CHAPTER 3

The Taxman Cometh

INTRODUCTION Taxes have already existed since the ancient times. Tax is the lifeblood of nations and governments. Without tax revenues or collections, a democratic republic country like the Philippines will have no money to fund its national expenditures, such as public infrastructures (public schools, hospitals, roads and bridges), health care, and national security. Thus, our government has established, enacted, and implemented a national tax system to regulate taxation in our country. Our current tax system is basically outlined in the Republic Act No. 8424, known as the Tax Reform Act of 1997 or the National Internal Revenue Code of 1997, as amended. This act has amended Presidential Decree No. 1158, Presidential Decree No. 1994 and Executive Order No. 273, otherwise known as the National Internal Revenue Code, as amended. The National Internal Revenue Code of 1997 covers the organization and function of the Bureau of Internal Revenue (BIR). It sets out the power and duties of the BIR and the powers and authorities of its commissioner, regional directors, and revenue officers. Powers and duties of the Bureau of Internal Revenue. The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws. The largely incomprehensible Tax code should be no barricade to your business aspirations. There are tax practitioners, for a modest professional fee, will grapple with the tax risks in any transaction you have the creativity to contemplate. What follows are a few simple lessons that will help you control some of the tax risks in your business. Before you get started in any new business, however, you need to conclude all previous unresolved tax matters.

A. HERES TO THE SPECIAL INTEREST GROUPS The Legislative Branch The legislative branch, which has the authority to make, alter or repeal laws, is the Congress. Congress is vested with the tremendous power of the purse, traditionally recognized in the constitutional provision that no money shall be paid out of the Treasury except in pursuance of an appropriation made by law. It comprehends both the power to generate money by taxation (the power to tax) and the power to spend it (the power to appropriate). The power to appropriate carries with it the power to specify the amount that may be spent and the purpose for which it may be spent. Under a bicameral system, the Congress is composed of the Senate and the House of Representatives. The Senate is composed of twenty-four (24) Senators, who are elected at large by the qualified voters of the Philippines. The term of office of the Senators is six (6) years. The House of Representatives, on the other hand, is composed of not more than two hundred and fifty (250) members, unless otherwise fixed by law, who are elected from legislative districts apportioned among the provinces, cities and the Metropolitan Manila area, and those who are elected through a party-list system of registered national, regional and sectoral parties or organizations. The term of office of members of the House of Representatives, also called Congressmen, is three (3) years. Congressmen, as elected representatives of the people, are supposed to insure that tax money is properly allocated and not squandered. Taxpayers have a right to expect that they are getting their money's worth. Congress has the power to reduce the size and cost of government agencies but presently lacks the political will due to the influence that government funds buy. Rather than representing the interests of the taxpayer, too many congressmen are representing special interests and the government itself.

B. RESOLVE YOUR OLD TAX MATTERS

The prospect of losing their entire investment in a new business just to settle old outstanding personal tax liabilities was heartbreaking. That prospect and the active pursuit of creditors left unpaid from the first business stopped all forward entrepreneurial momentum. An Offer in Compromise would allow qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt.

C. FILE AN OFFER IN COMPROMISE

An Offer in Compromise is a procedure that allows financially insolvent taxpayers to compromise their tax liabilities for a fraction of the assessed liability. The Bureau of Internal Revenue (BIR) has been continuously introducing new measures or improving those in place in its attempt to reduce if not eradicate tax evasion. One of the more recent measures issued to realize this objective and ensure uniform application of the penalties is Revenue Memorandum Order (RMO) No. 192007 which implements changes on compromise penalties that a taxpayer may pay in cases of criminal violations under the National Internal Revenue Code (NIRC). But what is compromise penalty and why is it imposed? Compromise penalty is a certain amount of money which the taxpayer pays to compromise a tax violation. This is paid in lieu of criminal prosecution. However, it must be emphasized that the essence of compromise penalty is mutuality and its unilateral imposition is without legal basis. As such, compromise penalties cannot be imposed or collected without the agreement and conformity of the taxpayer. In the event that a taxpayer refuses to pay the suggested compromise penalty, a criminal action may be filed against him for tax violation. This is clear from the provisions of the said RMO. Thus, to expedite the settlement of tax violations and for peace of mind, taxpayers normally agree to pay the suggested compromise penalties especially in assessment cases. Why suffer the indignity of an Offer in Compromise at all? For some entrepreneurs, there is no choice. The cumulative effect of years of noncompliance with tax laws has dug a hole from which even a bankruptcy petition is no escape. A bankruptcy petition may clear all nontax liabilities from your entrepreneurial balance sheet. However, there are only two ways for taxpayers to clear tax liabilities. Either pay the liabilities or offer to compromise them. It is almost always true that compromising a tax liability is a much better alternative than paying it. If you have marginal current savings, no personal savings, a negative net worth, and an unpaid tax liability that is out of this world, you are an ideal candidate for an Offer in Compromise. There is no assurance that an Offer in Compromise will always resolve your current tax dilemma to your complete satisfaction. At the time your offer is under consideration, you

must be up to date with your current years withholding requirements. That will give you less money to spend. You must also have a sensible personal budget with no extravagant or excessive consumption patterns. Erratic personal tax compliance habits always have the potential to increase your business risk. You increase that business risk when you fail to file a tax return by its due date and pay the correct amount of tax. Your risk in this area will increase in direct proportion to the number of tax returns you do not file and the size of tax liabilities you do not pay. D. FILE BY THE DUE DATE Filing a tax return by its due date and paying the tax is the single most cost-effective way to control tax risk in any business. To avoid being penalized and being imposed with additional charges, such as interest, surcharge and compromise due to non-filing and non-payment on time, it is wise to file your income tax return as early as possible. Description Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws.

Account Information Form For Self-Employed Individuals, Estates And Trusts (Including Those With Mixed Income , I.E., Compensation Income and Income from Business and/or Practice of Profession) Tax Form BIR Form 1701 AIF - Account Information Form For Self-Employed Individuals, Estates and Trusts (Including those with Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of Profession) and Estates and Trusts (Engaged in Trade or Business) Deadline Same deadline as BIR Form 1701 - On or before the 15th day of April of each year covering taxable income for the preceding year

Quarterly Income Tax For Self-Employed Individuals, Estates And Trusts (Including Those With Mixed Income, I.E., Compensation Income and Income from Business and/or Practice of Profession) Tax Form BIR Form 1701Q - Quarterly Income Tax Return For Self-Employed Individuals, Estates and Trusts (Including those with both Business and Compensation Income) Deadlines

April 15 for the first quarter August 15 for the second quarter November 15 for the third quarter

Annual Income Tax For Corporations And Partnerships Tax Form BIR Form 1702 - Annual Income Tax Return (For Corporations and Partnerships) Deadline Annual Income Tax Return - On or before the 15th day of the fourth month following the close of the taxpayers taxable year

Quarterly Income Tax For Corporations And Partnerships Tax Form BIR Form 1702 Q - Quarterly Income Tax Return (For Corporations and Partnerships) Deadline Corporate Quarterly Declaration or Quarterly Income Tax Return - On or before the 60th day following the close of each of the quarters of the taxable year

E. FIND A CPA WHO WILL WORK FOR YOU You now know that Congress continually rewrites tax laws to benefit the changing demographics of the contributing and voting constituency. This unique design parameter increases the degree of difficulty of the tax code. It is also the reason you will need a knowledgeable tax professional when you consider the tax consequences of any important business decision. There is very little that you need to know about tax law changes that you cannot discover by consulting with a full-time professional in the tax business. You are far better off in consulting with a tax professional several times a year regarding specific business matters as the need arises that in trying to learn the tax law yourself. As an entrepreneur, you do not have the time to develop anything more than a nodding acquaintance with a set of regulations that are arbitrary and will surely change one year from now. There are three requirements you should look for in finding the right CPA for your business: 1. Your CPA must be a tax expert 2. Your CPA must understand the concept of business risk 3. Your CPA must be accessible. All of the tax expertise in the world is of no use to you if it takes four days and half a dozen unreturned messages to reach to your accountant. All of your accountants time in the world is of no benefit to you if your accountant does not understand the first thing about managing business risk. A gamblers feel for risk and willingness to talk to you are of little value if your CPA does not specialize in taxation. There is another quality you should hope to find in your tax professional. Some professionals will exercise their initiative and will advise you of relevant changes in the tax law that will affect your business. This initiative and the related bill you receive for it are a sign that your advisor cares about your business and has taken the time to identify potential tax traps long before you put your foot in them. It is an initiative you should encourage. That initiative gives you the answers to tax questions you may not have had the time to ask. Indeed, you may not have known how to ask these questions. But as long as you own your business, taxes will be part of it and you will directly benefit from having a CPA involved. It is a good idea to establish a relationship today that will be in place when you require assistance at a later date. You will certainly need this professionals help the day you get audited. F. PREPARE FOR YOUR TAX AUDIT A tax audit can be a stressful and frightening event for many people; even if a person has done his taxes correctly and conscientiously, receiving notification of an audit can

be nerve wracking. Properly preparing for a tax audit can help ease anxiety and reassure an auditor that a person is ready and willing to cooperate. There are many steps that can help a person or business prepare for an audit. 1. Retain the services of a professional. Enrolled agents, tax attorneys or CPAs may represent you at an audit. They are trained in tax law and can represent you much better than you can represent yourself. To a lay person, reading the tax code is like reading a foreign language. 2. Keep good records. 3. Gather information. What if you haven't kept good records for the tax year in question? Go back to that year and try to recreate records as accurately as possible. Put everything in a neat format, summarized but with supporting documentation, to take to the audit with you. 4. Do your homework Einbinder suggests you research what the audit process is likely to entail. "Check with people in your industry or workplace to see if any of them have gone through the process," she says. "Find out what it was like so you can prepare yourself. You might be able to avoid some of the stresses they endured." 5. Behave professionally Remember that taxpayer presentation is critical. "Be polite, prompt and professional," says Einbinder. "It will get you so much further." Don't show up at the audit wearing jeans and with your receipts in a shoe box. Be on time, be organized and take the audit seriously. BUREAU OF INTERNAL REVENUE - GENERAL AUDIT PROCEDURES AND DOCUMENTATION 1. When does the audit process begin? The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayers books of accounts and other accounting records, in order to determine the Taxpayers correct internal revenue tax liabilities. 3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance; otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated. 5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidatedOnly once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or twice, in the case of LAs issued by the National Office. Any suspended LA(s) must be attached to the new LA issued (RMO 38-88). 6. How much time does a Revenue Officer have to conduct an audit? A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation. 7. How is a particular taxpayer selected for audit? Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayers books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases: When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer; When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts; When there is a need to verify the Taxpayers co mpliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue. When the Taxpayers capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process? In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also: Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).

G. OTHERS
USE EFPS

What is eFPS? eFPS stands for Electronic Filing and Payment System, and it refers to the system developed and maintained by the Bureau of Internal Revenue (BIR) for electronically filing tax returns, including attachments, if any, and paying taxes due thereon, specifically through the internet. What is e-Filing? e-Filing is the process of electronically filing returns including attachments, if any, specifically through the internet. What is e-Payment? e-Payment is the process of electronically paying a tax liability through the internet banking facilities of Authorized Agent Banks (AABs). Why do we need to use eFPS? What are its objectives? With eFPS, taxpayers can avail of a paperless tax filing experience and can also pay their taxes online through the convenience of an internet-banking service via debit from their enrolled bank account. In addition, since eFPS is available on the Internet, taxpayers can file and pay for their taxes anytime, anywhere as long as he or she is using a computer with an internet connection.

What are the expected benefits of the system? The eFPS is:

- Convenient to use - it is quick and simple to use, as well as secure - Interactive - information exchange is immediate and online, users get immediate feedback from the system when enrolling, e-filing or performing e-payments. - Self-validating - errors are minimized because all of the information supplied by the taxpayer is validated before final submission. - Fast - response or acknowledgment time is quicker than manual filing - Readily available - eFPS is available 24 hours a day, 7 days a week including holidays - Secure - return and payment transactions are more secure, as all data transmission is encrypted - Cost effective - processing cost of returns and payments is minimized (e.g. receiving, pre-processing, encoding, error-handling and storage)

Who is eligible to use the system? Qualified taxpayers who need to file and pay their taxes to the Philippine government are encouraged to use the system.

DEFINITION OF TERMS

Cometh - 3rd person singular present indicative of come. Department of Finance - is the executive department of the Philippine government responsible for the formulation, institutionalization and administration of fiscal policies, management of the financial resources of the government, supervision of the revenue operations of all local government units, the review, approval and management of all public sector debt, and the rationalization, privatization and public accountability of corporations and assets owned, controlled or acquired by the government. Bureau of Internal Revenue - is an attached agency of Department of Finance. BIR collects more than one-half of the total revenues of the government. Congress of the Philippines - is the national legislature of the Republic of the Philippines. It is a bicameral body consisting of the Senate (upper chamber), and the House of Representatives (lower chamber) although commonly in the Philippines the term congress refers to the latter. Bicameral - Composed of or based on two legislative chambers or branches Senate of the Philippines - is the upper house of the bicameral legislature of the Philippines, the Congress; the House of Representatives is the lower house. The Senate is composed of 24 senators who are elected at-large with the country as one district under plurality-at-large voting. House of Representatives of the Philippines - is the lower house of the Congress of the Philippines. Tax is the lifeblood of nations and governments. Offer in Compromise is a procedure that allows financially insolvent taxpayers to compromise their tax liabilities for a fraction of the assessed liability. eFPS stands for Electronic Filing and Payment System, and it refers to the system developed and maintained by the Bureau of Internal Revenue (BIR) for electronically filing tax returns, including attachments, if any, and paying taxes due thereon, specifically through the internet.

REFERENCES:

http://businesstips.ph/the-tax-code-of-the-philippines-national-internal-revenue-code-of1997/ http://www.bir.gov.ph/ http://www.punongbayanaraullo.com/pnawebsite/pnahome.nsf/section_docs/XO119G_1 8-9-07 http://businesstips.ph/how-to-file-income-tax-return-in-the-philippines/ http://www.wisegeek.com/how-do-i-prepare-for-a-tax-audit.htm http://ca.finance.yahoo.com/news/prepare-tax-audit-070040032.html http://www.american-partisan.com/cols/morse.htm http://en.wikipedia.org/wiki/