Tax assessment & collection by the BIR
Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.
Government agencies continue to operate and the state discharges its functions for the welfare of its constituents, and taxes are the fuel for this machine. (Asian Transmission Corporation vs. CIR, G.R. No. 230861, Sept 19, 2018)
It is also a fundamental principle that taxes should be collected without unnecessary hindrance. (CIR v. Algue, Inc. and CTA, G.R. No. L-28896, February 17, 1988)
The Bureau of Internal Revenue (BIR) has been tasked to assess and collect all national internal revenue taxes, fees, and charges.
Businesses are all too familiar with the process, as every year or two, they will receive a Letter of Authority from the BIR which triggers the beginning of an audit of their businesses’ taxes and compliance. This process will result in a tax assessment or very rarely, a finding or clearance that there is no tax deficiency or liability.
For the guidance of businesses-taxpayers, it would be beneficial to clear up the allowable time periods for assessment of the taxes and time to collect the tax assessed.
In the recent case of Commissioner of Internal Revenue vs. Court of Tax Appeals Second Division and QL Development Inc. (QLDI) (G.R. No. 258947, March 29, 2022), the Supreme Court explained the meaning of collection by the BIR, the period for the BIR to issue the tax assessment upon the taxpayer, and the time period within which the BIR must institute collection efforts against the taxpayer to collect the tax assessed and due.
The term “collection efforts” by the BIR has a specific meaning and, that is that the BIR has initiated an action for distraint or levy against the property of the taxpayer or filed a case in court.
Distraint and levy proceedings are commenced by the issuance of a warrant of distraint and levy and service thereof on the taxpayer by the BIR. While a judicial action for the collection of a tax is initiated (a) by the filing of a complaint with the court of competent jurisdiction; or (b) where the assessment is appealed to the CTA, by filing an answer to the taxpayer’s petition for review wherein payment of the tax is prayed for.
In that connection, collection efforts by the BIR must be made within a defined deadline as the Supreme Court explained that the right to collect taxes from the taxpayer is not perpetual. Collection beyond this set time period shall be barred by prescription.
This is true even if there is a valid and final assessment of the tax liability of the taxpayer. (G.R. No. 258947, March 29, 2022)
In the case of QLDI, the company received a Letter of Authority from the BIR on Nov 12, 2012 for taxable year 2010. A preliminary assessment notice was served and QLDI filed its reply. Thereafter the BIR issued its Formal Assessment Notice (FAN) or Formal Letter of Demand on Dec 12, 2014.
QLDI did not file any protest and the result is that there was no disputed assessment. The BIR issued its FDDA which QLDI received on March 3, 2015.
QLDI file a motion for reconsideration and this was denied by the BIR on Feb 4, 2020. The BIR issued collection letters upon QLDI in 2020.
QLDI then filed a petition for review with the Court of Tax Appeals (CTA), challenging the decision of the BIR and the assessment against it. It raised as an issue the defense that the BIR’s right to collect on the assessment has already prescribed and was made out of time.
The CTA ruled that upon the issuance of the FAN on Dec 12, 2014, the BIR had five years to collect the assessed tax, or until Dec 12, 2019. In this case, the BIR only issued its letters for collection of the assessed taxes in 2020, thereby the CTA declared that the demand for payment and right to collect had already prescribed and was made out of time.
The Supreme Court, while affirming that the BIR’s right to collect had already lapsed, declared it was not the five- year period that was applicable but the three- year period under Sec. 222 of the Tax Code (1997 National Internal Revenue Code or Republic Act No. 8424). Since the FAN was mailed to QLDI on Dec 12, 2014, the BIR had another three years from the date, or until Dec 12, 2017, to enforce collection of the assessed deficiency taxes. After that, prescription had set in and collection will no longer be allowed.
Simply put, the Supreme Court explained that since the Letter of Authority for QLDI was issued within the three- year period to assess the tax liability, the BIR had only three years to institute collection action. This three- year period to assess taxes for the BIR is referred to as the three year ordinary period.
If the BIR had relied on the extraordinary period of 10 years to issue the assessment, on the grounds of false or fraudulent tax return or failure to file a tax return by QLDI, then the BIR will have had five years from assessment to collect from the taxpayer. This 10-year period to assess taxes for the BIR is the 10-year extraordinary period.
In either case, the BIR’s right to collect from QLDI had already lapsed and prescribed.
The 3/3 & 10/5 year periods explained
Sec. 203 of the Tax Code provides that except as provided in Sec. 222, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be started after the expiration of such period. In case a return is filed beyond the deadline set by law, the three- year period shall be counted from the day the return was filed.
The Supreme Court reiterated that in cases of assessments issued within the three-year ordinary period, the CIR has another three years within which to collect taxes (CIR v. United Salvage and Towage (Phils.), Inc., G.R. No.197515, July 2 ,2014)
On the other hand, Sec. 222 of the Tax Code provides that in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within 10 years after the discovery of the falsity, fraud or omission. In such a case, the taxes may be collected by distraint or levy or by a proceeding in court within 5 years following the assessment of the tax. (G.R. No. 258947, March 29, 2022)
Accordingly, it is important for taxpayers to take note of the 3/3- and 10/5 -year period for the issuance of the assessment of taxes and for the collection of taxes, respectively.
Taxpayers’ rights must be respected
While it cannot be denied that taxes are the lifeblood of the government and that the timely and proper collection is essential for the running of the state, its collection should be made in accordance with law. Any arbitrariness will negate the very reason for government itself. (G.R. No. L-28896, February 17, 1988)
The law prescribing a limitation of the time for actions on collection by the BIR is beneficial to both the government and taxpayers. For the government, tax officers would have to act promptly and, to the taxpayer, after the lapse of the period, it would have some security and peace of mind. (G.R. No. 258947, March 29, 2022)
(The author, Atty. John Philip C. Siao, is a practicing lawyer and a founding partner of the Tiongco Siao Bello & Associates Law Offices, a professor at the MLQU School of Law, and an arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected] The views expressed in this article belong to the author alone.)
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