidders or bids then sold to meet the deficiency. then resold to meet the
inadequate to satisfy tax deficiency.
deficiency
3. As to advertisement for Advertisement once a week for three No advertisement is required.
sale weeks.

e. Tax Lien:
- It is a legal claim or charge on property, either real or personal, established by law as security in default of the payment
of taxes. The extent of lien shall be the tax together with the interests, penalties, and costs that may accrue. The lien
attaches not only from the service of warrant of distraint but from the time the tax become due and payable.

f. Forfeiture
- If there is no bidder in the public sale or if the amount of the highest bid is insufficient to pay taxes, penalties and costs,
the real property shall be forfeited to the Government. The effect is to transfer the title of the specific thing from
the owner to the Government.

g. Run After Tax Evaders (RATE)

i. It is a program initiated by the DOF and BIR to investigate and prosecute individuals and entities engaged in tax
evasion and other criminal violations of the National Internal Revenue Code of 1997
ii. The objectives of the RATE program are:
generate the maximum deterrent effect on the taxpaying public by impressing the fact that tax evasion is a
crime and violators will be caught and punished
enhance voluntary compliance among taxpayers
promote confidence of the public in the tax system.
iii. Fraudulent activities or criminal tax violations covered by the RATE Program
Offenses relating to income:
a. Failure to file tax returns
b. Failure to pay taxes
c. Deliberate underdeclaration of income by more than 30% of that declared per return (substantial
underdeclaration)
d. Hiding or transferring assets or income
e. Non-remittance of withholding taxes
Offenses relating to deductions:
a. Deliberate overstatement of amountof deductions by more than 30% of actual deductions (substantial
overstatement of deductions)
b. Claiming personal expenses as business expenses
c. Claiming false deductions
Other violations:
a. Use of fake Certificate Authorizing Registration (CAR), Tax Clearance Certificate (TCC) or other
accountable forms.
b. Failure to register with the BIR
c. Keeping more than one (1) set of books of accounts
d. Making false entries in books and records

iv. Background
In March 2005, the BIR and the DOF launched the Run After Tax Evaders (RATE) Program.
LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

Since March 2005, 87 complaints of tax evasion have been submitted to the Department of Justice (DOJ)
for preliminary investigation under the RATE Program, including those filed against actors, businessmen,
public officials and other high profile personalities.
The BIR registered a record income tax collection in 15 April 2005 of P21.4 Billion or a 43.6% increase from
the P14.8 Billion collected compared to the previous year.
But almost 5 years after the programs launch, only 6 out of the 87 complaints for tax evasion submitted to
the DOJ progressed to the filing of criminal cases in court.

h. Run After The Smugglers (RATS)

i. In 2005, the Bureau of Customs launched an aggressive battle against smugglers who pose serious and direct
threat to the national economy by depriving the government of its much- needed revenues.
ii. To boost its collection, the BOC introduced the Run After the Smugglers (RATS) Program which aimed to file
customs cases against high profile smugglers.
iii. It is designed not onluto collect taxes but also to ensure that importers comply with existing laws and regulations on
tariff and customs which complements the post-audit power of the BOC under RA 9135, which took effect on June
2, 2001.

i. Oplan Kandado
i. On January 23, 2009, the BIR issued Revenue Memorandum Order No. 3 2009 to implement a nationwide Oplan
Kandado Program
ii. Under the program, business operations of non-compliant taxpayers will be suspended and their establishments
will be temporarily closed if they will be found to have violated certain tax laws.
iii. The programs aims to intensify the Bureaus enforcement operations through strict imposition of prescribed
administrative sanctions for non-compliance with the basic tax requirements.
iv. Grounds for suspension:
Failure to issue receipts or invoices by a VAT-registered or registrable taxpayer;
Failure to file a VAT return;
Understatement of taxable sales or receipts by 30% or more of the correct amount thereof in the case of a
VAT-registered or registrable taxpayer;
Failure to register
v. The closure of the business establishment shall last for a period of not less than five (5) days, and shall be in force
until the violation is rectified by the concerned taxpayer.
vi. The suspension and temporary closure of business shall not preclude the BIR from filing the appropriate charges
under the RATE Program of the Bureau, if evidence so warrants the taxpayer concerned or responsible office of the
corporations.
vii. The closure order shall only be lifted by the BIR when there has been:
A subsequent filing or amendment of returns with the payment of the tax inclusive of statutory penalties;
Subsequent registration with the payment of the corresponding compromise penalties
Payment of deficiency taxes inclusive of penalties corresponding to the sales where no invoices/receipts have
been issued; and
Payment of deficiency taxes inclusive of penalties corresponding to the understatement of taxable sales or
receipts.

III. Remedies to the State: Judicial Remedies Civil and Criminal Action
a. Civil action is resorted to when a tax liability becomes collectible, that is, the assessment becomes final and unappealable, or
the decision of the CIR has become final, executory, and demandable.
b. Criminal action, like civil action, cannot be instituted without the approval of the CIR. It is resorted to not only for collection of
taxes but also for enforcement of statutory penalties of all sorts. The judgment in the criminal case shall not only impose the
penalty but shall also order the payment of the taxes.
c. The extinction of a taxpayers criminal liability does not necessarily result in the extinguishment of his civil liability. Conversely,
the subsequent satisfaction of a tax liability will not operate to extinguish the criminal liability.

IV. Remedies Available to the Taxpayer

1. Administrative Remedies
a. Protest
Protest is a challenge against assessment.
The filing of a petition for reconsideration or reinvestigation shall be made within 30 days from the receipt of the
assessment with the CIR. Within 60 therefrom, all relevant supporting documents should have been submitted,
otherwise the assessment shall become final.

b. Refund or Tax Credit

A taxpayer may file for tax refund in case of excessive or erroneous payment of a tax with the BIR:
i. Tax is collected erroneously or illegally.
ii. Penalty is collected without authority.
iii. Sum collected is excessive
LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

V. Remedies to the Taxpayer: Judicial Remedies Civil Action

a. General Rule: No action shall suspend the collection, payment, levy or distraint, and/or sale of any property of the taxpayer.
b. Exception: The CTA is empowered to suspend the collection of internal revenue taxes and custom duties only when there was
a:
c. Showing that collection of the tax liability may jeopardize the interest of the government and/or the taxpayer;
d. Deposit of the amount claimed or file a surety bond for not more than twice the amount of tax with the Court when required; and
e. Showing by the taxpayer that appeal is not frivolous nor dilatory
f.
g. Appeal to the CTA within 30 days from the receipt of decision on the protest or from the lapse of 180 days due to inaction of
the Commissioner, whichever comes earlier.
h. Action for damages against a revenue officer by reason of any act done in the performance of official duty
i. Filing of criminal complaint against erring BIR officials and employees.
j. Injunction, when the CTA in its opinion the collection by the CIR may jeopardize the taxpayer.

VI. Remedies to Both Government and Taxpayer

1. Compromise
a. Mutual concession between the taxpayer and the government in setting a tax deficiency amicably.
b. What cases may be compromised?
i. Delinquent accounts
ii. Cases under administrative protests
iii. Civil tax cases being disputed before the courts
iv. Collection cases filed in courts
v. Criminal violation, other than those already filed in court or those involving criminal tax refunds.
c. What cannot be compromised?
i. Criminal violation of NIRC already filed in court.
ii. Cases involving fraud.
d. What are the grounds for compromise?
i. A reasonable doubt as to the validity of the claim against the taxpayer exists; or
ii. The financial position of the taxpayer demonstrate a clear inability to pay the assessed tax
e. Prescribed minimum compromise rates:
i. Financial incapacity - 10% of the basic assessed tax
ii. Other cases - 40% of the basic assessed tax
f. Compromised settlement subject to approval of the Evaluation Board, composed of the CIR and the 4 Deputy
Commissioners:
i. Where the basic tax exceeds P1,000,000, or
ii. Where the settlement offered is less than the prescribed minimum rates above.

2. Abatement
a. A tax may be cancelled or obliterated upon the authority of the BIR under certain circumstances.
b. What are the grounds for abatement?
i. The tax or any portion thereof appears to be unjustly or excessively assessed;
ii. The administration and collection costs involved do not justify the collection of the amount due; and
iii. The Commissioner may also, even without claim therefore, refund or credit any tax where on the face of the
return upon which payment was made such payment appears clearly to have been erroneously paid.

PART 2 ADDITIONS TO TAX

I. Overview
II. Civil Penalties and Criminal Penalties

III. Civil penalties

a. Interest
In general, there shall be assessed and collected on any unpaid amount of tax, interest at the rate of 20% per annum, or such
higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.

1. Deficiency Interest
Any deficiency in the tax due, as the term is defined in the Tax Code, shall be subject to the interest at the rate of 20%
per annum, which interest shall be assessed and collected from the date prescribed for its payment until the full payment
thereof.

Formula:
Deficiency Interest = Deficient tax x 20% x no. of days or months
Total No. of days or months in a year
LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

2. Delinquency Interest
Delinquency interest in case of failure to pay:
i. The amount of the tax due on any return required to be filed, or
ii. The amount of the tax due for which no return is required, or
iii. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the
CIR, there shall be assessed and collected on the unpaid amount interest at the rate of 20% per annum until the
amount is fully paid, which interest shall form part of the tax.
Formula:
Delinquency Interest = Deficient tax plus any deficiency interest or surcharges
times 20% times no. of days or months
Total No. of days or months in a year

3. Interest on extended payment

If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of the
Tax Code, but fails to pay the tax or any installment thereof, or any part of such amount of installment on or before the date
prescribed for its payment, or where the CIR has authorized an extension of time within which to pay a tax or a deficiency
tax or any part thereof, there shall be assessed and collected interest at the rate of 20% per annum on the tax or deficiency
tax or any part thereof unpaid from the date of notice and demand until it is paid.

b. Surcharges
1. Simple Neglect (25%)
i. Failure to file any return and pay the tax due thereon.
ii. If the return is not filed with the proper internal revenue officer.
iii. Failure to pay on time the deficiency tax shown in the notice of assessment.
iv. Failure to pay the full or part of the amount of tax shown on any return required to be filed, or the full amount of
tax due for which no return is required to be filed, on or before the date prescribed for its payment.

2. Willful Neglect (50%)

i. Willful neglect to file the return on time.
ii. False or fraudulent return is willfully filed (failure to report sales, receipts or income in an amount exceeding 30%
of that declared per return, and a claim of deductions in an amount exceeding 30% of actual deductions, shall
render the taxpayer liable for substantial under-declaration of sales, receipts or income or for substantial
overstatement of deductions, thus making the return filed false or fraudulent).

Problems:

1. Anita filed her annual income tax return on April 3, 2015 for her income last 2014. Until what day can the Bureau of Internal Revenue make its
assessment?

2. Anita filed her annual income tax return on May 3, 2015 for her income last 2014. Until what day can the Bureau of Internal Revenue make a
collection if there should be an assessment?

3. XYZ Corporation filed its annual income tax return on April 10, 2015. On October 3, 2016, it was found out that the return filed was fraudulent.
Until what day can the Bureau of Internal Revenue make a collection?

4. XYZ Corporation filed its annual income tax return on April 10, 2015. On October 3, 2016, it was found out that the return filed was fraudulent.
Until what day can the Bureau of Internal Revenue make a collection if there should be an assessment?

5. Date assessment was received - February 8, 2009. Petition for reconsideration was filed with the Bureau of Internal Revenue of February 18,
2009. Documents supporting the petition were filed with the Bureau of Internal Revenue on February 28, 2009. Decision of denial of the petition
was received on March 11, 2009. Second request for reconsideration was filed with the Bureau of Internal Revenue on March 21, 2009. Date
revised assessment was received was April 2, 2009. Last day to appeal to the Court of Tax Appeals:

6. Assessment received - January 5, 2015. Petition for reconsideration filed with the Bureau of Internal Revenue - February 1, 2015. Documents
supporting the petition filed by the taxpayer - February 7, 2015. Decision of the Bureau of Internal Revenue denying the petition was received
- March 22, 2015. Second request for reconsideration filed with the Bureau of Internal Revenue - March 30, 2015. Decision of denial of second
request for reconsideration was received - April 12, 2009. Last day to appeal to the Court of Tax Appeals:

7. Date assessment was received - January 2, 2009. Petition for reconsideration was filed with the Bureau of Internal Revenue - January 12,
2009. Documents supporting the petition for reconsideration was filed with the Bureau of Internal Revenue - January 22, 2009. No decision on
the protest by July 12, 2009. Last day to appeal to the Court of Tax Appeals:

8. On January 20, 2008, a taxpayer filed a protest on/request for reconsideration of an assessment of a tax. He received a final decision of the
Bureau of Internal Revenue on the protest on April 30, 2008. He failed to appeal to the decision to the Court of Tax Appeals. The Bureau of
LECTURE 8: TAX REMEDIES AND ADDITIONS TO TAX

Internal Revenue was collecting the tax by summary proceedings on June 20, 2013. The taxpayer was opposing the collection of the tax on
the ground of prescription of the government to collect. When shall be the last day to collect?

9. Date of tax erroneously paid June 10, 2013

Date of claim for refund was filed with BIR March 3, 2015
Date of BIR decision of denial was received April 5, 2015
Last day to appeal to the Court of Tax Appeals is on:

10. Date the national internal revenue tax was erroneously paid - April 10, 2007. Claim for refund was filed with the Bureau of Internal Revenue -
March 10, 2008. Date decision of denial of refund was received March 21, 2009. Last day to appeal to the Court of Tax Appeals: