Professional Documents
Culture Documents
I. Objective
This Order prescribes the use of the Updated Handbook on Audit Procedures
and Techniques (Volume I) in the audit of tax returns. The Handbook is intended to
provide revenue officers with minimum standard procedures and a uniform guideline
for the proper examination and/or investigation of tax liabilities. This updated version
was prepared in order to conform with the provisions of the Tax Reform Act of
1997".
Revenue Officers are required to make a report after the audit has been
conducted. All reports should contain the minimum documentary requirements
specified under Chapter XVII of the Handbook.
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IV. Repealing Clause
This Order supersedes Revenue Audit Memorandum Order No. 2-95, all
revenue issuances and portions thereof inconsistent herewith.
V. Effectivity
All revenue officers and other employees concerned are hereby directed to
refer to the aforesaid Handbook in the audit/investigation of tax returns immediately
after the approval of this Order. CTSHDI
VOLUME I
PREFACE
The enactment of the National Internal Revenue Code of 1997 and its implementation
effective January 1, 1998 marked significant changes in Philippine taxation and the BIR's tax
administration policies. Hence, it is necessary to revise and update the existing revenue
issuances and assessment manuals in accordance with the new provisions of the Tax Code.
ACKNOWLEDGMENT
The updating of this Handbook on Audit Procedures and Techniques Volume I was
completed under the leadership of Commissioner Dakila B. Fonacier and Deputy
Commissioners Romeo S. Panganiban, Estelita C. Aguirre, Sixto S. Esquivias IV and Lilia C.
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Guillermo.
This Handbook is a project of the Assessment Service with the Assessment Programs
Division as the lead division which spearheaded the project. Acknowledgment is also
extended to Atty. Arnulfo B. Romero, Mr. Rodolfo Mendoza and Mr. Manny B. Jimenez for
their comments and invaluable contribution to the project.
ASSESSMENT SERVICE
Table of Contents
I. Introduction
Revenue Tax Administration
Purpose
Contents of the Handbook
II. Accounting Methods
Cash Basis
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Accrual Basis
Completion of Contract Basis
Percentage of Completion Basis
Installment Basis
Crop Year Basis
III. Bookkeeping Systems
Single Entry System
Double Entry System
IV. Accounting Records
Journal
Ledger
Subsidiary Book
Computerized Accounting System
V. Accounting Period
Calendar Year
Fiscal Year
VI. Financial Statements
Income Statement
Balance Sheet
VII. Purpose and Standards of Audit
General Standards
Standards of Preliminary Planning
Standards of Field Work
Standards of Public Relations
VIII. Preliminary Approach to Examination
Pre-audit Analysis of Tax Returns
Work Planning
Contact with Taxpayer
Preliminary Evaluation of Miscellaneous Records
Initial Examination Techniques
Evaluation of Internal Control
Sampling Techniques
IX. Balance Sheet Approach to Examination
Cash on Hand and in Bank
Notes and Accounts Receivable
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Allowance for Bad Debts
Inventories
Advances to Stockholders/Officers
Investments
Depreciable Assets
Allowances for Depreciation, Amortization and Other Valuations
Reserves
Intangible Assets
Prepaid Expenses and Deferred Charges
Other Assets
Exchange, Clearing or Suspense Accounts
Current and Accrued Liabilities including Notes Payable
Fixed Liabilities
Deferred Credits
Loans From Shareholders/Officers/Owners
Capital Accounts
Capital or Owner's Equity
Partners' Capital
Stockholders' Equity
Capital Stock
Retained Earnings
X. Audit of Income and Expenses
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XVII. Report Making
Document Locator Form
Table of Contents
Narrative Report
Duly Accomplished Revenue Officer's Audit Report
Working Papers
Attachments to the Docket of the Case
Appendix
Revenue Memorandum Order No. 15-95
General Policies in the Investigation of Tax Fraud Cases
Revenue Memorandum Order No. 53-98
Checklist of Documents to be Submitted by a Taxpayer upon Audit of his Tax
Liabilities as well as of the Mandatory Reporting Requirements to be Prepared by a
Revenue Officer, all of which comprise a complete Tax Docket
I. INTRODUCTION
The function of the Bureau of Internal Revenue is to administer the provisions of the
National Internal Revenue Code. It is the duty of the Bureau to implement the Tax Code and
related laws enacted by Congress in a fair and impartial manner.
The mission of the Bureau is to enforce internal revenue laws with impartiality,
consistency, collect the correct amount of taxes at the least cost to the government and least
inconvenience to the taxpayer and serve the public honestly and efficiently in a manner that
will elicit the highest level of confidence in the Bureau of Internal Revenue.
The purpose of auditing a tax return is to determine the taxpayer's correct tax liability.
A quality audit is the examination of a taxpayer's books and records in sufficient depth so as
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to ascertain the correctness and validity of entries thereon and- the propriety of application of
tax laws. ADaSEH
B. Purpose
The updated Handbook on Audit Procedures and Techniques has been prepared to
equip all Revenue Officers who conduct field examinations with-the necessary knowledge for
the proper examination of tax returns and provide them with confidence in carrying out the
investigation. This Handbook is designed to ensure that. the Revenue Officer acquires useful
auditing skills, progresses from simple audit techniques to more sophisticated procedures, and
advances in examination procedures from a single proprietorship to a large corporation and
from a simple bookkeeping system to a highly computerized one.
The Revenue Officer's job is to familiarize himself with the business activity and/or
undertaking of the taxpayers assigned to him for audit, to evaluate the various methods and
procedures the taxpayers apply, to be imaginative, observant and inquisitive in his
examination, and above all, to use common sense.
The handbook contains guides, instructions and suggestions in the conduct of audit for
various taxpayers. The discussions begin with the analysis of tax returns and financial
statements, familiarization with accounting methods, bookkeeping systems, books of accounts
and other related records. The audit procedures for balance sheet and income statement
accounts are laid out together with investigation techniques for each type of tax. This does
not preclude, however, the Revenue Officer from carrying out other audit techniques which
are deemed necessary in the circumstances surrounding a particular case.
The taxable income of a taxpayer shall be computed in accordance with the method of
accounting he regularly employs in keeping his books. However, if the taxpayer does not
regularly employ a method of accounting which reasonably shows his correct income, the
computation of income shall be made in such manner as in the opinion of the Commissioner of
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Internal Revenue or his -duly authorized representative that clearly reflects such income.
Under this method, gross income is to be reported in the taxable year in which the
contract is fully completed and accepted by the contractee if the taxpayer elected it as a
consistent practice to treat such income, provided that such method clearly reflects the net
income. Under this method, all expenditures, are deducted from gross income during the life
of the contract which are properly allocated thereto, taking into consideration any materials
and supplies charged to the work under the contract but remaining on hand at the time of the
completion.
However, pursuant to Republic Act No. 8424 which took effect on January 1, 1998,
contractors are no longer allowed to adopt this method of reporting their income derived in
whole or in part from long-term contracts.
1. The costs incurred under the contract as of the end of the tax year are compared with
the estimated total contract costs; or
2. The work performed on the contract as of the end of the tax year is compared with the
estimated work to be performed.
Beginning January 1, 1998 income from log-term contracts are required to be reported
using this method only.
In relation to the foregoing accounting methods, the Tax Code provides for a tax
credit system in computing the tax payable by certain taxpayers. While the tax credit system is
not an accounting system, it is discussed here for the proper understanding of the computation
of taxes due from taxpayers.
The tax credit system is a method used to account for the creditable taxes deducted by
the withholding agents from the income payments to certain payees (as in the case of
withholding tax at source pursuant to Revenue Regulations (RR) No. 6-85, as amended by
RR 2-98, or the creditable tax added to the sales price (as in the case of value-added tax). The
creditable taxes should be clearly identified in the books of the taxpayer, such as:
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2. VAT input tax (asset)
Bookkeeping may be classified into two systems, namely, (1) the single entry and (2)
the double entry.
Whenever a system of record keeping does not include equal debit and credit to asset,
liability, proprietorship, income and expense accounts, it is referred to AA a "single entry
system". The single entry is often used by comparatively simple ventures such as small retail
or commission merchants, professional firms, estates and trusts. In many cases, the only
record of income and deductions consists of entries on the stubs of their checkbooks. Some
taxpayers maintain an income tax folder in which they place documents to support their
income tax deductions.
Sometimes, the records consist of a complete set of journals (cash, sales, purchases
and general journal) and general ledger providing important accounts.
The accounting cycle starts with source documents (invoices, bills, paid checks, loan
documents, bank deposit slips, and bank statements) proceeding to the cash receipts and cash
disbursements journal, working paper summary and ending with the tax return.
Reconciliation of the taxpayer's books, working paper summary and records to the
return is a very important audit step. In this way, the Revenue Officer will become familiar
with the taxpayer's accounting system, policies and control procedures. If the records
available are organized, this will lend more credibility to the tax return, but if they are
inadequate, then the Revenue Officer should closely scrutinize the information on the income
tax return. Therefore, when encountered with the lack of formal books and records, the
Revenue Officer must use source documents and other available documents to establish the
taxpayer's financial position which shall be compared with the taxpayer's standard of living
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and business activity for validation. HTSAEa
The following formulae for reconstruction of income and expenses may be found
useful:
1. Computation of Sales
Cash Sales (cash book) xx
Add: Sales on account:
Collections from customers (cash book) xx
Less: Accounts receivable (beginning balance) xx
Collections from sales for the period xx
Add: Accounts receivable (ending balance) xx xx
TOTAL SALES xx
==
2. Computation of Purchases
Cash purchases (cash book) xx
Add: Purchases on account:
Payments to creditors (cash book) xx
Less: Accounts payable (beginning balance) xx
Payments for purchases for the period xx
Add: Accounts payable (ending balance) xx xx
TOTAL PURCHASES xx
==
3. Computation of Expenses
Cash payments for allowable expenses (cash book) xx
Add: Prepaid expenses (beginning balance) xx
Accrued expenses (ending balance) xx xx
Total xx
Less: Prepaid expenses (ending balance) xx
Accrued expenses (beginning balance) xx xx
TOTAL EXPENSES xx
==
B. Double Entry System Under this system of bookkeeping, accounting
recognizes the two-fold effect of every recorded event, the debit and the credit or the object
of the event and the equitable interest in that object. Every recorded event affecting one side
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must necessarily affect the other side. This can be presented in an equation:
This can be analyzed into its component elements which show that there are two
distinct parties that have right in the assets of the business, the creditors and the owners. The
rights of the creditors are the claims of such creditors on the assets of the business which are
referred to as liabilities and the rights of the owners on the business are referred to as capital.
In the double entry method, any net increase and net decrease in asset has a
corresponding increase and decrease in either liabilities or capital.
Audit of accounting records under this system shall be detailed as presented in the
discussions of audit of real and nominal accounts.
Taxpayers are required by law and regulations to keep and maintain accounting
records in sufficient detail to enable them to make a proper return of income. The
Commissioner of Internal Revenue is authorized to examine such records or other data which
may be relevant in ascertaining the correctness of the tax returns. The books and records kept
must be sufficient to establish the amount of the gross income and the deductions, credits and
other matters required to be shown in the tax return.
The primary records commonly used by all types of businesses, considering the
different accounting systems and reporting methods of the business are invoices, vouchers,
bills, receipts and other source documents which are also the supporting documents in the
selling and buying of merchandise, services and other assets used in the business. For
companies which require the use of inventories, the primary records include the detailed
inventory list. Other primary records used in financial transactions are the cancelled checks,
duplicate deposit slips, bank statements and notes.
The secondary records, regardless of the accounting method used by the taxpayer,
include permanent books of accounts and working papers which summarize and list the
individual documents including adjustments, when necessary. These records are properly
classified in such a way that the taxpayer will be able to determine the financial status of his
business in a given period of time and the profit and loss for the period.
All records required to be kept by the taxpayers should be preserved by them for
proper administration of any internal revenue law.
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A. Journal is a book of original entry in which transactions affecting the business of
a taxpayer are recorded consecutively day by day as they occur.
1. Sales Journal. This is a book whereby sales on account are recorded which are
supported by sales invoices and which are also the documents that will serve as the basis of
recording the transactions in the books of accounts.
Cash sales are usually recorded in the cash book although it may be posted in both
books representing a debit to cash in the cash book and a credit to sales in the sales book.
Every entry in the sales journal represents a debit to a customer's account and a credit
to sales to be posted in the general ledger.
Sales returns and allowances are also recorded in the sales book which represents a
debit to Sales Returns and Allowances and a credit to Accounts Receivable to be posted in the
general ledger. This would mean a decrease in Sales and eventually a decrease in an asset
account.
Purchase returns and allowances are also recorded in this book and posted in the
general ledger representing a debit to Accounts Payable and a credit to Purchase Returns and
Allowances which would mean a decrease in the purchases account.
In certain instances where the volume of business is large and under the Value-Added
Tax system, taxpayers maintain subsidiary sales and purchase journals where details of daily
sales and purchases are recorded.
3. Cash Book is a book whereby all transactions involving cash such as cash
receipts or cash disbursements are recorded.
3.1 Cash receipts book a book whereby all transactions involving cash receipts
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of whatever source are recorded. EHSTcC
3.2. Cash disbursements book a book whereby all transactions involving cash or
check disbursements are recorded.
B Ledger is a book of final entry wherein the classified accounts or items of all
transactions entered in the journal are posted. All entries in the journal must be posted to the
ledger and shall be classified accordingly so as to show the assets, liabilities, capital and the
operating accounts. This will be the basis for the preparation of the balance sheet and the
profit and loss statement covering the operation of the business. No entry shall be made in the
ledger unless said entry originates from the journal.
The accounts contained in the general ledger provide the Revenue Officer with insight
of the operations of the business. When pertinent, the chart of accounts and subsidiary
ledgers, if any, should be requested from the taxpayer. If a private ledger is maintained, it
should also be requested.
As the Revenue Officer goes through the ledger, unusual or non-recurring items
should be noted and verified. Most of these items are classified as follows:
1. Unusual in amount The Revenue Officer should be alert for month end
entries with significant amounts which may affect income and expenses.
2. Unusual by Source means the books of accounts from where the entry to
the ledger account originates. Hence, expenses or adjustments to income which
do not ordinarily originate from the cash journals, sales and purchase books
should be investigated. Such adjustments originating from the general journal
or journal vouchers should be thoroughly examined as to supporting
documents and proper authorization.
C. Subsidiary Book. In the general ledger, accounts are usually transferred and
grouped into certain accounts to a subsidiary book. This general ledger account is called
control account. Control accounts in the general ledger contain summarized information that
is recorded in detail in a subsidiary book or ledger. It is, therefore, the control account which
contains summarized information and the subsidiary ledger contains the same information but
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in detail.
Thus, in order to relieve the general ledger of too many individual accounts, business
concerns having numerous accounts with customers and creditors will transfer said accounts
to separate ledgers one for customers and another for creditors. For example, the control
account for the customer's subsidiary book will be called "Accounts Receivable", while the
control account for the creditor's subsidiary book will be called "Accounts Payable".
V. Accounting Periods
2. Fiscal year
A. Calendar Year is an accounting period which starts from January 1, and ends
on December 31. This is used by most taxpayers who elect the calendar year as their
accounting period. However, the calendar year shall be the basis of computing the net income
in the following cases:
B. Fiscal year is an accounting period of twelve months ending on the last day
of any month other than December 31.
Corporations and duly registered general co-partnerships are allowed to use this type
of accounting period.
A taxpayer may have a taxable period of less than twelve (12) months in the following
cases:
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3. when a corporation is dissolved;
5. in case of final return of the decedent and such period ends at the time of his
death.
A corporation and a general co-partnership have the option to choose between the
calendar year and the fiscal year.
The application for a change in accounting period should be filed in writing with the
Commissioner of Internal Revenue, through the Revenue District Office, where the business is
registered, within thirty (30) days prior to the date fixed for filing of the return on the basis of
the original accounting period designating therein the proposed date for the closing of its new
taxable year.
Financial Statements are reports signifying the end result of the financial accounting
process. These reports are as follows:
1. Sales reports the total sales to customers and fees received from clients for
the period. All sales transactions should be recorded and invoiced. EaISTD
B. Balance Sheet is a report that shows the financial position of the business unit
as of a specified moment of time. It is a status report rather than a flow report. It is variously
called statement of financial position, statement of condition, statement of resources and
liabilities and the statement of net worth. The balance sheet is the fundamental accounting
statement in the sense that every accounting transaction can be analyzed in terms of its effect
on the balance sheet. In order to understand the information a balance sheet conveys and how
economic events affect the balance sheet, it is essential that the reader be absolutely clear as to
the meaning of its two sides in the equation:
3. Owner's Equity is the residual interest in the assets of an entity that remains
after deducting its liabilities. It measures the interest of the ownership group in
the total resources of the enterprise. Such equities originally arise as the result
of contributions by the owners and the equities change with the change in net
assets resulting from operations.
The basic purpose of tax examination is the determination of correct taxable income as
defined by the National Internal Revenue Code and other internal revenue tax liabilities of the
person or entity whose return is being examined.
A. General Standards
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3. Issues should be raised only when, in the Revenue Officer's opinion, they have
real merit and only when they will contribute in the proper determination of tax
liability.
3. A general work plan should be formulated in each case prior to contacting the
taxpayer which includes the development of issues suggested by the return and
other information. The following steps may be included in the work plan:
3.1 Prepare a list of items which suggest a need for special consideration.
3.3 Identify other agencies or offices where the Revenue Officer can have
access to their records if the taxpayer cannot present the documents
requested.
2. The use of accounting skills, tax knowledge and ingenuity should be directed
toward recognizing and raising issues which relate to non-compliance areas.
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4. The position taken with respect to each issue should be supported by adequate
authority.
D. Standards of Reporting
3. Working papers should be used as a practical and professional tool to aid the
Revenue Officer in the discussion of issues or questions with the taxpayer or
his authorized representative. It also generally provides a record of the audit
procedures undertaken by the Revenue Officer.
1. Initial contact for audit arrangements should be made with the taxpayer and
care should be exercised in explaining the type of records required.
2. Revenue Officers must be fully cognizant of the proper sources for gathering
information and of the rights of the taxpayer and his representatives.
4. Tact and discretion are required in pointing out errors in books and records in
order to avoid discrediting an employee or representative of the taxpayer.
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1. The business organization of the taxpayer and whether it has business
establishments other than its main or head office;
2. The location of the business and its branches as this has a relation to the
volume of business;
5. The accounting methods and policies and the degree of internal control;
11. Gross profit and selling expense percentage as well as significant variations
between prior and current years;
12. Inconsistencies between items and also in the treatment with respect to bad
debts, inventory valuation methods, depreciation rates and methods, etc.;
14. The status of the retained earnings account as well as the basis of assets and
depreciation allowed or allowable; and
15. The report of the tax liabilities of the taxpayer for the immediately preceding
period in order to be aware of the deficiencies that were reported. Review of
prior year's examination records will clarify some doubts or questions in the
Revenue Officer's mind regarding certain items or bring light to situation that
otherwise would have remained concealed on the basis of the return alone.
B. Work Planning
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Work properly planned achieves good results.
In order to avoid any situation where the Revenue Officer will be faced with a
situation of a cramped audit workload and schedule, he should prioritize the audit of the
assigned cases in the following manner:
2. Claims for refund should be given the next priority in order to develop good
BIR-taxpayer relationship.
In work planning, an Audit Program should be prepared for each and every case. An
Audit Program is a checklist of the various auditing procedures to be undertaken and the
various books of accounts, records, documents and business forms to be verified in order to
assess the correct tax due from a taxpayer. This checklist would serve as a guide for the
Revenue Officer to conduct a "quality audit" within the time frame allowed to conclude a tax
audit. It is also a tool of the tax administrators to check on the progress of the tax audit and
for proper evaluation of the performance of the Revenue Officer.
A telephone or a personal call by the Revenue Officer should be made to the taxpayer
himself and not his representative.
2.1 On the first opportunity of the Revenue Officer to have personal contact with
the taxpayer, he should present the Letter of Authority (LA) together with a
copy of the Taxpayer's Bill of Rights. The LA should be served by the Revenue
Officer assigned to the case and no one else. He should have the proper
identification card and should be in proper attire.
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2.2 A Letter of Authority authorizes or empowers a designated Revenue Officer to
examine, verify and scrutinize a taxpayer's books and records in relation to his
internal revenue tax liabilities for a particular period.
The Revenue Officer should clearly specify the records he desires to be assembled for
his examination. Among the books and records that may be required are:
3.3 vouchers
3.5 bills and statements of accounts (utility bills, payment notices, etc.)
4. Initial Interview
The initial interview is the most important part of the examination process and should
be conducted in all audits.
Request should be made for a personal interview with the taxpayer himself.
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The preliminary interview should, as far as practicable, cover the following:
The investigation on the taxpayer's books of accounts may begin with miscellaneous
records other than accounting ledgers and journals. More often than not, scrutiny of these
records may reveal items which the Revenue Officer should take into consideration as the
examination progresses. The records and information to be obtained are the following:
1. Minute Book
The review of the minute book should not be confined to the taxable year under audit
but should cover at least some period immediately before or after. As the Revenue Officer
scans the minute book, he should note appropriate transactions and items of significance, such
as contracts entered into by the taxpayer, stock issuance, dividend declaration and
compensation of officers.
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2. Stock Transfer Book
This book contains the names of stockholders, past and present, with the number of
shares cancelled and issued. This book is also vital in computing documentary stamp tax,
liabilities. A general knowledge of the names of large shareholders is also of value when
checking the salary expense. When the stock and transfer book is not available, the record of
dividend payment is an alternative source of similar information.
3. Partnership Agreement
The Revenue Officer should read the auditor's report accompanying the financial
statements. Sometimes, Revenue Officers fail to evaluate the auditor's report. However, there
are cases when auditors do not issue an unqualified opinion. Any qualification or unusual
comments in the auditor's report or certificate such as expression of opinion as to taxpayer's
depreciation policy, inventory and cost valuation, adequacy of reserves, status of collectibility
of receivables and the like should be noted for consideration and should be related to the
examination of accounts.
In cases where the auditor issues two reports, one for management and the other for
attachment to the tax return, the former should be studied and compared with the latter.
Income and net worth in both reports may vary from income and net worth per books due to
the auditor's adjusting entries not reflected in the books. Thus, the adjusting entries and
supporting documents should be examined. If needed, the auditor's working papers should be
looked into to explain these entries.
Certain taxpayers are required to file financial statements and other reports with
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government bodies such as the Securities and Exchange Commission for corporate taxpayers,
the Garments and Textile Export Board for-garments exporters, the Board of Investments for
exporters, and other similar government offices. The Revenue Officer should compare the
statements filed with the Bureau of Internal Revenue against those filed with other
government offices. Any discrepancy should be inquired into and material differences should
undergo an in-depth investigation.
7. Appraisal Reports
Appraisal reports, particularly real estate appraisals, are important in many cases such
as for estate tax valuation of properties, capital gains tax verification, and donor's tax
investigation.
One technique that should be commonly used is for the Revenue Officer to interview
the taxpayer or his representative and ask him to walk him through the book recording of a
sale, purchase and expense transaction in order to have a thorough understanding of the
taxpayer's accounting system and records.
2.1 Request for a Chart of Accounts and identify account numbers and account
titles.
2.4 Ask the taxpayer for the ,tax working papers or any other type of working
papers that were used to prepare the return.
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data as reflected in the books and the tax returns.
2.5 Evaluate the Statement of Changes in Financial Position, if the taxpayer has
one, to identify sales and purchases of fixed assets, investments made and
disposed, loan and debt payments, capital contributions and other transactions
that might not be readily apparent on the balance sheet and income statement.
The Revenue Officer should establish the level of reliance that can be placed on the
books and records and determine whether the books show all the transactions which occurred.
3.1 In the backward approach, the figures per tax return are traced to the trial
balance, then to the general ledger, the various journals, and ultimately to the
source documents such as sales invoice or official receipts.
3.2 In the forward approach, the Revenue Officer should select a supporting
document, say a sales invoice, and trace it through the sales journal, general
ledger, trial balance and finally to the tax return.
It is important that the Revenue Officer understands adjusting journal entries because
tax issues are frequently discovered in the adjusting journal entries. These adjusting journal
entries are usually accruals, deferrals, corrections or reclassifications of accounts.
4.1 Accruals are normally entries to record certain known and fixed amount of
obligations or liabilities. Accruals are also used to book uncertain,. contingent
liabilities. Contingent liabilities are not fixed in amount or date and are not
deductible for tax purposes.
4.3 Corrections of prior year's earnings, other adjustments and reclassifications are
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made through adjusting journal entries which are recorded in the general
journal or in the journal vouchers. Usually, these entries are taken from the
auditor's working papers. The examining Revenue Officer should scrutinize
these entries, specially those credited directly to retained earnings, analyze the
tax issues involved, and note down possible tax assessments.
4.4 When scanning adjusting journal entries, the following should also be looked
into closely:
It is mandatory for the Revenue Officer to evaluate internal control for him to decide
up to what extent the system can be relied upon. This will also determine the nature, extent
and timing of audit tests to be applied in the examination and to plan subsequent audit
procedures.
Good internal control assures good record keeping and the inability of the employees
and the owner from misappropriating the assets.
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1.4 Record keeping and custody should be separated.
To establish the scope of the audit and degree of compliance tests to be performed,
internal control should first be valuated based on the following techniques:
3.1 Identify the personnel responsible for record keeping and determine their
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responsibilities and authority in the business operation.
3.2 Reconcile the returns with the books and records. Difficulty in reconciling the
return with the books and records may be an indication of inadequate internal
control in either financial or tax accounting.
3.4 Review the chart of accounts and identify unusual accounts or note those
accounts which should be included but not indicated.
3.5 Secure and study copies of operating manuals or instructional booklets that
may lead to an easy understanding of the taxpayer's business operations.
3.6 Determine if the taxpayer's personal transactions are segregated from business
operations or if separate bank accounts are maintained by the owner and the
business.
3.8 Determine the books and records maintained and the frequency of recording
transactions.
3.10 Determine the extent of involvement of auditors and other third parties in the
business.
3.11 Determine if certified audits for any reason were conducted. If so, copies of
documents in relation thereto should be secured. HIAESC
3.12 Determine if the income reported by the taxpayer reflects his lifestyle.
G. Sampling Techniques
Sampling is a large and important part of the examination of a tax return. It is the
application of examination procedures to less than 100% of the items in an account to
evaluate its accuracy.
2.3 Materiality
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2.4 Analytical Review
There are many sampling techniques as there are cases. The Revenue Officer is not
precluded from discovering and applying new techniques as may be needed in each particular
case.
Listed below are the suggested sampling techniques in testing income statement and
balance sheet items:
3.1 Select the first and last months of sales to ensure that income was not deferred
to an improper year.
3.2 The last month of the period under examination should be tested because of
the likelihood of errors and unallowable adjustments made before the end of
the year.
3.3 Selection of the largest three months incurrence of an expense account may
reveal expenses that should be capitalized, personal expenses or padded
expenses.
3.4 Scan the cash disbursements journal and general ledger for unusual or very
large entries. This step also familiarizes the Revenue Officer with the accounts,
payees, suppliers and clients of the taxpayer.
3.5 Select at least one month's (or one week for a large corporation) file of
cancelled checks. Thoroughly analyze each check together with the
endorsement at the back. This could lead to the discovery of fictitious; payees,
unusual transactions, personal items charged to expense and other possible
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disallowances.
3.6 Inspection of the corporate minutes and the articles of incorporation could lead
to a Revenue Officer's determination to sample a particular account.
3.7 Examine certain accounts in the income statement in relation to the balance
sheet accounts. Thus, Accounts Receivable should be analyzed together with
Sales. Bad Debts Expense should be verified together with the Allowance for
Bad Debts. Likewise, Accounts Payable should be examined together with
Purchases and other related expenses.
3.11 Contract or limit the scope of the sample if the majority of the samples are
completed and there are still no discrepancies.
4.4. Inspect and observe inventory flow, fixed assets acquired, sales transactions
and other transactions which may require ocular inspection.
Analyzing- the results of a sample is an important yet commonly missed step. The
sample taken should be evaluated and considered in relation to any peculiar situation, such as
related -party transactions or economically unsound transactions. One example would be
purchases made at unusually high or low prices. If the results of the sampling indicates
potential tax assessment, an in-depth analysis should be conducted as follows:
5.1. Verify the account showing the discrepancy or possible source of tax
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deficiency.
5.5. Take a close look at how the taxpayer handled the entire transaction.
5.7. Discuss the problems or discrepancies with the taxpayer or his authorized
representative.
The audit samples should be clearly documented in the working papers from which a
conclusion shall be drawn. If a quality sample analysis has been performed, it will be easy to
form a conclusion from the sample results. The conclusion reached should be clear, concise
and final.
After the foregoing process, the Revenue Officer should turn his attention primarily to
the books and records bearing in mind that there are some reconciling items which affect the
net income per books.
The following discussion offer guides and techniques in examining asset, liability and
net worth accounts. The Revenue Officer, however, is not precluded from applying other
techniques which are deemed necessary in a particular case.
1. Compare deposits shown in the bank statement against entries in the cash
receipts book and official receipts. .Note down any unrecorded or unreceipted
deposit and investigate the source.
2. Test check cash sales with the cash receipts book if they have been correctly
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recorded. Also check cash sales made at the beginning and end of the period
under examination to determine if year-end sales have been recorded in the
proper accounting period.
3. Investigate entries in the general ledger cash account. Look for unusual items
which do not originate from cash receipts or disbursements journals. These
entries may indicate unauthorized withdrawals or expenditures, sales of capital
assets, omitted sales, undisclosed bank accounts, etc. AcICTS
4. Review cash receipts journal for items not identified with ordinary business
sales, being alert to such items as sale of assets, miscellaneous income, sale of
scrap, income received in advance, proceeds from issuance of capital stock and
other taxable transactions.
5. Review cash on hand and cash in bank accounts to determine if there are any
credit balances during the period under examination. This may indicate
unrecorded receipts.
7. If the taxpayer is on cash basis, ascertain if checks were written and recorded
at the close of the period under audit but were issued thereafter. Verify checks
issued during the latter part of the year to check the authenticity of expenses
claimed.
8. Give special consideration to checks issued for cashier's checks, sight drafts
and other similar bank instruments where the payees and nature of the
disbursements are clearly shown.
9. Obtain bank statements and cancelled checks for each bank account for one or
more months, including the last month of the period under examination.
10. Note year-end bank overdrafts. This may indicate expenses which are fictitious
or unallowable since funds were not available for payment.
11. Determine if there are checks which have remained outstanding for an
unreasonable period of time. This may indicate improper, fictitious or
duplication of disbursements. Old outstanding checks could possibly be
restored to income.
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12. Determine whether voided checks have been properly adjusted in the books
and credited to the appropriate expense accounts, if applicable.
13. For a test period, check endorsements to verify if they are the same as that of
the payees', noting any endorsements by the owner, or any questionable
endorsement.
15. Test check disbursements from petty cash to determine if there are any
unallowable items included.
17. Tally debits and credits to the cash accounts per month against sales credit,
debts to purchases and expense accounts and other sources and application of
cash based on the worksheet of real and nominal accounts submitted by the
taxpayer. Note down discrepancies and substantial accumulation of cash
without reasonable credits.
2. Check entries in the general ledger control accounts. Look for unusual items,
especially those which do not originate from the sales or cash receipts journals.
4. Note any credit balances in the general ledger or subsidiary accounts. This may
indicate deposits or overpayments which could be considered as additional
income or unrecorded sales. Also, credit balances may indicate a misapplied
bad debt recovery or deposits received for so long a time that there is little
likelihood that they will ever be refunded. Whatever the cause, the credits, if
material, should be isolated for consideration.
5. Some credit sales invoices and postings should be test checked from the sales
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journal to the subsidiary and control account.
6. Compare balances of accounts receivable and sales for the current year with
that of the preceding year. Investigate significant changes.
9. Investigate the sources of notes receivable as there may be instances when the
taxpayer has other sources of income other than his regular business.
10. Determine whether accrued income on interest bearing notes or accounts has
been included in income.
11. If needed, check the detailed listing of beginning receivables to cash collected
as reflected in the cash receipts book. This may disclose diversion of funds and
other irregularities.
1. Ascertain the company's policy of providing for allowance for bad debts by
examining minutes of meetings and other documents.
2. Compare balances in the allowance account with that of the preceding year's.
Investigate significant changes.
4. Compute the ratio of bad debts expense over sales. Analyze if such is
reasonable.
6. For accounts written off which were charged to expense, examine minute book
for authorization to write off accounts.
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cases.
8. If possible, check the financial status of the customers for which allowance for
bad debts was provided.
9. Check entries to the allowance account for possible bad debts recoveries and
trace if the same were declared as income at the time of recovery.
D. Inventories
2. Verify the inventory valuation method being applied if such is acceptable for
tax purposes and consistently applied from year to year.
3. Compare inventory balances in the return under examination with the balances
on the prior and subsequent year's returns and financial statement; then verify
these with the taxpayer's records.
4. Check BIR authorization for changes in inventory valuation method and verify
taxpayers compliance with the requirements set forth under existing rules and
regulations.
8. Verify cost of production reports and test check certain costs reflected therein
to supporting documents.
10. Analyze unusual entries to cost of sales account such as materials, labor and
overhead charges not directly related to sales or transfers of finished goods, if
applicable.
11. Determine if there have been write-downs for "excess" inventory to below
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cost. Verify authorization and supporting document/report for such
write-downs.
12. When items have been removed from inventory for the owners' or shareholders'
use, check if these are properly recorded as part of sales. These required
minimum audit procedures, however, should not deter the Revenue Officer
from making a more detailed examination of the inventory account, when
warranted.
E. Advances To Stockholders/Officers
F. Investment
The investments most commonly found on the books are stocks and bonds and, in
some cases, real estate not used in actual business operations. The following procedures
should be conducted in the examination of investments if such are material assets of the
taxpayer:
2. Analyze sales and other credit entries to the account. If stocks sold are listed in
the stock market, test check selling price of stocks sold at the prevailing
"close" price at the Philippine Stock Exchange during the date of sale. Real
properties sold should not fall below fair market value and/or zonal value
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where the zonal value has been established. The application of the "whichever
is higher" rule shall be observed.
3. Verify journal entries to ascertain the selling price and gain on sale of
investments. Vouch supporting documents such as deeds of sale, proof of
remittance of taxes withheld, payment of documentary stamp tax and other
relevant records.
5. Cross-check all investments during the year to the interest, dividend or rental
income accounts.
G. Depreciable Assets
This group includes tangible properties of relatively long life which are used in the
operation of the business. However, natural resources such as oil or mineral lands are not
included in this group of asset account. The following verification procedures should be
undertaken on these accounts:
1. Compare the asset and related reserve amounts as they appear on the tax
return, balance sheet, depreciation schedule, and taxpayer's books and
schedules. Compare the beginning and ending figures for the taxable year and
reconcile differences or ask the taxpayer to make the necessary reconciliation.
Verify the correctness of such reconciliation.
3. Review asset additions during the year by reference to invoices, contracts and
other documents and determine if the proper cost basis was used.
3.1. Note items which appear to have originated from unusual sources such
as appraisal increases, transfers and exchanges, and determine propriety
thereof. Ascertain if prior earnings were adequate to cover acquisitions.
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3.3. Ascertain if assets include items of a personal nature. If the assets are
used by the officers for their personal use, the depreciation should be
disallowed.
3.5. With regard to the basis of recognition of costs of assets, consider such
items as trade-ins, acquisitions from related taxpayers, allocation of
cost between land and building and other basis.
4. Decreases in the asset accounts during the year should be noted. The accuracy
of the gains or losses resulting therefrom should be verified and ascertain that
the appropriate tax on the transaction, such as value-added tax, if applicable,
has been paid.
1. Review the nature and source of all accounts and ascertain if they are being
used to claim unallowable deductions.
2.2. Where land and building are acquired on lump-sum, the following
formula should be used in computing the building cost for depreciation
computation:
FMV or Zonal value of land
X
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FMV or Zonal value of land
and building
Total acquisition cost = Cost of
Land
Total acquisition cost
Of land and building Pxxx
Less: Cost of land per
above computation xxx
Cost of building Pxxx
====
3. Ascertain the taxpayer's depreciation and amortization policies and consider
the following:
3.1. Whether the methods applied by the taxpayer are in compliance with
the Tax Code and existing revenue regulations;
3.2. Whether the depreciation rates used by the taxpayer are fair and
reasonable; and
3.3. Whether the taxpayer has applied the same method consistently from
period to period.
I. Intangible Assets
1. Investigate the nature of the intangible assets whether leases, patents, licenses,
trademarks, goodwill, copyright, franchise and others.
2. Costs of acquiring the intangible should be capitalized when useful lives can be
estimated. If not, no amortization is allowable for tax purposes.
3. Determine if the recorded cost and cost of current additions includes proper
elements such as legal fees, application fees and other costs of acquisition.
Examine contracts and other legal documents.
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4.1. Leasehold costs are subject to amortization over the term of the lease.
4.4. Patents sold with the exclusive right to make, use and sell an article
constitutes ordinary income.
5. Determine if there have been transactions with related taxpayers. If so, verify if
these are made at arms-length.
1. Verify the nature and source of these assets and the manner in which they are
charged off to expense.
2. When prepaid expenses are not reflected in the balance sheet, verify charges to
expenses which entail advance payments such as insurance, rent, supplies,
repairs and maintenance that are covered by contracts.
K. Other Assets
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L. Exchange, Clearing or Suspense Account
2. Test check debit and credit entries, being aware of the possibility that such
account may be used as a means for diverting sales, padding expenses, and
concealing other irregularities.
These liabilities are found on business records under various titles such as accounts
payable, vouchers payable, notes payable, accrued expenses and other current liabilities. The
audit procedures are as follows:
1. Reconcile subsidiary ledgers with the control accounts. Request the taxpayer
for explanation of any discrepancies noted.
3. Note accounts which have long overdue balances. These may indicate
contested liabilities or accounts that no longer exist such as unclaimed wages
or unclaimed deposits which should be reverted to income.
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7. If payables include liability on security deposits, secure a copy of the lease
contract/agreement to determine provision on the application of lease deposits.
These security deposits are taxable when received.
N. Fixed Liabilities
4. Verify if funds were borrowed for use of affiliates as the interest expenses
thereon shall not be deductible on the part of the borrowing taxpayer. There
should be a reallocation of profits and the tax burden must be shifted to the
affiliate in accordance with existing rules and regulations.
5. Determine whether the indebtedness will give rise to interest expense that are
subject to limitations on deductibility under Section 34(B) of the Tax Code.
Determine if loans were borrowed to finance acquisition of tax-exempt
securities. If so, the interest expense is not considered deductible for income
tax purposes.
O. Deferred Credits
1. Check all payments received as recorded in the cash receipts book, (i.e. date of
receipt, source of collection, and other entries).
2. Check if collections were included in the gross income during the year when
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the payments were actually received. Amounts are generally includible in gross
income for tax purposes not later than the time of receipt if they are subject to
free and unrestricted use by the taxpayer. Under this theory, collections,
advance rentals, legal retainer and the like, advance sales of transportations
tokens or communications tickets and other advances are income when
received.
3. Look for credit balance of accounts which fall under deferred credits. They
may be clearly labeled as advanced rentals, deferred service income or may be
shown as a reserve account that is mixed with true liability accounts, or as a
contra-balance in the receivables.
4. If the taxpayer used the completed contract method of accounting for contracts
entered into and construction work that actually commenced prior to January
1, 1998, income and expenses attributable to a particular job or project are
properly deferred until completion of the project. The contracts and progress
reports should be inspected to determine whether the reporting of income has
been delayed beyond the completion of the project.
4. Verify certain payments of loans against check vouchers and cancelled checks.
5. Verify the debit and credit entries in the general ledger account and watch out
for unusual sources other than the cash receipts and disbursements book.
6. Examine adjustments, specially increases in the account, at the end of the year
as this may constitute shifting of taxable income to this liability account. Verify
general journal entries, journal vouchers and related documents supporting the
entries.
Q. Capital Accounts
1.1. 210. Reconcile amount appearing on the books, tax return and financial
statements. Verify discrepancies, if any.
1.2. Review debits and credits to the account during the period under audit
and check supporting entries to the account. Increases which originate
from sources other than profit and loss may indicate omitted income.
1.3 Relate the account balance and withdrawals with the owner's standard
of living. Where owners report no other sources of income, and
withdrawals appear insufficient to maintain personal living expenses,
there may be under reporting or diversion of income.
2.1. Review debits and credits to the account during the period under audit.
Verify increases and decreases and check for unusual sources other
than profit and loss.
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2.2. Reconcile amount appearing on the tax return, books and financial
statements. Verify any differences noted.
2.4. Ascertain that the correct tax has been withheld on distribution of
partnership profits.
3.1.1. Review entries in the capital stock account and verify increases
and decreases thereto.
3.1.4. Compare data from minute book with items recorded on the
books of accounts to determine if entries have been made.
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documents:
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3.1.9.1.2.3 Verify Deed of Assignment of
property for shares of stocks; and
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which the net income or net loss from operations is transferred and
accumulated into. The minimum audit procedures that should be
undertaken in analyzing this account are as follows:
3.2.3. Check increases which do not originate from net income. Verify
entries from the general journal/journal vouchers, specially
those recorded other than as year-end adjustment as these may
indicate sales or income directly posted to the retained earnings
account.
This Chapter discusses the books of accounts, accounting records and documents used
to record income and expense transactions. It enumerates the audit procedures and techniques
for income and expenses.
The audit of income or revenues are applicable to resident and non-resident individuals
engaged in business and the practice of profession, estates and trusts engaged in trade or
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business, general professional and business partnerships and corporations.
Expenses chargeable against income are allowable in their entirety only for business
partnerships and corporations. Self-employed resident citizens and aliens engaged in business
or the practice of profession, non-resident aliens engaged in business, estates and trusts
engaged in trade or business and general professional partnerships as defined under Section 22
(B) of the Tax Code and their individual partners can claim expenses subject to the provisions
of Section 34 of the Tax Code.
1. Sales
1.1 Review the taxpayer's accounting method of revenue recognition if the same is
acceptable and consistent with prior years.
1.2 Ascertain that all sales were reported as of the cut-off date. Cut-off refers to
the point at which entries from one accounting period stop and entries for the
next period begin. This is usually the last day of a taxable year. If the last day
of the taxable year is not used, the cut-off date must be the last day of the
taxpayer's fiscal period. ASTcEa
1.3 Verify revenues/sales recorded and deposited near the end of the tax year and
immediately during the subsequent month to determine if these pertain to
income earned for the tax year under examination.
1.4 Account for all sales invoices issued. Match delivery receipts, gate passes, if
any, against sales invoices issued.
1.5 Compare totals of sales invoices, sales summary, entries in subsidiary sales
journals and general ledger accounts. Inquire and investigate discrepancies
between book entries and returns filed.
1.6 Reconcile credits to sales with debits to accounts receivable and debits to cash
receipts book. Test check monthly entries.
1.7 Research unusual and unfamiliar issuances of goods or goods which are not
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normally sold by the taxpayer.
1.10 Determine if merchandise is being withdrawn for personal use or for any other
purpose not in relation to normal sales process.
1.11 Scan credit memo issued to customers and test check entries to Sales Returns
& Allowances and Sales Discounts to insure proper recording of credits.
1.12 Verify cancelled sales invoices by test checking deposits made and withdrawal
of goods on the day of cancellation.
a. Sales volume
c. Major products
g. Inventory level
1.14 Review sales contracts, consignment agreements and other documents relative
to sales.
1.15 On installment sales, ascertain that collections have been properly segregated
as to the year of sales and that the proper gross profit ratios have been applied.
Review unearned or deferred income accounts for any uncollected balances
which have been outstanding for an unreasonable period of time.
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1.16 Determine whether sales on consigned goods are taken up at the time of
shipment or after sixty (60) days from the date goods were consigned.
1.17 Where the internal control is weak and records are unreliable or inadequate,
apply other approaches to audit revenue such as cash analysis, net-worth
analysis, third party verification, and other indirect approaches to investigation.
2. Rent Income
2.2 Conduct ocular inspection of the premises under lease. Identify tenants and
monthly or annual rentals. Conduct interviews, if necessary.
2.3 Relate real properties under lease agreement to assets declared in the balance
sheet. Note inconsistencies between asset values and income generated.
2.4 Where the rental income is based on a percentage of sales of the lessee, the
sales of the lessee should be tested for a representative period, say one month,
to get a proper approximation of the lessee's sales during the taxable year
under audit and the rental income received by the lessor. In such cases, proper
authorization from the lessee should be obtained before conducting the test
verification.
2.5 Obtain information on rental of neighboring properties and compare with rent
income reported.
2.6 Examine official receipts issued. Compare total collections per official receipts
with entries in the cash receipts book and general ledger. Investigate
discrepancies.
2.8 Secure copies of lease contracts or agreements. Take note of lease contracts
which are actually conditional sales.
3. Professional Fees
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3.1 Determine the taxpayer's accounting method of recognizing income, whether
cash or accrual. Most professionals, however, adopt the cash basis of
accounting.
3.3 Compare income reported on the tax return with the books of accounts,
creditable withholding tax forms, financial statements and official receipts
issued. Verify discrepancies, noted, if any.
3.4 Account for official receipts issued. Note any missing receipt or break in the
series and investigate the reasons therefor.
3.7 Relate the income reported per tax return to the lifestyle and assets of the
taxpayer. If the taxpayer's assets and estimated costs of living expenses are
beyond the income earned, verify and compute for possible underdeclaration of
income by using the net worth method of investigation.
4.1 Identify in the tax returns and financial statements any sale, exchange or
disposal of assets other than inventories or stocks in trade.
4.2 Obtain copies of deeds of sale and other documents relating to the sale.
4.3 Determine zonal values, fair market values or appraisal values and compare
with the actual selling price.
4.4 Compute any underdeclaration of sales by comparing the selling price with the
existing fair market value, zonal value or value of similar properties sold.
4.5 In case of disposal of capital assets, ascertain compliance with the provisions
of the Tax Code on capital gains and losses.
4.6 Verify sales of property reported on the installment basis and determine if all
requirements pertaining thereto have been complied with.
4.7 Determine if proper accounting for depreciation, book value and salvage value
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was correctly taken up
4.8 Inquire from certain company personnel on possible sales of assets which may
not have been recorded in the books of accounts.
5. Other Income
5.1 Scrutinize the entries in the general ledger and general journal for any other
income or other receivables recorded thereto.
5.3 Investigate suspense accounts and unusual liability accounts, such as due to
affiliates/due to stockholders and other payables to uncover possible income
not recorded in the income accounts.
1. Purchases
For taxpayers engaged in trading and manufacturing businesses, the purchase account
is one of the largest accounts in the income statement. Thus, there is a possibility that
taxpayers may hide a number of non-deductible expenditures in this account due to the
volume of transactions posted to it. The following audit procedures should be followed in
examining purchases:
1.1 Account for all purchase invoices and receiving reports as of the cut-off date.
Determine if year-end purchases have been recorded in the proper accounting
period.
1.2 Compare totals of purchases in the return, income statement, purchase book,
subsidiary purchases book, if any, and general ledger. Determine any
discrepancy and investigate its nature as well as the nature of year-end
adjustments.
1.3 Determine that the purchases declared are neither overstated nor understated
by vouching the supporting documents, and test-checking the footings of
invoices, purchase books and ledger accounts Under-statement of purchases
may also mean underdeclared sales.
1.4 Tour the premises where inventory items are kept and correlate actual
inventory level against purchases reported. Test-check stock cards of major
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inventory items to evaluate accuracy of inventory reports. TDcAaH
1.5 Scan the purchases book for possible unusual payees or unusual amount of
purchases. Take note of suppliers not generally associated with the products or
services handled by the taxpayer.
1.6 Verify entries in the general ledger account which originate from unusual
sources such as journal entries, debit and credit memoranda and other
accounting records.
1.7 Test check recorded purchases for a representative period with suppliers
invoices and cancelled checks. Note if there are personal expenditures,
withdrawals of merchandise by the owners, fictitious or duplicate invoices,
cancelled purchase invoices, excessive rebates, discounts and allowances and
purchases not received.
1.8 Where there are only a few major suppliers, conduct third party verification to
ascertain the correctness of purchases declared, if there is suspicion of fraud or
if the Revenue Officer believes that this is necessary.
1.9 If purchases are from suppliers related to the owners or from affiliates, conduct
a review of a number of transactions to uncover prices in excess of market
value, excessive rebates and allowances, and other similar schemes.
2.1 Verify the inventory valuation method applied by the taxpayer whether first-in,
first-out (FIFO) last-in, first-out (LIFO), specific identification, weighted
average or simple average. Last-in, first-out is not acceptable for income tax
purposes. Determine consistency of its application from year to year.
2.2 Obtain an understanding of the production process thru familiarization with the
taxpayer's business, tour of the premises, conducting interviews, and analyzing
cost of production reports.
2.3 Compare inventory balances in the return under examination with the balances
for the prior and subsequent years' returns, and reconcile these with the general
ledger and the physical inventory summary.
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2.5 Check gross profit variations. Any significant variation should be discussed
with the taxpayer and a reasonable explanation in writing should be obtained.
A material decrease in gross profit from one year to the next could be due to
understated ending inventory.
2.8 Analyze unusual entries to cost of sales. Account for labor, materials and
overhead charges not directly related to sales or transfers of finished goods. Be
alert on the possibility that the taxpayer may be trying to include a
non-deductible item in the cost of sales account.
3.1 Evaluate the expense initially by comparing the ratio of salaries and wages to
sales and the percentage of taxes withheld to total salaries, allowances bonuses
and other compensation. Low ratios might indicate that the company hires
sub-contractors or an understatement of expenses which may be a lead to
underdeclared sales. High ratios may also mean an understatement of sales or
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padded payroll with functions or terminated employees.
3.2 Review payroll sheets. All expenses claimed having the semblance of a
compensation payment should be verified together.
3.3 Interview personnel assigned to prepare payroll and inquire if family members
are included in the payroll. If so, check legitimacy of the work assignment and
reasonableness of compensation paid.
3.4 Compare payroll costs with industry standards and other independent data.
Require explanations for significant deviations.
3.5 Observe the actual number of employees and relate this to the declared sales.
Inquire if independent contractors are hired in lieu of regular employees.
3.6 Perform a comparative analysis of salaries, wages and other employee benefits
with prior and subsequent years. Material changes may indicate a change in the
volume of business or in the policy of classifying manpower employed.
3.7 Determine if the taxpayer is properly withholding the correct amount of taxes
on compensation by test-checking actual pay slips against employee records
and BIR Form 1604 CF (Annual Alpha List of Employees from whom
Withholding Tax has been deducted).
3.8 Reconcile totals of wages paid which were subjected to withholding tax and
totals of compensation paid which were not subjected to withholding tax with
payroll expense claimed. Consider the possibility of disallowing any noted
discrepancy in accordance with existing rules and regulations.
3.9 Verify Social Security System Premium Remittance List to cross check the list
of employees to whom compensation was paid.
4. Fringe Benefits
Fringe benefits tax is a final withholding tax imposed on the grossed-up monetary
value of fringe benefits furnished, granted or paid by the employer to the employee, except
rank and file employees as defined in Revenue Regulations No. 3-98.
4.1 Obtain a list of managerial and supervisory employees from the Human
Resource or Personnel Department of the company being audited with the
following information per personnel:
a. Nationality
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b. Citizenship
d. Position/Job designation
4.3 Analyze expenses and other pertinent accounts where fringe benefits may have
been lodged or recorded. Determine the amounts of benefits subject to the tax.
a. Housing
b. Expense Account
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or similar amounts in excess of allowable amount under the law.
4.3.2 Exclude the following fringe benefits from the fringe benefits subject to
FBT (Sec. 2.3.3.(c) of RR No. 3-98):
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d.9 Company picnics and sports tournament in the
Philippines and are participated exclusively by
employees
4.4 Determine the correct valuation of fringe benefits based on the provisions on
valuation prescribed and illustrated in RR No. 3-98
4.5 Compute for the amount of taxable fringe benefits by dividing the monetary
value of the fringe benefit by the appropriate percentages in accordance with
the following schedule:
Effective January 1 ,1998 66%
Effective January 1, 1999 67%
Effective January 1, 2000 68%
4.6 Compute for the correct final withholding tax on fringe benefits by multiplying
the grossed-up monetary value of the benefits with the following rates for the
applicable taxable years:
1998 34%
1999 35%
2000 32%
The following are subject to different tax rates as provided by the
NIRC and RR No. 3-98:
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(Section 25 (E))
4.7 Examine monthly final withholding tax returns with corresponding official
receipts of payment to check if the correct final withholding tax on fringe
benefits was paid. In case of underpayment or late payment, compute the
deficiency tax due and/or penalties, where applicable.
4.8 Compare the amount of fringe benefits per income tax return, audited financial
statements and per books against the withholding tax returns and official
receipts. If the taxpayer is on accrual basis, examine the journal entry made in
accruing the expense at the end of the year. Verify if the tax has been paid on
or before the due date on the first month of the following year.
4.9 Disallow claims for fringe benefits in excess of supported amounts or where
the payees are determined to be fictitious.
5. Rents
5.1 Verify pertinent provisions of the lease contract with the lessor.
5.2 Verify reasonableness of rentals paid by the lessee, particularly if the lessor is
related directly to the taxpayer.
5.3 Verify whether the corporation is renting property for which it has no actual
business use. Any rentals in that case would be unreasonable and unnecessary;
hence, the expense should be disallowed.
5.4 Determine the terms of the lease. If the lessee may take or acquire title to the
property, the claim for rental expense should be disallowed.
5.5 Determine if there are any capital expenditures included in the accounts.
5.6 Determine whether the proper amount of expanded withholding tax on rental
payments has been withheld and remitted.
6. Royalties
6.1 Verify minute book and pertinent provisions of the contract with the lessor.
6.2 Check correctness of the amount of the expense by computing the percentage
of royalty or terms specified in the contract in relation to the reported sales.
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Disallow excess claim.
6.3 Determine whether the proper amount of final withholding tax has been
withheld and remitted.
6.4 If the recipient is a non-resident alien or foreign entity, determine whether the
proper amount of tax has been withheld and remitted.
6.4.1 Check whether the recipient is a treaty country resident. If so, ask for a
copy of a ruling issued for the use of the preferential tax rate.
6.4.2 If a copy of a ruling has been produced, verify from the issuing office
[International Tax Affairs Division (ITAD) or Law Division] for the
authenticity of such ruling.
7. Interest
7.1 Verify sources of interest expenses such as actual notes, loans, mortgage or
bond instruments. Check whether the indebtedness is business related.
7.2 Determine the accounting method used by the taxpayer. If he uses accrual
basis, only the interest accruing during the taxable year is deductible.
b. Accrual of items payable to related taxpayers which are not paid within
the prescribed time limit.
7.4 Determine if deductions claimed relate to interest incurred in carrying tax free
obligations. If so, then the interest claimed is not deductible.
7.5 Disallow interest claimed in excess of interest income subject to final tax.
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7.6 Determine if the interest deduction includes any principal amount.
7.7 If the recipient is a non-resident alien or other foreign entity, determine if the
proper amount of tax has been withheld (Follow procedures in 6.4 to 6.4.3.
hereof).
7.8 Ascertain if the loans acquired were not utilized but were loaned out to
affiliates. If so, disallow interest expense claimed.
8. Taxes
8.1 Verify whether only the taxes properly paid or accrued during the year have
been claimed.
8.2 Determine that no protested taxes or reserves for deficiency taxes upon audit
are claimed.
8.3 Determine existence of claims for taxes not allowable as deduction such as:
8.4 Determine if the taxpayer has title to the real and personal property being
taxed.
8.5 Determine if there are any taxes on the purchase of capital assets that were
already capitalized but also charged to expense account.
9. Repairs
9.2 Verify nature of expenditures. If the expenditure prolongs the life or enhances
the value of the existing assets, then it is not deductible but should be
capitalized and depreciated over the years of their estimated usefulness.
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9.3 Check repair accounts for the possibility that personal expenses of owners or
other company officers and employees are included.
10.2 Determine with a reasonable degree of certainty the uncollectibility of the debt.
10.3 Determine if the charge-off is based on worthlessness of the debt within the
year.
10.4 Determine if there are repossessed merchandise. If so, verify if the value of
repossessed merchandise has been correctly assigned and deducted from the
claimed amount of bad debts.
10.6 Determine if the method of deducting bad debts is acceptable and consistent
with the method applied in the preceding year.
10.7 Verify bad debts expense in relation to the examination of the allowance for
doubtful accounts. SEcAIC
11. Losses
11.1.1 Verify if the amount of the abandonment loss is the adjusted basis of
the abandoned asset.
11.1.2 Determine if the loss of missing assets really occurred within the
taxable year.
11.1.4 Determine the reason for the demolition of a building. If it was the
taxpayer's intention to demolish the building when the property was
first acquired, abandonment loss is not allowable. It should form part of
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the cost of the building.
11.2.2 Ascertain that the loss is claimed in the proper year. Generally casualty
loss, is claimed in the year incurred while losses from theft or
embezzlement is claimed in the year discovered.
11.2.4 Ascertain that the adjusted basis of lost property has been properly
computed. Consider reasonableness of values used in the computation
and ascertain that the loss claimed does not exceed the adjusted basis.
11.2.5 Ascertain that the rule as to the manner of deductibility have been
complied with (type of asset, whether insured or not, time or period
held, and other relevant factors).
11.2.6 In cases involving loss of cash, be alert on the possibility that the cash
stolen may not have been included as income.
11.2.8 Analyze any loss claimed for assets located in a foreign country.
11.2.9 Verify police blotters, fire department records and other independent
documents in support of the claim.
Pursuant to Section 34 (D) (3) of the Tax Code, "net operating loss"
means the excess of allowable deduction over the gross income of the business
in a taxable year.
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The validity of the claim for net operating loss carry-over may be
determined through the following procedures:
11.3.1 Secure copies of income tax returns and the applicable audited financial
statements for the three (3) consecutive taxable years immediately
preceding the year of claim.
11.3.2 Verify audit reports, if any, covering the taxable years with net
operating loss to ascertain correctness of amount claimed after audit. If
the results of audit for prior years show a net income instead of loss,
disallow claim for net operating loss carry-over.
11.3.3 Determine if the net loss was incurred during the taxable year in which
the taxpayer was exempt from income tax. If so, the net operating loss
carry-over should not be allowed as a deduction for the succeeding
period.
11.3.4 Examine the taxpayer's stock and transfer book and report submitted to
the Securities and Exchange Commission to ascertain that there is no
substantial change in the ownership of the business or enterprise in that:
b. Not less than seventy five percent (75%) of the paid up capital
of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
11.3.5 For operators of mines, other than oil and gas wells, which did not avail
of the incentives under E.O. 226, otherwise known as the Omnibus
Incentives Code of 1987, verify correctness of claim for net operating
loss:
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the business or enterprise as stated in Section 4 hereof.
12. Depreciation
12.1 Compare total depreciation as shown by the depreciation schedule with the
deduction claimed on the return. Reconcile any differences. Be alert for
duplication of claimed deductions.
12.2 Review the rates of depreciation used to determine if they are reasonable.
12.3 Test check a representative number of items listed on the depreciation schedule
to determine if the accumulated depreciation at the end of the accounting
period exceeds the depreciable basis of the asset.
12.4 Test check extensions and prove footings to determine if current depreciation
has been correctly computed.
12.5 Determine if there is any personal use of cars and other depreciable assets.
12.6 Ascertain if proper cost allocation has been made on bulk purchases of
depreciable and non-depreciable assets.
13. Depletion
13.2 Determine if the taxpayer has acquired, at least by investment, any interest in
oil, gas or mineral in a place, and secures, by any form of legal relationship,
any income derived from the extraction of oil, gas or mineral.
13.3 The following additional guidelines should be followed in the verification of the
deduction for depletion:
13.3.1 Ascertain that the sales reported in relation to a property do not include
sales applicable to another property, sales of purchased minerals,
non-minerals sales or other income items.
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excise taxes, trade discounts allowed and other deductions. CSAcTa
13.3.3 In situations where the basis for percentage of depletion is not the
actual sales price of a finished product but a value of the mineral at the
point at which it has passed through the last allowable treatment
process applicable thereto, determine if the value used is the correct
representative market or field price.
13.3.5 Ascertain that all expenses applicable to a property have been charged
to that property including a proper allocation of general, administrative
and overhead expenses.
14. Contributions
14.3 Verify if the claim is actually paid within the taxable year.
15.1 Determine if the expenditures have been incurred in relation to the business or
practice of profession, not for personal use.
15.2 For transportation and travel expenses, the following information are necessary
to properly determine deductibility:
a. Date of travel
15.6 Prepare a summary of the total expenses posted to the accounts and compare
the same with the deductions claimed per tax return.
15.7 Select a representative test period or periods and test check entries in the
ledger against supporting receipts and documents.
15.8 Determine from the analysis and verification of supporting documents the
reliability of the records.
16.1 Determine if the expenses claimed are not capitalizable office furniture and
equipment.
16.2 Verify if personal purchases by the taxpayer/owner are included in the account.
16.4 Compare receipts with the amounts claimed and investigate significant
discrepancies.
17.1 Determine if the charges include amounts incurred for legal, accounting,
engineering, appraisal, surveying and other similar services.
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17.2 Verify if the amounts are material and examine contracts to check the detailed
description of the exact professional services rendered.
17.4 Determine charges for research and experimental expenses. These items should
form part of the cost of patents, trade-marks and copyrights and other
intangible assets subject to amortization.
18.2 For individuals, ascertain if his claim for insurance premiums on health and/or
hospitalization insurance, including for his family, does not exceed two
thousand four hundred pesos (P2,400) during the taxable year, provided that:
b. Only the spouse claiming the additional exemption for dependents shall
be entitled to this deduction.
18.3 Determine if the employee is the beneficiary of the insurance. Otherwise, the
premiums paid shall be treated as an additional salary provided that it is
reasonable.
18.4 Check the account if it includes fire insurance, burglary insurance and other
policies on officer's/stockholder's personal and real properties.
19.2 Examine the receipts issued by the utility companies. Compare the same with
the amounts claimed per return. Investigate material discrepancies.
19.3 Determine if there are personal expenses included in the expense account.
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19.4 Relate the expense consumption against sales and production to determine any
possible underdeclaration of sales.
20.3 Ascertain if the miscellaneous expenses claimed do not contain any personal
items.
XI. Audit of Minimum Corporate Income Tax and Improperly Accumulated Earnings Tax
Pursuant to Section 27 (E)(1) of the Tax Code, a minimum corporate income tax
(MCIT) of two percent (2%) of the gross income as of the end of the taxable year is imposed
on a corporation taxable under Title II of the Tax Code, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business operations,
when the minimum income tax is greater than the tax computed under Section 27 (A) of the
Tax Code. Any excess of the minimum corporate income over the normal income tax shall be
carried forward and credited against the normal income tax for the three (3) immediately
succeeding taxable years.
The verification of the minimum corporate income tax may be conducted as follows:
1. Determine the taxability of the taxpayer to the MCIT. The MCIT shall apply to
domestic and resident foreign corporations subject to the normal corporate
income tax and shall not be imposed upon any of the following:
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system units and other depository banks under the foreign currency
deposit system, including their interest income from foreign currency
loans granted to residents of the Philippines under the expanded foreign
currency deposit system, subject to final income tax at ten percent
(10%) of such income;
1.7 Firms that are taxed under a special income tax regime such as those in
accordance with RA Nos. 7916 and 7227.
2.1.2 Exclude items of sale specifically exempt from income tax, and
those passive income subject to special tax rates.
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2.2 Verify correctness of the claim for cost of goods sold. Ensure that only
business expenses directly incurred to produce the merchandise to bring
them to their present location and use or to provide the contracted
services are included in this account.
3. Determine the period when the taxpayer becomes subject to the minimum
corporate income tax.
3.2 Verify the year of taxpayer's registration with the BIR to ascertain
whether or not it is subject to MCIT:
a. Firms registered with BIR in 1994 and earlier years are covered
by the MCIT beginning January 1, 1998.
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30, 1998.
3.3 Ascertain whether the first taxable period under the MCIT of the
taxpayer using fiscal-year accounting covers month/months in 1997
prior to the imposition of MCIT. Be sure that the computed MCIT due
for 1998 using the apportionment formula is correct.
4. Verify if the taxpayer is entitled to the relief from the imposition of the MCIT
and secure documentary proof for the suspension of its imposition as approved
by the Secretary of Finance.
5. Check accuracy of the amount of excess MCIT carried over and credited
against the normal tax within the three (3) immediately succeeding years from
payment thereof, if any. See to it that any excess MCIT are not claimed against
MCIT itself or against any other losses.
2.1 Look into the following factors to ascertain if the accumulated profits
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are reasonably needed in the business:
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result in reduction of capital instead of reduction of earnings
and profits.
2.7 Secure copies of the board resolutions and verify therefrom any
existence of undue accumulation of profits, correlating the findings
with the plans per resolution as against the business activities and
dealings made by the corporation.
2.3 Require the taxpayer to submit documentary proof negating the clear
preponderance of evidence that the profits were permitted to
accumulate beyond the reasonable needs of the company's business.
The accumulation of surplus for the reasonable needs of the business is
not prevented if the purpose is not to prevent the imposition of the tax
upon the shareholders. Undistributed income may be considered as
properly accumulated in the following cases:
3.3 Deduct dividends actually or constructively paid and income tax paid
for the taxable year from the adjusted taxable income.
Compute the 10% surtax based on the adjusted improperly accumulated taxable
income. The computation of the surtax shall be made on a year-to-year basis depending on the
thorough evaluation of the circumstances proving that the company has indeed permitted itself
to accumulate earnings or profits beyond the reasonable needs of the business.
The use of computers to process accounting data has a significant effect on the audit
skills of the Revenue Officer. The ability to understand and evaluate the taxpayer's
information technology (IT) is important. The Revenue Officer must understand the flow of
accounting data or audit trails on a computerized system to conduct a quality audit.
Auditing computer records require basic techniques used in auditing manual books and
records. There is still a need to:
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b. Interview the taxpayer;
e. Reconcile the information reflected in the books, financial statements and the
tax returns;
k. Apply sound accounting principles, relevant provisions of the Tax Code and
existing revenue issuances to reach the proper conclusion regarding the data
examined.
As part of the initial interview, the Revenue Officer should ask questions to achieve a
clear understanding of the taxpayer's books and records, such as:
b. Determine who authorizes the debit and credit of certain accounts and
write-off of certain transactions.
c. Determine who encodes the accounting transactions. If the same person enters
both the payables and the receivables, there is no segregation of functions. This
would allow one person to perpetuate or conceal errors by controlling the
offsetting of debits and credits.
d. Find out what reports are generated and how often these are generated.
Identify management reports which may be utilized to disclose audit findings.
In addition to asking the taxpayer about the particular information system, the
Revenue Officer must study the software manual. The manual will tell how the system works
and the types of reports available. The Revenue Officer shall determine the reasonable time to
be spent in reviewing the software capabilities.
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C. Audit Techniques For Computer Produced Records
The traditional audit approach to audit double-entry books and records is to scan
through the general ledger and note any unusual entries. The purpose of this scanning is to
identify entries in the computerized general ledger which are unusual due to the amount,
source or nature.
1. Unusual in Amount
2. Unusual by Source
The basic technique for detecting entries to accounts from unusual sources consists of
comparing monthly posting summaries from each source with the chart of accounts. A
computerized system will utilize monthly posting summaries. These summaries will show
monthly changes to an account, most often by account number and originating journal. By
comparing the accounts which show monthly changes with the chart of accounts, posting to
unusual accounts can be detected. Scan the accounts payable listings for vendors that appear
personal in nature.
3. Unusual by Nature
The basic technique for detecting entries to accounts, which are unusual by nature,
involves the same process as shown for detecting entries from unusual sources. You are
looking for debit posting to accounts which normally contain only credit posting and vice
versa. An example would be a debit to a sales account, which could be a bad debt written-off.
Accounts which exist at the beginning of the year and not at the end might indicate
unauthorized accounting changes.
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Over the years, the Bureau of Internal Revenue has developed the following general
methods for reconstructing a taxpayer's income.
A. Percentage method
A. Percentage Method
1. Percentage Mark-up
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each group of items to arrive at the gross receipts.
Once the gross receipts are determined, the taxpayer should be given
the opportunity to explain the discrepancy noted between the reconstructed
gross receipts and the amounts reflected in the books and in the tax returns.
The taxpayer may argue that the percentage mark-up should not be applied to
purchases which were stolen, broken or spoiled.
3. Profit Margin
Net Income
= Profit Margin
Net Sales
If the profit margin is low, this will indicate that the firm's sales prices
are relatively low or that its costs are relatively high or both.
e. Inventory Turnover
Inventory turnover=
Sales
Total Assets
or
Cost of Sales
Beg. Invty. + End Invty./2
If the turnover is low, the company could be holding damaged or obsolete materials
not actually worth their stated volume.
Average inventory at a given point X turnover rate = total purchases during the year.
The fact that the taxpayer's books and records accurately reflect the figures on the
income and business tax returns does not prevent the use of the net worth method of proof.
The Revenue Officer can still look beyond the "self-serving declaration" in the taxpayer's
books and records and use any evidences available to contravene their accuracy. However,
this net worth method is most often used when one or more of the following conditions
prevail:
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This is a method of reconstructing income which is based on the theory that if the
taxpayer's net worth has increased in a given year in an amount larger than his reported
income, he had understated his income for that year.
In applying this method, it is important to establish the net worth on a fixed starting
date. This is to erase doubts that the increase in net worth or the excess of expenditures over
reported income did not originate from prior accumulated funds (i.e. hoarded cash or
undisclosed assets which do not represent income during the tax year).
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property under Sec. 40
of the Tax Code xxx
Social Security benefits
received from foreign
gov't. and institutions
(PD220) xxx
Other non-taxable items xxx
Total non-taxable items xxx
Adjusted net income per investigation xxx
Less: Statutory Exemptions: xxx
1. Exemption of Working
Wife xxx
2. Personal and addt'l.
exemption xxx
3. Special additional
exemption xxx
Total Statutory exemption xxx
NET INCOME SUBJECT TO TAX xxx
===
2. Burden of Proof
The "Net Worth" method to be acceptable must establish with reasonable certainty an
opening net worth, to serve as a starting point from which to compute future increases in the
taxpayer's assets. It must also introduce evidence to support the inference that the taxpayer's
net increases are attributable to currently taxable income.
In computing the increase, the taxpayer's assets are totalled and net worth as
determined at the close of the previous taxable year is subtracted from the total at the close of
the taxable year in question. The remainder, if .any, is the increase for the taxable year, and
constitutes taxable income if no adjustments are required.
However, where net worth increase is the income determinant the Revenue Officer
may, in making the final computation upon which to base the tax, add to the increase
estimated living expenses incurred by the taxpayer since such expenditures are presumed to
have come from income. The taxpayer, on the other hand, is entitled to reduce the
reconstructed income by the amount of depreciation allowable on assets which are not
considered in determining net worth.
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The factors to be considered in reconstructing net worth are variable, like availability
of evidence. Generally, net worth has been computed on the basis of some, all or a
combination of the following:
a. bank records
b. securities
c. financial statements
d. fixed assets
e. inventory
The difficulty of establishing the opening net worth of a taxpayer has led to the use of
the Cohan rule to estimate or approximate the amount of cash at that time. The Cohan rule
(established by the US Seventh Circuit Court of Appeals in Cohan vs. Commissioner) allows
the use of estimates where the taxpayer lacks adequate records.
When the taxpayer's records are apparently inaccurate or manifestly incomplete, the
Revenue Officer may look at the bank deposits of the taxpayer as evidence income. Under the
bank deposit method, the bank records of the taxpayer are analyzed and the Revenue Officer
estimates income on the basis of the total bank deposits after eliminating non-income items.
This method stands on the premise that deposits represent taxable income unless otherwise
explained as being-non-taxable items. This method can be used if the Revenue Officer has
been allowed access to the taxpayer's bank records or if the Revenue Officer has obtained
documented evidence from reliable sources as to the taxpayer's bank accounts. cSATEH
While the mere deposit of money does not prove the receipt of taxable income as
alleged by the Revenue Officer, the burden is on the taxpayer to prove that various deposits
did not stem from the receipt of taxable income. The passage of time makes it difficult for the
taxpayer to meet this burden but this does not relieve him from showing the non-taxable
source to contradict the Revenue Officer's determination. If the bank deposit method is used
in support of findings of fraud, however, the burden of proof is on the Revenue Officer.
When computing taxable income under this method, it is appropriate to add to the
amount of the bank deposit the amount of cash expenditures from undeposited funds for
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personal expenses which is non-deductible for tax purposes. Withdrawals which can be
identified as deductible are allowed against the taxable income determined.
In using this method, it is proper to prove the existence of a business and the practice
of making deposit of business income into one or more bank accounts and then to adjust the
total deposits for transfers, redeposits, deposits otherwise explained and finally to allow for
ascertainable expenses, deductions and exemptions.
The Revenue Officer's careful analysis of the taxpayer's bank deposits constitutes the
most important phase of his investigation. A review of the taxpayer's personal and business
bank records for several months should be made. The following questions should be answered
in analyzing the taxpayer's deposits:
1.1 Are deposits made on a basis consistent with the information secured during
the initial interview?
1.3 Are there any deposits from sources not reflected on the tax return?
1.4 Did the examination of the taxpayer's cancelled checks reveal additional bank
accounts not previously disclosed by the taxpayer?
1.5 Are there checks endorsed by the taxpayer and deposited into an account not
previously disclosed?
1.6 Are there checks for assets or personal expenses that affect the taxpayer's
standard of living?
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c. Personal expenses
paid in cash (sch. 3) xxx
d. Cash accumulated
during the year from
receipts xxx
e. Increase in
Accounts Receivable xxx
f. Decrease in accounts
payable xxx xxx
Total xxx
Less: Non-taxable cash used in
(a) thru (d) xxx
Decrease in accounts
receivable xxx
Increase in accounts
payable xxx xxx
Gross Receipts xxx
===
Schedule 1 Non-Taxable Receipts include:
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Schedule 3 Personal Expenses Paid in Cash
Total personal expenses xxx
Less: Business expenses paid in cash (xxx)
Personal expenses paid in cash xxx
===
Deposits may represent redeposited items and loans, in which case, taxable income as
determined by the Revenue Officer should be reduced by such amounts. When there is
evidence that some of the deposits were for non-taxable items and as such, there is no proof
of the precise amount of taxable income, the Cohan principle may be resorted to. Deposits
may also be shown to represent amounts on hand at the start of the year in which they are
deposited rather than income in that year.
The bank deposit method, like the net worth method, encompasses an area of
uncertainty. Though the taxpayer's records are inadequate for precise and complete
verification of its return, a determination of income by the bank deposit method will be
rejected if it is inconsistent with surrounding circumstances and gives an absurd result.
An outgrowth of the net worth method of determining income is the "excess cash
expenditure method. This method assumes that the excess of a taxpayer's expenditures during
a tax period over his reported income for that period is taxable to the extent not approved
otherwise. The taxpayer may show that this excess resulted from non-taxable items such as
loans, gifts, inheritance or assets on hand at the beginning of the period.
While it has been said that no opening net worth is needed when the cash expenditure
method is used, the more impressive authority is to the contrary. The two steps involved in
the cash expenditure method are: a) valuation of the taxpayer's assets at the beginning of the
taxable period in order to determine the taxpayer's funds available for expenditure during the
ensuing taxable periods and b) determination of the amount by which expenditures exceed
reported income for the taxable period. To show a failure to report the full amount of income
by the use of this method, it must be demonstrated that the expenditures made during the
taxable year were in excess of the available funds during the year which were reported on the
tax return.
Total expenditures may not include checks drawn to cash and items for which the
taxpayer has paid in cash, unless the cash bank withdrawals were not used to pay for the cash
expenditure. The burden is on the taxpayer to establish the relationship between the cash
withdrawal and individual items. Expenditures may not necessarily come from income, but
very large expenditures for personal purposes each year may be interpreted as an indication
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that the income being reported was too small.
Consideration must be given to non-taxable sources of cash. Here, too, the difficulty
of establishing the amount of cash at the starting point has led to the use of Cohan rule to
estimate the cash available at the opening of the taxable period. The method has to be rejected
when it gives an unrealistic result.
Proof in cash expenditure case may be difficult, for it is highly unusual for anyone to
keep accurate records of personal living expenses. However, once the Revenue Officer has
made a determination as to the amount of cash expenditures, the burden of proof to establish
a different amount is on the taxpayer.
Third party contacts are a source of information that should not be forgotten. The
Revenue Officer should determine when to make third party inquiries. The decision to make a
third party inquiry is shaped by the size of the peso amount involved and the volume of the
transaction. Third party inquiry through access to records can be time consuming. The
Revenue Officer must weigh the benefits to be realized from work against the time required to
make an access to records and the availability of the needed information through other
methods. The need for the Revenue Officer to obtain third party information is most often
involved in our attempts to verify gross receipts.
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XIV. Audit Procedures on Other Kinds of Taxes
A. Withholding Taxes
The audit procedures are classified according to the classification of withholding taxes,
to wit:
1.1 Verify the number and list of employees per payroll records and the list
of employees submitted to the Social Security System and the
Department of Labor and Employment as against the alphalist of
employees from whom taxes have been withheld which is attached to
the annual information return (BIR Form 1604CF).
2.1 Check amount payable or paid per income statement and income tax
returns (BIR Forms 1701 and 1701Q) against those declared in the
monthly and annual returns (BIR Forms 1601E and 1604E).
2.3 Verify the correctness of the payee classification and withholding tax
rate applied.
2.5 Determine the dates of payment or the period when the obligation to
pay the amount subject to withholding tax is due. The time to withhold
is fixed at the time the obligation is due irrespective of the actual
payment. SHacCD
3.1 Review the contracts for payment of certain items of income to resident
and non-resident payees of interest and rent, Central Bank approval
papers, commercial papers, employment contracts, contract for
payment of royalties, records of prizes or winnings and financial
statements.
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the year it was accrued, irrespective of whether the taxes withheld were
remitted within ten (10) days following the month in which the payment
was accrued. In the case of withholding tax on interest on bank
deposits, the remittance shall be made quarterly within twenty five (25)
days after the end of each quarter.
3.3 Check the correctness of the basis and rate of withholding tax applied.
3.3.1 If a preferential tax rate is being availed of, verify the correctness of the
rate used from the ruling issued either by the International Tax Affairs
Division (ITAD) or Law Division. Also verify the authenticity of said
ruling from the issuing office.
3.4 Ascertain the date of accrual of the income payment, to fix the time to
withhold, irrespective of the actual remittance or non-remittance of the
tax withheld by reason of official restriction.
4.4 Check whether the correct amount of tax has been withheld and
remitted within the prescribed period. Otherwise, impose appropriate
penalties for non-withholding or non-remittance of the tax, as the case
may be.
This Section equips the Revenue Officer with minimum audit steps prescribed by
existing revenue issuances in the proper determination of the correct capital gains tax due on
sale, transfer or exchange of real properties. Additional audit techniques must be employed by
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the Revenue Officer depending on the complexity and materiality of the transactions involved.
1.4 Whether the proceeds of the sale or disposition was fully utilized in
acquiring or constructing a new principal residence of the seller; and
2.2.1 The historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built;
2.2.3 The exemption from capital gains tax shall be availed of only
once in every ten (10) years; and
2.2.4 In case where the proceeds of the sale or disposition is not fully
utilized, the portion for the unutilized part shall be subjected to
tax using the formula:
Gross Selling Price or Fair Market Value
(whichever is higher) x Unutilized
Amount
X 6%
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Gross Selling Price
3. For disposition of real property without any improvement, obtain a certificate
from the City/Provincial/Municipal Assessor on the non-existence of
improvement on the real property being sold, transferred or exchanged.
5. If the seller is a non-resident alien claiming exemption from paying the capital
gains tax, check the existence of a ruling issued to that effect pursuant to RMO
1-2000. Also verify the authenticity of said ruling from the issuing office.
6. Review computation of the tax base for land and improvement in accordance
with the following:
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Construction xxx
Value of Improvements xxx
===
c. Improvements introduced in 1985 and prior years, and in cases
of improvements in places other than the National Capital
Region and chartered cities where there is no building permit
and/or occupancy permit, use the following formula:
Fair Market Value (FMV) per latest
tax declaration xxx
Add: 100% of the FMV of the
improvements per latest tax
declaration, if classified as
residential or agricultural other
than fishpond/prawn farm xxx
or
150% of FMV of the
improvements per latest tax
declaration, if classified as
commercial, industrial and/or
agricultural devoted to
fishpond/prawn farm xxx
Value of improvements xxx
6.1.2 Determine tax base of land and improvements as follows:
Zonal value of land xxx
Add: Value of
Improvement under
a, b or c of 6.1.1, as
applicable xxx
Tax base of land and
improvements xxx
===
6.2 When the zonal value of land has not been established
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of land and improvement
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7. In case of installment sales, determine whether the taxpayer is qualified to
report his gain under the installment basis. An individual is qualified to account
for his gain on installment basis if the initial payment does not exceed 25% of
the selling price. The term "initial payment" means the payment or payments
which the seller receives before or upon execution of the instrument of sale and
payments which he expects or is scheduled to receive in cash or property
(other than evidence of indebtedness of the purchaser) during the taxable year
of sale or disposition. HcSaTI
If the taxpayer qualifies and elects to pay the capital gains tax in
installments, the tax may be paid in installments, the amount of each
installment of which shall be the proportion of the tax so determined
which are:
Illustrations:
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Selling Price P100,000
Total Tax
Due at
6% thereof P6,000
Portion of the tax payable upon sale or upon receipt of first payment is
determined as follows:
[First payment/Contract price] x Total
Tax Due = Portion of Tax Payable
or
Portion of the tax payable annually for five years beginning 1999 is
computed as follows:
a. Installment payment
received P16,000
b. Total selling price P100,000
c. Total capital gains tax P6,000
d. Amount payable
annually (a) divided by
(b) multiplied by (c) P960
Example 2. Assume that in 1969, an individual acquired a property for
P60,000. In 1999, he sold the property for P100,000. Terms of sale:
Downpayment, January 2, 1998, P10,000; mortgage assumed, P40,000;
balance payable in four annual installments beginning January 2, 1998. The
taxpayer elects to pay the tax on the gain in installments.
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Total contract price:
Selling Price P100,000
Less: Mortgage
assumed by buyer 40,000
Total contract
price 60,000
Total capital
gains tax due P6,000
Amount of tax payable:
[P10,000/P60,000] x P6,000 = P1,000
=======
Amount of succeeding tax payments:
Annual installment
receipts P12,500
Total contract price P60,000
Total capital gains tax P6,000
Annual tax payable on installments:
[P12,500/P60,000] x P6,000
= P1,250
Example 3. Assume that in 1998, an individual sold for P100,000 a
piece of real property which he bought in 1980 for P40,000. Prior to sale, the
property was mortgaged for P60,000. The terms of sale are as follows:
Downpayment, P10,000; assumption of unpaid mortgage, P50,000; balance of
P40,000 payable in four semi-annual payments beginning January 15, 1999.
The taxpayer elects to pay the tax in installments. Amount of tax payable in
installments is computed as follows:
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Computation of tax payment in the year of sale:
First payment:
Cash P10,000
Excess of mortgage
assumed by buyer
over the
acquisition cost
(P50,000-P40,000) 10,000
Total first payment 20,000
=======
Total Contract Price:
Selling Price P100,000
Less: Mortgage
Assumed 50,000
P50,000
Add: Excess of
mortgage
assumed
over basis of
property sold 10,000
Total contract price P60,000
=======
Total basis of tax payable on first payment:
First payment P20,000
Contract Price P60,000
Total capital gains tax P60,000
Amount of tax payable on first payment:
P20,000/P60,000 x P6,000
= P2,000
Basis of tax payable on succeeding semi-annual payments:
Installment
received P10,000
Total contract
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price P60,000
Total tax due P6,000
Amount of tax payable semi-annually:
[P10,000/P60,000] x 6,000 = P1,000
======
8. Confirm payment of Capital Gains Tax by cross-checking the payment thereof
with the Batch Control Sheet prepared by the bank or the Collection Officer,
as the case may be.
If the taxpayer cannot show proofs that the same is not ante-dated, the
rules applicable at the time of presentation of the document shall apply.
C. Estate Tax
The following audit procedures were culled from existing revenue issuances. They
enumerate the steps to be taken by a Revenue Officer in the processing, verification and
investigation of estate tax returns of resident and non-resident decedents subject to estate tax.
However, these do not preclude the application of other audit procedures as warranted by the
circumstances surrounding each case.
1. The estate tax return of a decedent and all his unverified income tax returns for
the last three years prior to his death shall be simultaneously investigated by a
Revenue Officer or a group of Revenue Officers, if so provided in the annual
Audit Program. SEcTHA
2.1 An income tax return for the estate as a taxable person has been filed
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by the fiduciary or administrator; and
2.2 Individual returns for the spouse, heirs or beneficiaries have been filed
covering their respective income from the estate and applicable
deductions for the period from the date immediately following the
death of the decedent to the end of the taxable year.
The estate's income tax return shall cover the income and
deductions of the estate for the period from the date immediately
following the death of the decedent to the end of the taxable year.
Thereafter, quarterly and annual returns for the estate shall be filed until
the estate is divided and distributed to the rightful heirs and
beneficiaries.
4. Verify if a Notice of Death was filed within two (2) months after the decedent's
death where the gross value of the estate exceeds twenty thousand pesos
(P20,000). In case of failure to file the notice, impose the appropriate penalty
even after the lapse of the prescribed period of two (2) months after the
qualification of the executor or administrator. This contemplates the filing of
the estate proceedings in courts and the appointment of the executor or
administrator by the court.
5. Determine if the value of the gross estate exceeds two million pesos
(P2,000,000). If so, check whether the estate tax return is supported by a
statement duly certified by a Certified Public Accountant showing the
following information:
5.1 Itemized assets of the decedent with their corresponding gross value at
the time of his death, or in the case of a non-resident alien, of that part
of his gross estate situated in the Philippines;
5.2 Itemized deductions from gross estate allowed under Sec. 86 (A) of the
Tax Code; and
5.3 The amount of tax due whether paid or still due and outstanding.
6. Examine the inventory of assets and/or liabilities not reported in the said
return. Prepare an adjusted schedule of assets and liabilities as basis in
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computing the yearly increase in the net worth of the taxpayer up to the time of
his death.
8. Scrutinize the provisions of the insurance policies taken out by the deceased
upon his own life as to the designation of the beneficiary. If the designation is
revocable, the proceeds of the life insurance shall be included in the gross
estate. If irrevocable, the proceeds thereof shall be excluded from the gross
estate, irrespective of whether or not the insured retained the power of
revocation, if the beneficiary named in the policy is the estate of the decedent.
9. Verify if the land, as part of gross estate specially urban land, include
improvements and buildings. Secure a certification from the Assessor's Officer
as to the existence of non-existence of improvements on the land. Conduct an
ocular inspection of the land whenever possible.
10. Conduct third party verification on certain government agencies such as Office
of the Register of Deeds, Securities and Exchange Commission, Land
Transportation Office, Office of the Provincial, City or Municipal Assessor for
possible properties listed and registered in the name of the decedent which may
not have been included in the estate tax return.
11. Inquire into the bank deposits or other investments of the decedent. Pursuant
to Sec. 6 (F)(1) of the Tax Code, the Commissioner is authorized to look into
the bank deposits of a decedent for estate tax purposes, the provisions of
Republic Act No. 1405 and other general or special laws notwithstanding.
Foreign currency deposits, if any, shall be converted using the foreign
exchange rate.
12. Ascertain if the shares of stocks are properly valued. In doing so, observe the
following rules on valuation pursuant to RAMO No. 1-82:
12.1.1 The selling price shall be used where there are sales made on
the valuation date. The mean between the highest and lowest
selling prices on valuation dates shall be the fair market value
per share.
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12.1.2 If there were no sales on the valuation date but there were sales
on dates within a reasonable period both before and after the
valuation date, the fair market value is determined by taking the
weighted average of the mean between the highest and the
lowest sales in the nearest trading date after the valuation date.
The weighted average is to be computed inversely by the
respective number of trading days between the selling dates and
the valuation date. The reasonable period of valuation must not
exceed six months before or after the valuation date.
Example:
12.1.4 If there are no sales or bonafide bid and asked prices available
on a date within a reasonable period before the valuation date,
but such prices are available on a date within a reasonable
period after the valuation date, then the mean between the
highest and lowest available sale prices or bid and asked prices
nearest the valuation date may be taken as the value of shares.
DHIcET
12.2 For unlisted stocks or stocks not quoted or traded in the stock market:
12.2.2 In case the shares are valued on a basis lower than their book
values, a justification for the deviation from the book value,
together with the evidences in support thereof should be
submitted. The following factors are considered relevant in the
valuation of shares of stock of closed corporations:
f. Goodwill;
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stock;
l. Dividend arrearages;
13. Audit of itemized deductions under Section 86 (A) of the Tax Code:
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Insurance (MRI). If so, disallow deduction claimed.
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13.4 Claims Against Insolvent Persons
13.5.1 The prior decedent must have died or the donation must have
been made within five (5) years before the decedent's death. acCITS
13.5.4 The estate tax or donor's tax due on the donation or estate of
the prior decedent must have been paid.
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13.7 Losses
13.7.1 The value of the property lost must have been included in the
gross estate.
13.7.2 The loss must not have been compensated for by insurance, in
whole or in part.
13.7.3 The loss must not have been claimed as a deduction for income
tax.
13.7.4 The loss must have been incurred not later than six (6) months
after the decedent's death.
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to the fair market value or zonal value of the family
home as declared or included in the gross estate but not
exceeding P1,000,000.
To illustrate:
c. Same facts and figures as in (b) except for family home which has a fair market
value/zonal value of only P1,500,000.
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Exclusive Conjugal Total
Conjugal Properties:
Other real properties P3,000,000 P3,000,000
Family home 1,000,000 1,000,000
Exclusive Real Properties
Other real properties P2,000,000
Family lot 400,000 2,400,000
Gross Estate P2,400,000 P4,000,000 P6,400,000
(Less): Deductions:
Other deductions (1,000,000) (1,000,000)
Share of surviving
spouse
Conjugal properties P4,000,000
Less: Conjugal
Deductions 1,000,000
Net conjugal estate P3,000,000
Share of surviving (1,500,000) (1,500,000)
spouse
Family home and lot P400,000 (500,000) (900,000)
(P500,000 + P400,000)
Standard deduction (1,000,000) (1,000,000)
Net Taxable Estate P2,000,000 P- P2,000,000
========= ========= ========
3. Family home is conjugal property and both spouses died in the same year, leaving
three (3) children:
a. Estate of HUSBAND:
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Gross Estate 5,000,000 12,000,000 P17,000,000
(Less): Deductions:
Conjugal deductions 4,000,000 4,000,000
Net Estate 5,000,000 8,000,000 P13,000,000
Less: Share of surviving spouse (4,000,000) (4,000,000)
Family home (1,000,000) (1,000,000)
Standard deduction (1,000,000) (1,000,000)
Net Taxable Estate 5,000,000 P2,000,000 P7,000,0000
========= ========= =========
b. Estate of WIFE:
Inherited Share from
Portion from Conjugal Total
Husband Estate
Conjugal real properties P750,000 * P3,000,000 P3,750,000
Conjugal personal properties 500,000 * 2,000,000 2.500,000
Family home 250,000 * 1,000,000 1,250,000
Exclusive properties 1,000,000 - 1,000,000
Paraphernal/exclusive personal
properties 250,000 - 250,000
Gross Estate P2,750,000 P6,000,000 P8,750,000
(Less): Deductions:
Other deductions P500,000(2,000,000) (1,000,000)
Family home (1,000,000) (2,500,000)
Standard deduction (1,000,000) (1,000,000)
Vanishing deduction ** (1,964,286) (1,964,268)
Net taxable estate P285,714 P2,000,000 P2,285,714
======== ========= ========
* In addition to of the gross estate, the wife had a share as inheritance from the
husband equivalent to the share of each child. Hence, since there were 3 children, the
wife had a share of 1/4 on the other half of the estate. cDCSET
** Vanishing deduction:
Inherited properties P2,750,000
Less: 2,750,000 x P2,500,000 =
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8,750,000 785,714
Amount subject to vanishing deduction P1,964,286
100% Vanishing Deduction P1,964,286
========
13.9 Standard Deduction
D. Donor's Tax
1. Determine if the donor's tax return has been filed within thirty (30) days from
the date of donation. If not, impose penalties incident to late filing and late
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payment of tax.
2. Verify if the donor has made previous donations during the same taxable year
from existing records available in the Revenue District Office or the
Assessment Division for purpose of determining how much is the gross gift to
date.
6. Ascertain whether the gross gift has been valued either at adjusted fair market
value or zonal value, whichever is higher, at the time of the donation.
7. Determine the relation between the donor and the donee for the imposition of
the proper donor's tax rate.
8. Verify if the donation of the land includes improvements and buildings. Secure
a certification from the Assessor's Office as to the existence or non-existence
of improvements on the real property donated. Donation of land ordinarily
includes the improvements unless specifically excluded in the Deed of
Donation.
9.1 Ascertain the correct balance of the indebtedness as of the time of the
donation.
9.2 Verify the genuineness of the deduction claimed and require the
submission of pertinent documents in support of the deduction.
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9.3 Verify if the assumption of the liability is expressly stipulated in the
Deed of Donation and is duly accepted by the donee. Otherwise, the
claimed deduction should be disallowed.
A. Jurisdiction
1.1 The Tax Fraud Division (TFD) shall have jurisdiction to conduct or
undertake the investigation and/or reinvestigation of cases referred to
or developed by the Division, and those assigned referred or approved
by the Commissioner of Internal Revenue.
2.1 The SID shall have jurisdiction over the following cases:
B. Procedures
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The formal fraud investigation, which includes the examination of the taxpayers' books
of accounts through the issuance of Letters of Authority, shall be conducted only after the
prima facie existence of fraud has been established.
1.3 All other reports on cases not recommended for criminal prosecution
shall be forwarded to the Commissioner, through the ES, for approval.
2.1 The Chief of the SID shall issue the corresponding Letter of Authority
if the prima facie existence of fraud has been established, and the same
has been confirmed by the Regional Tax Fraud Committee (RTFC),
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composed of the following:
The RDO shall then desist from issuing any Letter of Authority
to the taxpayer concerned, and shall transmit to the SID all the
documents in its possession relative thereto.
2.2 Where the SID has established the prima facie existence of fraud
against a taxpayer who has been the subject of an on-going or
terminated investigation by the RDO, the SID shall nevertheless
forward the records of the case for evaluation to the RTFC.
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Internal Revenue.
2.3 Where the business activities and/or establishments are situated in more
than one revenue region, the tax fraud case must be referred to the
TFD through the IIS.
4. The RDO shall then assign a RARO to assist and coordinate with the
SID in the investigation of the said case.
A. Civil Fraud
In the case the quantum of evidence gathered does not warrant a criminal prosecution
because it is not sufficient to prove the guilt of the taxpayer beyond reasonable doubt, but
there exists a clear and convincing evidence that fraud has been committed, a corresponding
50% surcharge shall nevertheless be imposed.
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by the Revenue Officer assigned to the tax case. During this time, the Revenue Officer and his
supervisor explain to the taxpayer how the assessment of his tax liability was arrived at. If
necessary, the records of the case shall be presented to the taxpayer to document the Revenue
Officer's findings. The taxpayer shall then be allowed to examine such records and to present
his arguments. If the taxpayer agrees with the audit findings, he shall be made to sign an
Agreement Form. If not, the Revenue Officer shall give the taxpayer enough time to
document his objections to the proposed assessment. In both cases, the report of investigation
shall be prepared and submitted to the Revenue District Officer for review and pre-approval
prior to final review by the Assessment Division of the Regional Office or by the concerned
office in the National Office (NO) for cases investigated by the audit divisions/teams in the
NO.
Upon receipt of the report of investigation, the Revenue District Officer (RDO) or
head of the audit division/team in the NO shall send to the taxpayer a notice for informal
conference. The notice should be accompanied by a summary of the Revenue Officer's
findings.
The notice shall be made in writing and sent to the taxpayer at the address indicated in
his return or his last known address. This notice, however, may be dispensed with in case the
taxpayer agrees in writing to the proposed assessment, or where such proposed assessment
has been paid. EHCDSI
In case the taxpayer responds to the notice within the period prescribed in the informal
conference letter, he or his duly authorized representative shall again be allowed to examine
the records of the case and to present his arguments in writing protesting the proposed
assessment. Thereafter, the RDO or head of office/team shall, on the basis of the evidence on
record, decide whether or not to approve the report before forwarding it to the Assessment
Division or concerned office in the NO for approval and issuance of the corresponding
Termination Letter or Assessment Notice, as the case may be.
In the event the taxpayer fails to respond to the notice for informal conference within
the prescribed period, or when the response is found to be without merit, the report of
investigation shall be given due course and shall be forwarded to the Assessment Division or
to the concerned office in the NO for review.
The Revenue Officer is required to make a report after the investigation/audit has been
conducted. Before starting to write a report, the Revenue Officer should have in mind a
definite outline as to arrangement in which the facts and evidence may be presented in the
most effective manner. A good general plan is to state the problem, present the results of the
investigation and set forth the conclusions and recommendations.
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The report to be prepared by the Revenue Officer in the conduct of his investigation
shall contain the following:
This form, which shall be duly accomplished by the Revenue Officer, indicates the
dates when the docket was received and acted upon.
B. Table of Contents
The table of contents shall indicate the description and page number of each and every
document attached to the report.
C. Narrative Report
This is a memorandum report prepared and submitted by the Revenue Officer. The
narrative report shall contain the following:
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2.4 the authorized representative of the taxpayer; and
4. A recommendation for:
These forms are required to be accomplished properly and accurately by the Revenue
Officer in reporting the results of investigation/verification. BIR Forms 1717 are used for
non-computerized district offices while BIR Forms 0500 are prescribed for computerized
districts under the BIR's Integrated Tax System (ITS).
BIR Form 1717A/0500 This form shall be accomplished by all Revenue Officers in
reporting results of investigation/verification of income tax liabilities of taxpayers.
E. Working Papers
Working papers form the most important portion of a report as they provide all the
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information on the investigation conducted. They are the best evidence of the scope of the
investigation and the diligence with which it was completed. They further constitute the basis
for the Revenue Officer's determination of tax liability.
The working papers should include all notes made before, during, and after a tax
investigation, which relates to his findings on a particular tax return and shall include items
raised during the analysis of the return as possible issues. It should also include explanations
on the various observations and analyses of pertinent schedules and information.
Working papers prepared by the Revenue Officer are used as sources of a more
detailed information, which he may use later on as a witness in court in case of litigation. The
properly concluded examination should therefore be reflected by adequate working papers.
Memory should not be relied upon in recounting the facts determined in the investigation.
There is no better way to present the fact that an item or issue has been extensively explored
on except by significant notes in the working papers.
Each of the working papers should be labeled clearly showing the name of the
taxpayer, year of examination, date prepared and the signature of the Revenue Officer should
appear on each page. The pages should be numbered and prepared in the Revenue Officer's
own handwriting.
The requirement is that the working papers should document whatever transpired
during the examination. This would include summaries or transcripts of accounts analyzed,
schedule of specific items checked, reconciliation of accounts, analysis of reserves and all
other pertinent notes of the work performed.
The basic working papers consist of, but are not limited to the following:
3. Reconciliation of net income per financial statements with the net income per
income tax return
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5. Schedule of taxes and licenses
6. Schedule of depreciation
Attachments consist of documents that are necessary to the proper understanding and
substantiation of results of the investigation. The documents to be attached to the dockets are
composed of but not limited to:
1. General Requirements
1.1 All tax returns with all the required attachments for the year/period
under audit;
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1.10 Photocopy of Payment Form and Official Receipt as evidence of
deficiency tax payment;
APPENDIX
ATTACHMENTS
June 9, 1995
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(amended by RMO 31-95)
A. OBJECTIVE
To provide the policies and rules in the manner of investigating tax fraud cases by the
Tax Fraud Division (TFD), Special Investigation Division (SIDs) and the Revenue District
Offices (RDOs) for criminal prosecution, and to avoid the multiple issuances of Letter of
Authority and/or simultaneous investigation of the same taxpayer covering the same taxable
year.
All revenue officers concerned shall be guided by the updated "Guidelines and
Investigative Procedures in the Development of Tax Fraud Cases for Internal Revenue
Officers", hereto attached as Annex "A".
B. JURISDICTION
1.1. The Tax Fraud Division shall have the jurisdiction to conduct or
undertake the investigation and/or reinvestigation of cases referred to or
developed by the Division, and those assigned, referred or approved by the
Commissioner of Internal Revenue.
2.1. The SID shall have jurisdiction over the following cases:
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immediately to the SID and provide assistance in the formal investigation
thereof.
C. PROCEDURE
The Formal Fraud Investigation, which includes the examination of the taxpayers
books of accounts through the issuance of Letters of Authority, shall be conducted only after
the prima facie existence of fraud has been established.
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Court's ruling in the case of Ungab vs. Cusi, 97 SCRA 877.
2.1. The Chief of the SID shall issue the corresponding Letter of
Authority if the prima facie existence of fraud has been established, and the same
has been confirmed by the Regional Tax Fraud Committee (RTFC), composed of
the following:
a. Regional Director Chairman
b. Chief, SID Member
c. RDO having jurisdiction over the taxpayer Member
d. Chief, Assessment Division Member
e. Chief, Legal Division Member
The RDO shall then desist from issuing any Letter of Authority to the
taxpayer concerned, and shall transmit to the SID all the documents in its
possession relative thereto.
However, the RDO may assign one Revenue Officer, whose name shall
be included in the Letter of Authority as the "RDO" Assisting Revenue
Officer" (RARO), to assist and coordinate with the SID in the formal
investigation.
2.2. Where the SID has established the prima facie existence of fraud
against a taxpayer who has been the subject of an on-going or terminated
investigation by the RDO, the SID shall nevertheless forward the record of the
records of the case for evaluation to the RTFC.
If after evaluation the RTFC confirms to the SID the prima facie
existence of fraud, the following procedures shall be followed:
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If a re-investigation is necessary, the SID shall forward the same to the
IIS with a recommendation for the issuance of the corresponding Letter
of Authority by the Commissioner of Internal Revenue.
3.2 The RDO shall then assign a RARO to assist and coordinate with
the SID in the investigation of the said case.
D. CIVIL FRAUD
In case the quantum of evidence gathered does not warrant a criminal prosecution
because it is not sufficient to prove the guilt of the taxpayer beyond reasonable doubt there
exists a clear and convincing evidence that fraud has been committed, a corresponding 50%
surcharge shall nevertheless be imposed.
E. ATTRIBUTION OF COLLECTION
All collections arising out of the investigations by the TFD and SID, the latter either
by itself or through coordination with the RDO, shall be attributed to the RDO having
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jurisdiction over the taxpayer.
F. PENAL CLAUSE
Strict compliance with this RMO is hereby enjoined. Any willful violation hereof shall
be treated as gave misconduct and the corresponding penalty of dismissal as provided under
Civil Service Rules and Regulations shall be imposed.
G. REPEALING CLAUSE
Any provision of any order and pertinent issuances inconsistent with his Order is
hereby revoked, modified or amended accordingly.
H. EFFECTIVITY
ANNEX "A"
A. OBJECTIVES:
The substantial revenue collections of the government derived from the series of tax
amnesties signify to a large that the BIR has not effectively tapped a great number of potential
sources of revenue. The tremendous shortfall in revenue collections for the preceding year
should spur the BIR on the need for a more systematic and vigorous tax campaign by instilling
more awareness and tax consciousness among our taxpayers, more especially those who have
continuously flaunted our revenue laws with impunity.
To provide a strong detergent to the commission of fraud against the revenues for the
purpose of increasing and enhancing our revenue collections, the imposition of criminal
sanctions, in addition to the civil liabilities, on erring taxpayers should be implemented to the
fullest extent of the law in line with the pronouncement of the President of the Philippines.
These guidelines are, therefore, presented to guide and to refresh all internal revenue
officers with the necessary know-how in the investigation, evaluation, and submission of
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reports of fraud cases envisioned to withstand judicial scrutiny.
Definition-fraud or evasion
Tax fraud or evasion means the elimination or reduction of one's correct and proper
tax by fraudulent means. "The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and deliberately done or resorted to
in order to induce another to give some legal right . . . "Aznar vs. CTA and Collector, G.R.
No. L-20569, Aug. 25, 1974.
All the following elements must be proven by competent evidences to establish the
existence of fraud:
1. The end to be achieved - the payment of less tax than that known
by the taxpayer to be legally due:
3. The overt act done or scheme used by the taxpayer to achieve the
non-payment of taxes known to be due. The act or scheme must be tinged with
some elements of deceit, misrepresentation, trick, device, concealment or
dishonesty." Fraud under Tax, Balter.
Mere suspicious and mere doubts on the intention of the taxpayer are not sufficient
proof of fraud. Fraud is never presumed, it must be proved.
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Types of Tax Fraud Cases
Criminal Fraud
A criminal tax fraud case results when all the elements of fraud can be proven beyond
reasonable doubt. Proof beyond reasonable doubt not mean such a degree of proof as,
excluding possibility of error, absolute certainty; only required, or that degree of proof which
produces conviction in an unprejudiced mind.
Here, the taxpayer upon conviction shall be liable from the deficiency taxes, to both
criminal and civil penalties.
Civil Fraud
A civil tax fraud case results when all the elements of fraud cannot be proven beyond
reasonable doubt, but rather by clear an convincing evidence amounting to more than a mere
preponderance, and cannot be justified by mere speculation.
"Preponderance of evidence" means that the testimony adduced by one side is more
credible and conclusive than that of the other.
"Clear and convincing" need not rise to proof beyond reasonable doubt as in a criminal
case but yet must be stronger than mere preponderance of evidence.
Here, the taxpayer shall be liable aside from the deficiency taxes only to the civil
penalties.
1. Civil penalties rise to the imposition of the 50% surcharge; to be imposed by the
BIR;
3. Power of the Commissioner to asses and collect the tax is extended to 10 year
from date of discovery, however, Sec. 280 provides the five year prescription on the filing of
criminal action;
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Sections 111 of Tax Code for violation of the VAT provisions.
1. The Direct Approach Method or by Direct Evidence, also called Specific Item
Cases Proof of fraudulent acts are adduced by specific items of fraudulent transactions. It
is that one, if the allegations are believed, the existence of the principal or ultimate fact is
proven without any inference or presumption.
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1.2.3.1 Claiming tax credits on purchases of goods from
Non-VAT registered enterprises; and
1.3.5 Claim of fictions items - funeral expenses, claims against the estate,
judicial and testamentary expenses.
1.4.3 Willful omission of prior donations made during the same taxable
year;
The legal bases for an indirect approach in the determination of the correct income or
transactions of a anchored on Sections 16 and 37 of NIRC of 1988.
Formula:
The mathematical formula for this method may be laid down as follows:
a. Increase in net worth, plus
b. Non-deductible item, less
c. Non-taxable income or receipts subjected to final tax or transfer
taxes, equals
d. Taxable net income, less
e. Personal and additional exemptions, equals
f. Net income subject to tax
The Commissioner's determination of taxpayer's unreported income through the net
worth expenditure method usually involves the following steps:
(2) The net worth at the close of each tax year under examination is
established;
(3) Comparison is made of the net worth at the beginning and end of
each year, to determine the increase, if any;
(4) The increase in net worth for each year is adjusted to eliminate
items accounting for such increases which arise from non-tax sources (i.e., gifts,
bequests, other receipts exempt from tax, etc.) and adjustment is made where
property is sold at a profit but the entire profit is not taxable because of
long-term capital gain provision. The increase in net worth for the year, after
these eliminations and adjustments, is presumed to be income realized in that
year;
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(6) The reconstructed income under the net worth expenditure method
is the sum of items (4) and (5) and this amount is then compared with the income
reported, if any, by the taxpayer. (Id. par. 6059, see also Perez vs. Araneta,
L-10507, May 30, 1958, Reyes vs. Col. of Internal Rev., L-11534 and L-11558,
Nov. 25, Jamir vs. Col of Int. Rev. L-16552, Mar. 30, 1962; Avelino vs. Col. of
Int. Rev. L-17715, July 31, 1963).
(1) That the taxpayer's accounting records are inadequate and do not
clearly reflects his income; of that the taxpayer maintains no books and records;
or that taxpayer's accounting records are available, but he refuses to produce
them;
(2) That there is a fixed starting point or opening net worth, i.e., a date
beginning of a taxable year or prior year to it, at which time the taxpayer's
financial conditions can be affirmatively established with some definitives;
(Statements of net worth of taxpayers who availed of the tax amnesty under the
provisions of Executive Order No. 41, may be used as the starting point as at
December 31, pursuant to the authority given to the BIR under section 7 of said
Executive Order)
(3) That the circumstances are such that the method does reflect the
taxpayer's income with reasonable accuracy and certainly, and proper and just
addition of personal expenses and other non-deductible expenditures were made
and correct; fair and equitable credit adjustments were given by way of
eliminating non-taxable items or receipts or taxable income which have been
subjected to final tax.
(4) The need for evidence of the source of income under this method:
"In all the leading cases on this matter, courts are unanimous in
holding that when the tax case is civil in nature, direct proof of sources of
income is not essential. . . . However, when a taxpayer is criminally
prosecuted for tax evasion, the need for evidence of a likely source of
income becomes a pre-requisite for a successful prosecution . . ." RMC
No. 43-74.
(2) A showing that the nature of the taxpayer's business is such that it
has capacity of generating a substantial income.
(6) Keeping separate sets of books one registered and the other
reflecting the correct transactions of a business.
The expenditures method proceeds on the theory that where the amount of money
which a taxpayer spends during a given year exceeds his reported income, and the source of
such money is otherwise unexplained, it may be inferred that such expenditures represent
unreported income.
The discussion on when and how the net worth method should be used are equally
applicable to the expenditures method. In a case where the taxpayer has several assets (and
liabilities) whose cost bases remain the same throughout the period under investigation, the
expenditure method may be preferred over the net worth method because a more laconic
presentation can be made of the computation of taxable income. This is because assets and
liabilities which do not change during the period under investigation may be omitted from the
expenditures statement. The expenditures method is used often on a taxpayer who spends his
income on lavish living and has little, if any, net worth.
Formula:
Under this formula enunciated by the court in the above-cited case, the
particular in the use of this method are shown below:
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A. Expenditure for a given taxable year:
(1) All expenses and deductions claimed per
return filed with the BIR (Exclude non-cash items,
such as aromatization of goodwill, depreciation
of assets, application of deferred
expenses from prior period, etc.) P xxx
B. Sources of Cash:
(1) Declared income per Income Tax Return xxx
Deduct: Accounts Receivables if taxpayer
is on cash basis method of accounting (xxx)
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(5) Cash loans, if any xxx
3. Percentage Method
Although the use of this method is of little value in criminal cases, it is useful in
test-checking or corroborating the results obtained by some other means of proof such as
specific items, net worth, and expenditures methods, and for evaluating allegations from
information regarding unreported profits or income.
The percentage method is a computation whereby determinations are made by the use
of percentages or ratios considered typical of the business under investigation. By reference to
similar businesses or situations, percentage computations are secured to determine sales, gross
profit, or even net profit. Likewise; by the use of some known base and the typical percentage
applicable, individual items of income or expenses may be determined.
This method is feasible when the investigation can ascertain the number of units
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handled by the taxpayer and also when he knows the price or profit charged per unit.
There may be regulatory body to which the taxpayer units of production or service.
Examples are:
d. False vouches and receipts which were verified in the course of the
routine examination.
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b. Thru research of available government records such as from offices
of the Register of Deeds, Bureau of Highways, and other government offices;
and
E. INDICATIONS OF FRAUD
2. Concealment of Assets;
10. Payee names on checks left blank and inserted at a later date;
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the taxpayer of the receipt of the income or inability to provide a satisfactory explanation for
its omission;
20. Failure to file a return, especially for a period of several years although
substantial amounts of income were received;
22. Inadequate explanation for dealing in large sums of currency, or the unexplained
expenditure of currency, (especially when in a business not calling for large amounts of cash);
26. False entries or alternation made on the books and records, backdated or
postdated documents, false entries or invoices or statement, or other false documents;
27. Failure to keep records, especially if put on notices by the BIR as a result of
prior examination, concealment of records or refusal to make certain records available.
29. False statements, especially if made under oath about a material fact involved in
the investigation;
31. The taxpayers knowledge of taxes and business practices where numerous
questionable items appear on the returns;
32. Destruction of books and records, especially after the investigation was started;
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36. Unsubstantiated or unexplained wealth;
37. Mental handling of ones affair to avoid keeping records usual in transactions of
the sale kind;
39. Any conduct, the likely effect would be mislead or to conceal material facts.
The items listed are the indications of fraud most commonly committed but are not all
inclusive.
1. Preliminary Investigation
The examiner or revenue official who discovers a potential tax fraud case
must submit a memorandum report to his immediate superior stating the facts
and circumstances which constitute the indication of fraud, and the evidence at
hand to be verified and confirmed.
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The issuances and approvals of Letters of Authority for fraud cases shall
be in accordance with existing rules and regulations on such issuances. The
issuance of Letters of Authority, in the case of the Tax Fraud Division, may be
dispensed with when so warranted by the circumstance of the case, provided that
the taxpayer shall be noticed by the Commissioner of Internal Revenue that his
internal revenue tax liabilities are under investigation or that the report thereon
has been submitted.
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(a) Obtain as much information as possible on the
suspect;
The table of contents should indicate the subject matter, and page
number in the docket, to provide quick reference to important features of
the case.
The format of the report must more or less contain the following
information and presentation whenever it is necessary:
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b-3 Returns filed and statute of limitations
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The examiner, before beginning his report, should arrange the
proposed appendices and exhibits in the order of his planned presentation
of facts and evidence, and then he prepares his report discussing the
appendices and exhibits in that order. When the report is completed, the
exhibits should be assembled in the order in which they are originally
mentioned in the report, and they should be numbered for easy reference.
ANNEX "A-1"
PRO-FORMA STATEMENT OF ASSETS, LIABILITIES AND NETWORTH
(Revised to conform to recent laws)
PARTICULARS Dec. 31, 1993 Dec. 31, 1994
ASSETS (Net of Depreciation)
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3. Backpay/Pensions non-taxable xxxx
4. Proceeds of Life Insurance Policy xxxx
5. Non-taxable stock dividends (provided stocks
are reflected in Assets) xxxx
6. Pensions received under RA 4917 (private firms) xxxx
7. Retirement pay from GSIS and SSS xxxx
8. Non-recognized gains from exchanges of
property under Sec. 34(c)(2) of the Tax
code of 1988 xxxx
9. GSIS Cash Dividends xxxx
10. Social Security benefits received from
foreign government and institution (per PD 220) xxxx
11. Other non-taxable items (such as those
excluded under Sec. 28(b) of NIRC of 1988, those
subjected to final tax such as foreign earnings
by a non-resident Filipino, royalties, prizes,
yields on deposits, dividends, share in profits
of taxable partnership, etc., per Sec. 21(b),
Sec. 21(c), Sec. 22(2) of NIRC of 1988.) xxxx
12. Other exempt income xxxx
13. Proceeds of sale of Real Estate subjected to
final tax under Sec. 21(e) of the Tax Code
of 1988 xxxx
Total Non-taxable items Pxxxx
Adjusted Net Income as per Investigation Pxxxx
Less: Statutory exemptions:
Personal & additional exemption xxxx
NET INCOME SUBJECT TO TAX xxxx
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(Revised to conform with provisions of recent laws)
- 1994 -
Source of Funds
ANNEX "A-2"
SAMPLE
EXHIBIT REF.
W1 Atty. ROBY CAPULON 1 PP. 66-72 1990 ITR and
Bureau of Internal Attachments
Revenue District
Officer RDO No. XX, 2 PP. 73-80 1991 ITR and
Manila Attachments
Tel. No. 315-62-22
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Taxes 1990,
1991
W3 ANJIE FARUMOG 1 P. 12 Affidavit dated
Manager FLORR, INC. August 4, 1994
125 ABC St. QC 2 P. 13 Confirmation letter
Tel. No. 40-15-24 dated June 6, 1994
CONTEMPLATE
CORP. 1000,0000 1600,0000 EMILLE FRENILLE W5-1 P. 22 Worksheet
Comptroller W5-2P P. 23-30 Invoices
CONTEMPLATE
CORP. W5-3 PP. 31-36 Cancelled
Checks
MAGGS ENTER-
PRISE 500,0000 75,000.00 SANDREX DUTERTE W6-1 P. 38 Worksheet
Manager, MAGGS
ENT. W6-2 PP. 39-46 Invoices
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ANNEX "A-3"
SAMPLE
APPENDIX B
COMPUTATION OF ADJUSTED TAXABLE INCOME 1990 & 1991
SING and FURR, INC.
REPORTED 960,0000 P117,800.00 Atty. ROBY W1-1,2 PP. 66-80 1990, 1991
TAXABLE CAPULON ITRs
INCOME Rev. District Off.
RDO No. XX, Mla.
ADD: UNRE-
PORTED
GROSS RE-
CEIPTS 240,000.00 355,000.00 Atty. CARLS APPENDIX P. 84 Computation of
MIRANDA, JR. A Unreported
Intelligence Officer Gross Receipts
SUB-TOTAL 336,000.00 472,800.00
LESS: ADDITIONAL
OR DEDUCTIONS
ADJUSTED P336,000.00 P4728,00.00 TO APPENDIX C
TAXABLE
INCOME ======== ========
ANNEX "A-3"
SAMPLE
APPENDIX C
COMPUTATION OF DEFICIENCY TAXES 1990, 1991
SING and FURR, INC.
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ADJUSTED
TAXABLE
INCOME 336,000.00 472,000.00 Atty. CARLS MIRANDA, JR. APPENDIX P.85
Intelligence Officer B
INCOME TAX
INC. TAX Due
Thereon 117,600.00 165,480.00
Less: TAX Due/
Return 336,00.00 41,230.00 Atty. ROBY CAPULON W1-1,2 PP. 66-80
Rev. District Off.
========== =========
I. BACKGROUND
It has been observed that for the same kind of tax audit case, Revenue Officers differ
in their request for requirements from taxpayers as well as in the attachments to the dockets
resulting to tremendous complaints from taxpayers and confusion among tax auditors and
reviewers. cdphil
For equity and uniformity, this Bureau comes up with a prescribed list of requirements
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from taxpayers, per kind of tax, as well as of the internally prepared reporting requirements,
all of which comprise a complete tax docket.
II. OBJECTIVE
Percentage Tax
Annex C (2 pages)
Estate Tax
Annex E (4 pages)
Donor's Tax
Annex F (2 pages)
All existing issuances or parts thereof which are inconsistent herewith are hereby
repealed.
V. EFFECTIVITY
ANNEX A
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21) Schedule of Loss, if applicable
22) Schedule of Advances from Officers and Stockholders, if applicable
23) Schedule of Advances to Officers and Stockholders, if applicable
24) Schedule of Miscellaneous Income, if material/applicable
25) Schedule of Miscellaneous Expense, if material/applicable
26) Schedule of Interest Income (give details as to source/s and amount), if
material/applicable
27) Schedule of Other Receivables/Miscellaneous Receivables, if
material/applicable
28) Schedule of Other Payables, if material/applicable
29) Computation of Realized Gross Profit and Unrealized Gross Profit, if the
taxpayer is engaged in the business of selling real estate, whether by
installment or lump sum
30) Computation of Realized Gross Profit and Unrealized Gross Profit, if the
taxpayer is engaged in the business of selling personal properties by
installment
31) Computation of Gross Income from Contracts, if the taxpayer is engaged
in "Construction Business"
32) Detailed reconciliation of "Book Income" and "Taxable Income", if
necessary
33) Reconciliation of the Financial Statements' figures with the Withholding
Tax Returns' and Information Returns' figures
34) Checklist of audit procedures undertaken
35) Agreement Form (for agreed assessment)
36) Notice for an Informal Conference/Post Reporting Notice with the
summary of findings (for non-agreed assessment)
37) Comparative Report of Deficiency Tax Paid/Assessed, if applicable
a) current year/period
b) previous year/period
38) Docket Locator Form
39) Delinquency Verification Report (for Claims for Refund / TCC )
40) Authority to Issue Refund / TCC ( for Claims for Refund / TCC )
41) Breakdown of Control Accounts, if applicable
42) Certification by the Revenue District Office, that he could not locate the
BIR copy of the tax return etc., if applicable
43) Result of Tax Mapping Program or Third Party Information Program for
LAs/Audit Notices issued thereunder
Note:
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In case of non-availability of documents from RDO / RDC mentioned in B.2 - B.11,
request photocopies thereof from taxpayer LLjur
ANNEX B-1
VALUE-ADDED TAX
(For audit involving Claim for Refund / TCC)
6) VAT Returns filed for the quarter showing that the amount
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applied for refund/TCC has been reflected as a deduction from
the total available input tax, as well as VAT Return for the
succeeding quarter
13) Certification from BOI, DOF, BOC, EPZA, etc., that subject
taxpayer has not filed similar claim for refund covering the same
period
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a. sales invoice number, name of buyer, airway bill / bill of
lading number, lading date, amount of sales in foreign
currency, peso value of sales, conversion rate, date of
remittance, bank credit memo number and amounted
remitted in pesos
2) export declaration/permit
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a) Monthly BSP report on income of agency received
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I. Requirements mentioned in Annex B
Note:
ANNEX C
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4) Form 1717 series / 0500 series (Audit Reports)
5) Narrative Memorandum Report
6) Revenue Officer's Activity Report/Log Sheet
7) Table of Contents
8) Working papers showing the computation of the taxable receipts/sales
(tax base) and percentage tax due duly signed by the Tax
Auditors/Revenue Officers cda
Note:
ANNEX D
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a) current year/period
b) previous year/period
Note:
ANNEX E
ESTATE TAX
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I. General
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death;
3) "Certificate of No Improvement" issued by the Assessor's Office
where properties have no declared improvement;
4) Certification from the Municipal/City/Provincial Assessor's Office
as to the declared real properties in the name of the decedent
and/or his/her surviving spouse at the time of death;
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13) Working papers showing computation of estate tax due duly signed by
Tax Auditors/Revenue Officers
14) Report of Ocular Inspection, if applicable
15) Detailed Schedule of deductions, if applicable
16) Reporting requirements for all the other internal revenue taxes, if they are
covered by the tax audit cdtai
Note:
1. if applicable
2. Proofs of all the claimed deductions must be presented to the Revenue Officer during
the original investigation and that only photocopies must be attached to the docket.
ANNEX F
DONOR'S TAX
I. General
Note:
ANNEX G
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7) Seller's latest Certificate of Registration with HLURB or HUDCC and
the latest LICENSE TO SELL, if applicable
8) Seller's latest Certificate of Accreditation issued by the appropriate Real
Estate Builders Association, if applicable
9) Certificate of Exemption from Withholding Tax/Capital Gains
Tax/Documentary Stamp Tax issued by the Commissioner of Internal
Revenue or his representative to the taxpayer, if applicable
10) Proof of Exempt Transfers, if applicable
11) Proof of deficiency tax paid, if any
12) Certificate of Non-productivity of ricefield and other agricultural lands
issued by the Barangay Captain, if applicable
13) Xerox copy of location plan, if applicable
Note:
ANNEX H
Note:
ANNEX I
Note:
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 185
Endnotes
1 (Popup - Popup)
1. if applicable
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2. Proofs of all the claimed deductions must be presented to the Revenue Officer during
the original investigation and that only photocopies must be attached to the docket.
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 186