Tax Articles

A Refresher on Some Technical Defenses Against Assessments

By: Atty. Fulvio D. Dawilan

The best defense against any assessment is always the proof that tax reports had been accurately filed and that taxes had been correctly paid. But taxpayers should also be aware that in the conduct of an assessment, there are obligations and responsibilities on both the part of the tax authority and the taxpayers. Procedures missed by the tax authority may affect the validity of an assessment, and serve as defense for the taxpayer. On the other hand, failure on the part of the taxpayer to observe some procedural rules may lead to the imposition of an assessment that otherwise should be invalid. And there are also some avenues where taxpayers may recover payments of taxes that were invalidly assessed.

Some of these rules are clearly defined, but some would require judicial pronouncements for clarity. Most of these judicial precedents had been applied and reiterated in a number of cases and therefore serve as reliable references when taxpayers are faced with similar issues. Basic as they may be, there is a need to refresh ourselves as any taxpayer may be faced with similar circumstances as the examination by the tax authority intensifies.

This brings me to a recent decision by the Court of Tax Appeals (in CTA Case Nos. 9577 and 9739), reiterating some of these principles, some of which I’ve discussed here.

1. The CTA may not entertain an appeal against an assessment that had become final and executory. However, it may take jurisdiction on a timely filed claim for refund on payments made upon application for compromise settlement on the same assessment, if the application for compromise is denied. Payment of an assessment through a compromise is an option available to a taxpayer for the settlement of an assessment. When this option is resorted to, the taxpayer usually disregards the procedures for contesting and assessment, leaving the same to attain finality. That assessment may no longer be appealed to the CTA as the latter may not have jurisdiction to act on the appeal.

What if the application for compromise is also denied – what is the remedy of the taxpayer? Should there be basis for the invalidity of an assessment but which can no longer be questioned before the CTA through an appeal on the assessment, a claim for refund of the amount paid on the supposed compromise may be an option. This gives the tax court the opportunity to rule on the validity of the assessment itself.

Under this scenario, a taxpayer may, instead of contesting an assessment, pays the same and then apply for a refund on the basis of the invalidity of an assessment.

2. In the absence of a false or fraudulent return, the three-year prescriptive period for the issuance of an assessment remains. For the ten-year prescriptive to apply as an exception to the three-year prescriptive period, the tax authority should allege and prove that the taxpayer filed false or fraudulent returns. Falsity or fraud has to be alleged and proven by the tax authority. The imposition of a 50% surcharge does not equate to an allegation of falsity or fraud, absent an explanation for claiming the same.

3. A second assessment for the same type of tax covered by a previous assessment is void. The present rules allow the issuance of more than one letter of authorities for the examination of a taxpayer for the same period. An example is the examination by a taxpayer for VAT by the Value-Added Tax Audit Group (VATAG). A separate letter of authority may be issued for the regular examination of all other taxes, other than VAT.

It sometimes, happen, however that the same period is again subjected to another round of examination for the same type of tax. If this happens, any the second assessment is without basis. As emphasized by the Court, when the tax authority had already sifted through a taxpayer’s books of accounts and thus had ample opportunity to make a complete assessment, and come up with findings of deficiency taxes, it may not undertake another assessment for the same type of tax for the same period already covered by the previous assessment. It is also unfair for a taxpayer to be subjected to another round of tax audit and assessment especially if the second assessment is already beyond the prescribed period to assess.

I believe this principle should apply to all types of examination, including those supposedly covered by fraud audit, if the tax authority had been given the opportunity to conduct a complete audit during the first examination.

4. Absence of a letter of authority renders an assessment made void. Pursuant to Revenue Memorandum Order No. 12-98, only one letter of authority for each taxable year should be issued. The tax authority may not circumvent such limitation by carrying out an assessment only by virtue of a mere letter notice and giving the latter the effect of an LOA. The absence of an LOA is tantamount to a denial of a taxpayer’s right to due process.

5. A compromise settlement made pursuant to an invalid assessment is without legal basis. An invalid assessment cannot be used as a basis for the perfection of a tax compromise. Any payment may therefore be the subject of a refund.

These are a number of available defenses and options that taxpayers may avail in case of tax examinations. The items enumerated above are just among them. Each assessment case, however, has its own peculiarity. The defense should be tailored to the uniqueness of the case.