April 28, 1975

REVENUE MEMORANDUM CIRCULAR NO. 10-75

SUBJECT :

Civil Fraud and Criminal Tax Evasion Cases; Burden of

Proof; Evidence to be Secured

TO

All Internal Revenue Officers and Others Concerned

This circular is a supplement of Revenue Memorandum Circular No. 43-74

dated August 1, 1974 and its purpose is to guide examiners in discovering and
establishing civil fraud and criminal tax evasion cases.
I. Statement of Policy. Taxpayers were offered tax amnesty provided that
they declare their untaxed income and/or wealth and pay a tax of 10%, 15%, or 20%
pursuant to Presidential Decrees No. 23, 370, and 631, respectively. Many availed of
the amnesty offered in said decrees. However, many tax evaders ignored the generous
and benevolent offer of the government, perhaps believing that their evasion of taxes
will escape detection. On the other hand, some of those who availed or tax amnesty
made a mockery of the tax amnesty under the aforementioned decrees, have not
reformed at all and continue with their nefarious schemes of evading taxes.
This Office believes that such hardened and unrelenting tax evaders should not
escape the penalties imposed by law on tax evasion. All officers and others concerned
are therefore exhorted to help in ferreting out such tax evaders in order that they be
meted the punishment they deserve.
II. Tax Evasion: Meaning and Types of Evasion. Tax evasion means the
elimination or reduction of the correct and proper tax due from a person by fraudulent
means. Such evasion may be considered a civil fraud case, in which case the taxpayer
shall be penalized with the ad valorem penalty of 50% surcharge on the deficiency tax
found due from him. Or if the evidence so warrants, the tax evasion may be
considered a criminal tax evasion case, and consequently, the taxpayer shall be
criminally prosecuted and upon his conviction, shall be penalized with a fine and/or
imprisonment, in addition to the 50% surcharge imposed on the deficiency tax due
from him.

Copyright 2010

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

A civil fraud case and a criminal tax evasion case are similar in the sense that
both involve evasion of tax thru fraudulent means and both require the Commissioner
to bear the burden of proving such evasion. However, there are cognizable differences
between them and said differences may be categorized as follows:
(a)

As to degree of fraud. In a civil fraud case, although fraud is found

to be present the evidence available is believed not sufficient to
establish beyond reasonable doubt that the evasion was "willful" as
that term has been defined by the Courts, and for this reason,
criminal prosecution of the taxpayer is not resorted to. In other
words, the additional element of "willfulness" must be present in
order that a criminal tax evasion case can be established.

(b)

As to degree of proof . Although the Commissioner bears the

burden of proving tax evasion by fraudulent means in both cases,
however, in a civil fraud case, all that is required of him is to prove
such evasion by clear and convincing evidence. But a criminal tax
evasion case requires a higher degree of proof. In such a case, the
Commissioner must prove willful evasion beyond reasonable
doubt.

III. Devices or schemes by which taxpayers evade income tax. The means by
which taxpayers evade income tax are as ingenious and limitless as the imagination of
the particular wrongdoer permits. It would therefore be impossible to list here all such
devices or schemes. However, for the guidance of examiners investigating taxpayers
for tax evasion, there are listed hereunder some of the devices or schemes usually
adopted by taxpayers in eliminating or reducing their income tax.

Copyright 2010

1.

Using false set or double sets of books, in order to conceal

purchases, sales and receipts;

2.

Using false receipts to support deductions claimed in the return;

3.

Understating sales and overstating purchases;

4.

Understating inventory in order to cover up understatement of sales

and overstatement of purchases;

5.

Transacting in the names of dummies or under assumed names;

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

6.

Transacting thru controlled subsidiaries which are actually mere

conduits for the purpose of reducing taxable sales and gross
income;

7.

Sluicing off of corporate income earnings to principal shareholders

in the disguise of commissions or salaries usually out of proportion
to the value of services rendered to the corporate taxpayer;

8.

Making false entries in books or altering entries therein to support

falsification in the return;

9.

Destroying books and records to prevent discovery of unreported

income; and

10.

Deducting personal expenses as business expenses.

The foregoing are mere examples of devices or schemes adopted by taxpayers

in order to eliminate or reduce income tax due from them. But as aforesaid there are
limitless means by which taxpayers evade income tax. It is for the examiner to detect
such devices or schemes and to secure the evidence that will support his findings and
establish either a civil fraud case or a criminal tax evasion case.
IV. Burden of proof . Degree of proof in fraud cases. The examiner
investigating a tax fraud case should bear in mind the following rules on burden of
proof and degree of proof required in the cases hereunder mentioned:
A. Civil Fraud Case. Where the Commissioner asserts a fraud penalty as an
addition
to
the
deficiency
which
he
has
determined
to
be
due, then the burden of proof is on him to establish the presence of fraud with intent
to evade tax.
The degree of proof required on the issue of fraud in a civil fraud case is that it
be "clear and convincing" and need not rise to proof "beyond reasonable doubt" as in
a criminal case, but it must be stronger than the mere preponderance of the evidence
which would be sufficient to sustain a judgment on the issue of the correctness of the
deficiency itself apart from the fraud. To illustrate:
(1)

Copyright 2010

Case of Undisclosed or Understatement of Income. The fact that

certain income is not reported in the return or if reported, is
understated may in itself involve the elements of misrepresentation

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

and deceit so as to furnish the necessary basis for fraud with intent
to evade the tax. However, to bolster the stand of the
Commissioner, the examiner should secure evidence showing that
the understatement or concealment was deliberate, such as returns
for previous years showing the same understatement or
concealment, and/or testimony of third parties, such as the
bookkeeper or accountant of the taxpayer, or one who had
transacted with him;
(2)

Case of Overstatement of Deductions. Taken alone, the

overstatement of a deduction is not conclusive on the issue of
fraud. But when the deduction is considered with other suspicious
circumstances in the case, the overstatement will support fraud
penalty. For example, the deduction from corporate income of
alleged salaries, or bonuses can be proved fraudulent by showing
that the recipients were majority stockholders of the corporations;
that they did not render any service or if they did, that the service
they rendered did not warrant payment of such salaries or bonuses;
and that the amount received by each of them is proportionate to
his stockholdings, indicating that the amounts represented as
salaries or bonuses were actually dividends due the recipients.

B. Criminal Tax Evasion Case. The same factors which will sustain "fraud
with intent to evade tax" may be considered in a criminal tax evasion case provided
the element of "willfulness" is proved.
The term "willfulness" has been defined as an act done with a bad purpose or
without justifiable cause. The word is also employed to characterize a thing done
without ground for believing it is lawful, or conduct marked with careless disregard
whether or not one has the right so to act. (see United States vs. Murdock, 290 U.S.
389)
Proof of "willfulness" is therefore the crucial core of a criminal tax evasion
case. The government must introduce evidence which would tend to indicate bad faith
or dishonesty in the defendant's dealing with the government. However, since
"willfulness" is rarely capable of proof by indirect evidence, it may be proved by
circumstantial evidence.
The following were mentioned in the Spies case (Spies vs. U.S. (1943) 317
U.S. 492) as acts which could be attempts to evade and defeat tax and therefore,
Copyright 2010

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

subject of a criminal tax evasion case:

1.

Keeping double sets of books or keeping a double set of financial

statements, the false ones to be presented to the investigating
agents.

2.

Making false entries in books or alterations of books.

3.

Making false invoices or documents so as to conceal the true nature

of income.

4.

Destruction of books and records.

5.

Concealment of amount of income or covering sources of income

by entering into contracts in the name of dummies.

There are many more such acts and transactions which can be considered as
indicative of tax evasion. Examiners are therefore directed to keep alert and
immediately report any criminal tax evasion case they may discover.
V. Indirect proof of tax evasion: 'et worth increase and expenditures
considered unreported taxable income. Since it is only in rare instances that the
government is able to establish proof of undisclosed income by direct evidence, the
Commissioner, by authority of Section 15 and 18 of the Tax Code, may resort to
indirect proofs of unreported taxable income by the so-called net worth increase
expenditures method, details of which are explained in Revenue Memorandum No.
43-74, dated August 1, 1974.
Hereunder is how the government proceeds in proving unreported taxable
income by the aforementioned method:
Firstly, it submits evidence to establish an opening "net worth", or total net
value of the taxpayer's assets at the beginning of a given year. It then proves increases
in the taxpayer's net worth for each succeeding year covered by the period under
examination by showing the difference between the adjusted net values of the
taxpayer's assets at the beginning and end of each of the years involved. The
taxpayer's non-deductible expenditures, including living expenses are added to these
increases, and if the resulting figure for any year is substantially greater than the
taxable income reported by the taxpayer for that year, the government claims the
excess as representing unreported taxable income.
Copyright 2010

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

A. 'et worth increase in civil fraud cases. Burden of Proof . The use of the
said method was approved by the Supreme Court in several cases, namely: (1)
Eugenio Perez vs. Court of Tax Appeals and Collector of Internal Revenue. G.R. No.
L-10507, May 30, 1958; (2) Collector of Internal Revenue vs. Aurelio P. Reyes, G.R.
No. L-11534 and L-11558, November 25, 1958; (3) Commissioner of Internal
Revenue vs. Enrique Avelino, G.R. No. L-1484, September 19, 1961; (4) Jose
Avelino vs. Collector of Internal Revenue, G.R. No. L-17715, July 31, 1963; and (5)
William L. Yao vs. Collector of Internal Revenue, G.R. No. L-11875; December 28,
1963.
The following significant rulings were issued by the Supreme Court in the
aforecited cases:
(a)

In civil cases, the application of the net worth method does not
require identification of the sources of the alleged unreported
income.
In other words, once the government proves the increases in
net worth, the burden of proof is shifted to the taxpayer, for as the
Supreme Court observed, normally, acquisitions are made from
accumulations of taxable income and where not so made, it lies
within the peculiar province of the taxpayer to explain how much
acquisitions were made with non-taxable resources.

(b)

The determination of the tax deficiency by the Government has

prima facie validity and the burden rests upon the taxpayer to
overcome this presumption and to show to the satisfaction of the
Court that the determination is not correct.

(c)

Consistent and substantial underdeclaration of income determined

by net worth increases of the taxpayer during the years under
examination is sufficient basis for a finding of fraud, for
affirmative willful intent may be inferred from any conduct, the
likely effect of which would mislead or conceal. (Collector vs.
Aurelio P. Reyes citing Spies vs. U.S. 317 U.S. 492)

The foregoing rulings should not, however, lull examiners into sleeping on
their duties. They should verify and secure proofs establishing the following:
1.
Copyright 2010

Sources of income of the taxpayer. However, proof of a likely

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

source from which one could reasonably find that the net worth
increases sprang, is sufficient.
2.

What the taxpayer's assets were at the beginning of the tax year in
question, i.e., the starting point.

3.

What was the value taken at cost of these assets.

4.

What were the taxpayer's assets and their value at the end of the tax
period in question.

5.

If the process of showing increase in net worth extends over a

period of more than one tax year, what is the fair and reasonable
allocation of the increase over the years in question.

6.

What are the correct and fair adjustments to be made by way of

eliminating duplications, return of capital, evaluation of
unspecified or contingent obligations, depreciation, gifts, devises,
bequest, or non-taxable items. Although the burden is upon the
taxpayer to show that his net worth increase was derived from
non-taxable sources, the examiner should nevertheless pursue leads
furnished by the taxpayer to explain the yearly increase of his
assets. However, his duty to do so is limited to those reasonably
susceptible of verification.

7.

What are fair and equitable adjustments to be made for living

expenses, payment of taxes, cost of life insurance, etc.

In this connection, it is advised that in determining the net worth increases of a

taxpayer, the examiner may avail of the statement of assets, liabilities and net worth
filed by the taxpayer pursuant to Presidential Decree No. 379, as amended. However,
if the taxpayer had availed of tax amnesty under Presidential Decree No. 23, his
acquisitions in 1971 and prior years shall not be subject to the aforesaid networth
increase method of determining untaxed income. If he availed of the tax amnesty
under Presidential Decree No. 157 and/or Presidential Decree No. 370, his immunity
from such method of determining untaxed income shall extend to the year 1972. And
if he availed of the amnesty under Presidential Decree No. 631, his immunity from the
aforesaid method of determining untaxed income shall extend to the year 1973 and his
net worth reported in the Statement filed pursuant to Presidential Decree No. 379 shall
be considered his beginning net worth as of January 1, 1974.
Copyright 2010

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

If the taxpayer has not availed of tax amnesty, the statement filed by him
pursuant to Presidential Decree No. 379, as amended shall, where circumstances so
require, be looked into, for the purpose of determining whether the taxpayer has any
untaxed income or wealth. However, the examiner should not depend entirely on said
statement as it may not be true or correct. He should ascertain the true and correct
assets of the taxpayer from the books and records of the taxpayer himself, records of
third persons with whom the taxpayer may have transacted, and records of
government offices such as land records of registers of deeds, assessors and
treasurers, and records of the motor vehicle office.
B. 'et worth increase in Criminal Tax Evasion cases. Burden and degree of
proof . A higher degree of proof is required for establishing the criminal liability of a
taxpayer whose unreported income is determined by the net worth increase
expenditures method, for as in other criminal case, the guilt of a defendant must be
proved beyond reasonable doubt. Thus it has been held that before the increased net
worth method of proof is effective, the net worth of the taxpayer at the beginning of
the tax period must be clearly and actually established by competent evidence. The
best evidence which the government can use are of course the following:

Copyright 2010

1.

The statement of assets, liabilities and net worth submitted by the

taxpayer pursuant to Presidential Decree No. 379, as amended.
However, as hereinbefore pointed out, such statement should not
be used against taxpayers who availed of tax amnesty under
Presidential Decrees Nos. 23, 157, 370 and/or 631. The extend of
immunity of a taxpayer from being subjected to the net worth
increase method of determining untaxed income depends on which
of the aforementioned Presidential Decrees was availed of by the
taxpayer to secure tax amnesty (see discussion above)

2.

Financial statements filed by the taxpayer with his income tax

returns or with other government agencies;

3.

Books and records of the taxpayer. But where no such document

and/or record is available, the examiner should resort to
reconstruction of the taxpayer's assets from available sources such
as (a) records of other persons with whom the taxpayer had
transacted; (b) records of government offices where transactions or
properties are registered; and (c) statements of persons who have
knowledge of the business and affairs of the taxpayer, such as the

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010

accountant or bookkeeper of the taxpayer.

Examiners should see to it that documentary evidence needed to establish his
findings are secured and submitted together with his report; and reviewing officers
should immediately study the report and evidence submitted by the examiner and
instruct him on what further facts should be ascertained and what additional evidence
should be secured.
All internal revenue officers and others charged with enforcement of internal
revenue laws are enjoined to be guided by this circular and to give it as wide a
publicity as possible.
cdtai

MISAEL P. VERA
Commissioner of Internal Revenue
TAN-1601-593-5

Copyright 2010

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia 2010