Application of the BIR's 10-year prescriptive period

By: Marion Jasper Tagle

IF there is one thing that taxpayers would like to avoid receiving from the Bureau of Internal Revenue (BIR), it is definitely a letter of assessment, which signifies that the taxpayer is subject to a tax audit or an investigation by the BIR. When confronted with such, taxpayers should be aware of their rights so that they can properly defend themselves from unwarranted assessments.

In a recent case promulgated by the Court of Tax Appeals (CTA) — Case 10098 dated July 12, 2024 — the CTA had the opportunity to further clarify the issue of application of the 10-year prescriptive period following the Supreme Court decision, GR 247737 promulgated on Aug. 8, 2023.

As background, the BIR issued a Letter of Authority (LoA) on May 25, 2015, to examine the taxpayer's books of accounts and accounting records for 2012. It then mailed the Preliminary Assessment Notice (PAN) on Oct. 3, 2018, which the taxpayer received on October 9 and filed a response to on October 24. On the same date, the BIR issued the Final Assessment Notice (FAN), which was received by the taxpayer on November 4.

The taxpayer argued that the FAN was issued beyond the three-year period prescribed by Section 203 of the National Internal Revenue Code of 1997, as amended (Tax Code). This section provides that the BIR may assess the taxpayer within three years from the deadline to file the return or upon actual filing of the return, whichever comes later.

The BIR disagreed, arguing that substantial underdeclaration existed; hence, the extended 10-year period granted by Section 222 of the Tax Code was applicable. This provision provides that when there is either a non-filing of tax return or if the taxpayer files a false or fraudulent return with intent to evade taxes, the BIR may assess the taxpayer within an extended period of 10 years from the discovery of the falsity, fraud or omission.

The main issue arose from the different interpretations of the phrase "false or fraudulent return with intent to evade taxes."

The taxpayer argued that willful intent to evade taxes must be established to apply the extended 10-year period, citing GR 104171, dated Feb. 24, 1999, and GR 232663, dated May 3, 2021. The BIR countered that substantial underdeclaration was enough, citing GR 221590 dated Feb. 22, 2017.

Considering that the taxpayer filed its final adjusted income tax return for 2012 on May 29, 2014, relevant prevailing doctrine at the time of the assessment must be applied. Note that the BIR had until May 29, 2017, to assess the taxpayer.

On May 10, 2014, in GR 193100, the Supreme Court ruled that substantial underdeclaration was enough to justify the 10-year period. This was abandoned in GR 215957, dated Nov. 9, 2016, where the Supreme Court ruled that fraud must be established to use the 10-year period. Then, on Feb. 22, 2017, the Court promulgated GR 221590, which reiterated that substantial underdeclaration justified the 10-year period.

However, on 22 March 2017, in GR 213943, the Court held again that willful intent was necessary for using the 10-year period to assess. In this light, the interpretation that is applicable here is that of GRs 104171, 232663, 215957 and 213943, more so as the BIR failed to even allege such willful intent against the taxpayer.

Further, it is worth noting that in the latest case, GR 247737, the Supreme Court reviewed the history of its conflicting rulings on the period granted for assessment and concluded that only intentional errors can justify the 10-year period.

Aside from the failure to establish the willful intent to evade taxes, the Revenue Officer (RO) who conducted the tax audit was deemed unauthorized as the BIR failed to reissue a new LOA naming the said RO. Incidentally, the FAN was issued prematurely, which deprived the taxpayer of a full opportunity to respond to the PAN, violating the taxpayer's right to due process. Because of these, the assessment was canceled and declared null and void.

Dealing with a tax assessment requires knowledge of tax rules and regulations and existing jurisprudence so that taxpayers can properly exercise their rights during tax audits. The recent court case further highlights the importance of being aware of important tax developments, such as recent existing jurisprudence, in order to mount a defense against a BIR tax assessment.

As published in The Manila Times on 5 August 2024. The author is a Senior at the Tax & Corporate Services practice of Deloitte Philippines.