A Bureau of Internal Revenue (BIR) Reconciliation of Listings for Enforcement (RELIEF) deficiency tax assessment must be a grant of authority in the form of a Letter of Authority (LOA) before a revenue officer may validly examine or assess a taxpayer. In the absence of such authority, the examination or assessment is invalid.
Practical requirement: For a RELIEF-based assessment to survive, the BIR must show a valid LOA, issued by the BIR, naming the revenue officers who conducted the audit, covering the correct taxpayer, taxable year, and tax types.
The Supreme Court in People v. Gernale emphasized that a Letter Notice cannot substitute for a L0A. It cited the McDonald’s doctrine and explained that an LN merely informs the taxpayer that a discrepancy was found based on RELIEF data, while an LOA authorizes the revenue officer to examine.
Practical requirement: The BIR should not proceed from RELIEF matching directly to Preliminary Assessment /Final Assessment (PAN/FAN) without a valid LOA. The safer enforcement sequence is: RELIEF finding?LN/discrepancy notice?unresolved reconciliation?valid LOA?audit verification?PAN?FLD/FAN.
Even if there is an LOA, the assessment may still fail if the actual audit was performed by officers not named in it. In McDonald’s, the Court rejected the practice of replacing or reassigning revenue officers through internal memoranda without a new or amended LOA. The Court held that substitution without proper authority violates due process and usurps the statutory power to authorize tax examinations.
The BIR must prove that the specific officers who examined the taxpayer and recommended the assessment were the same officers authorized in the LOA, or that a valid new/amended LOA was issued.
In CIR v. Lancaster Philippines, Inc., the Court held that an assessment outside the taxable period covered by the LOA is void. The case is also frequently cited for the principle that the presumption of correctness does not apply to a ‘naked assessment’ that is arbitrary or without factual foundation.
Practical requirement: A RELIEF tax assessment for a particular year or quarter must be supported by an LOA covering that same taxable year or period. RELIEF data from one year cannot justify an assessment for another year unless the audit authority properly covers it.
In CIR v. Hantex Trading Co., Inc., the Supreme Court ruled that the presumption of correctness of a tax assessment does not apply where the assessment is without factual foundation-a ‘naked assessment.’ This doctrine is especially relevant to RELIEF cases because RELIEF relies on third-party matching and can produce discrepancies due to timing differences, encoding errors, wrong TINs, branch reporting, accounting classifications, or supplier mistakes.
The BIR must go beyond the RELIEF mismatch. It should verify the supplier/customer records, invoices, official receipts, VAT returns, books of accounts, SLSP data, and reconciliation explanations. The RELIEF discrepancy should be supported by competent evidence, not merely system-generated variance.
In CIR v. Avon Products Manufacturing, Inc., the Supreme Court held that due process requires the BIR to consider the taxpayer’s defenses, documents, and explanations. The Court invalidated assessments in which the BIR merely repeated the findings in the PAN, FAN, and collection letters without demonstrating that it had evaluated the taxpayer’s submissions.
This is crucial in RELIEF cases because the taxpayer may be able to explain discrepancies through timing differences, cancellation of invoices, returns and allowances, inter-branch reporting, wrong tagging by suppliers, or expenses recorded in accounts other than purchases.
The BIR must document why it accepted or rejected the taxpayer’s reconciliation. A RELIEF-based PAN or FAN that merely restates the LN or PAN figures, without addressing the taxpayer’s explanation, is vulnerable.
Section 228 due process doctrine requires that the taxpayer be informed of the factual and legal bases of the assessment. In Liquigaz Philippines Corp. v. CIR, the Supreme Court explained that taxpayers must know how the CIR appreciated their defenses; otherwise, they cannot make an intelligent appeal. The Court warned that failure to show the factual and legal bases raises the possibility that the amounts were arbitrary.
A RELIEF-based assessment should not simply say ‘per RELIEF matching, undeclared sales/purchases were found.’ It should identify the counterparties, invoices or transactions, taxable period, tax type, computation, legal basis, and reason why the taxpayer’s reconciliation was rejected.
In CIR v. Villanueva, Jr., a case involving a Letter Notice and Tax Reconciliation System follow-up, the Supreme Court reiterated that if the taxpayer denies receipt of assessment notices, the BIR bears the burden of proving actual receipt by the taxpayer or authorized The BIR must keep strong proof of service of the LN, LOA, PAN, FLD/FAN, FDDA, and collection notices. Improper service can defeat the assessment even if the RELIEF discrepancy is substantial.
In CIR v. Maxicare Healthcare Corp., the Supreme Court voided the assessment because the BIR issued the FDDA before the taxpayer’s full 60-day period to submit supporting documents had expired.
Practical requirement: In RELIEF assessments, where reconciliation documents are often voluminous, the BIR must observe the full protest and document-submission periods. Premature issuance of the FDDA can void the process.
In summary, the controlling principle for tax assessments arising from the RELIEF is that this may trigger an inquiry. Still, it cannot dispense with an LOA that legitimizes the authorized examination. Furthermore, the taxpayer, which is being subjected to a BIR audit that is mainly focused on the RELEF’s mismatches of transactions, is not expected to assume the burden of responsibility to disapprove the BIR’s tax findings, but rather it is the BIR which is expected to document and explain its findings or undeclared transactions with another third party.
This is a clear case that the judiciary has sided with the taxpayers when it declared that the rights of taxpayers to due process in the course of a BIR tax audit and assessments should strictly be observed, and that BIR’s tax assessments should be based on facts and the law, and not merely on RELIEF determined mismatches of transactions, even though the BIR would tend to justify the assessments as being valid because these were generated by technology tools that the BIR has developed over time.
To be continued
Joel L. Tan-Torres was the former Dean of the University of the Philippines Virata School of Business. Previously, he was the Commissioner of the Bureau of Internal Revenue, the Chairman of the Professional Regulatory Board of Accountancy, and a partner of Reyes Tacandong and Co. and the SyCip Gorres and Velayo and Co. He is a Certified Public Accountant who garnered No. 1 in the CPA Board Examination of May 1979. He is now back to his tax practice with his firm, JL2T Consulting. He can be contacted at joeltantorress@yahoo.com.