Justifying an extraordinary prescription
At the core of the Commissioner of Internal Revenue’s power is to make tax assessments that enforce the correct payment of taxes. Nonetheless, while tax assessments are presumed to be correct and issued in the ordinary performance of the tax authorities’ duties, there is also a presumption that tax returns have been filed in good faith. Hence, following due process, taxpayers are given the opportunity to dispute assessed irregularities in the taxes they have filed within a practicable period of time.
As a general rule on the prescriptive period of assessment under Section 203 of the Tax Code, the Bureau of Internal Revenue (BIR) has three years to assess deficiency taxes, counting from the last day fixed by the law to file the returns or from the day the returns were actually filed, whichever comes later. This prescriptive period affords taxpayers protection against lengthy and unreasonable investigations.
However, by exception, under Section 222 of the Tax Code, this three-year prescriptive period may be extended either by (1) the taxpayer’s execution of a waiver of the statute of limitations; or (2) in the case of a false or fraudulent return with intent to evade a tax or of failure to file a return, where the prescriptive period would be 10 years from the BIR’s discovery of the falsity, fraud or omission.
Three years to 10 years is quite a leap. Hence, it is important to have some guidelines for both taxpayers and tax authorities on what exactly would justify an imposition of the extraordinary 10-year prescription period for tax assessments. Would honest mistakes or inaccuracies automatically render a return as a “false or fraudulent” return? Are there due process requirements when invoking the 10-year prescriptive period and the presumption of falsity or fraud?
There have been conflicting decisions as to when this extraordinary period of prescription would apply. There had been various cases which would require convincing evidence from the BIR that a taxpayer has intentionally and deliberately or fraudulently falsified or omitted information on returns before the extraordinary period applies. However, there have similarly been various cases wherein the BIR would simply invoke a 1974 Supreme Court (SC) decision which ruled that the 10-year period prescription could apply to false returns in general, whether deviations or misstatements in returns were intentionally made or not. This has caused confusion and puts taxpayers in an unfavorable situation where honest mistakes, carelessness or inaccuracies in returns, even without the intent to evade taxes, can warrant an extended prescription period for assessments.
Thankfully, in a recent decision, the SC abandoned this 1974 ruling. Now, as clarified, the extraordinary 10-year assessment period may only apply in situations where returns contain errors, misstatements and omissions; AND when such were made deliberately or willfully by the taxpayer.
Moreover, the SC described two due process requirements when applying the extraordinary perspective period.
Due process requirement No. 1: The assessment notice issued to the taxpayers must clearly state that (i) the extraordinary 10-year prescriptive period is being applied and (ii) the basis for alleging falsity or fraud.
The BIR generally has the burden to prove with clear and convincing evidence that there had been an intention on the part of the taxpayer to evade taxes, and said evidence must be presented when imposing the extended period. However, the BIR may be relieved of this burden of proof when there is prima facie evidence of falsity or fraud. Under Section 248(B) of the Tax Code, there is prima facie evidence of a false or fraudulent return when there is either a substantial understatement of taxable sales/receipts/income or overstatement of deductions/expenses by more than 30%. With this prima facie evidence, the burden of proof (that there’s no fraud) would shift to the taxpayer.
To satisfy the due process requirement, the BIR should set out in its formal notice to the taxpayer the computation by which misdeclarations were ascertained to exceed the 30% threshold. If the taxpayer fails to overcome the presumption of fraud, the prima facie evidence should be sufficient to justify the application of the 10-year period.
Due process requirement No. 2: The tax authorities should not act in a manner that is inconsistent with the invocation of the extraordinary prescriptive period or that would have otherwise misled the taxpayer that the basic three-year period will be applied, prejudicing the taxpayer’s defense.
In the past, the SC regarded the following acts performed by the tax authorities as contradictory to the application of the 10-year prescriptive period: (i) in cases where waivers of the statute of limitations have been executed; and (ii) in cases where assessment notices were hastily issued before the prescription of the basic three-year period.
It must be noted that the extended prescriptive period is granted as a benefit to the BIR only by exception and upon convincing evidence of the taxpayer’s fraud or bad faith. Due process must always be followed on both sides. The BIR’s authority and right to properly assess and collect tax liabilities should always be respected. Likewise, taxpayers have the right to timely defend themselves against allegations of fraud and unreasonable and lengthy examinations.
As common as the idiomatic expression is, honesty is the best policy. I believe that as citizens, we taxpayers inherently and in good faith want to contribute to the betterment of the country. As far as our taxes go, being the lifeblood of the government, most of us strive to honestly comply with the rules and regulations and pay what is due from us. This honesty should be safeguarded by statutory limitations provided under law and not be prejudiced.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Maryjane Almira Kau Chong is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.
