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Unauthorized letters of authority

BY CHRISTELLE MARY DOMINGO ON MAY 28, 2018BUSINESS

The first step in an investigation into a tax case is the issuance of a valid Letter of Authority
(LOA) duly signed by the Revenue Regional Director to the taxpayer under Revenue
Memorandum Order (RMO) No. 43-90. The LOA should be furnished to the taxpayer 30
days from the date of its issuance. Otherwise, the examination and resulting assessment
may be considered ineffective [Saga Casting and Productions vs Commissioner of Internal
Revenue (CIR), CTA Case No. 8484, dated May 28, 2015]

The LOA empowers a Revenue Officer (RO), headed by a Group Supervisor (GS), to
perform assessment functions and to examine a taxpayer’s books of accounts and
accounting records in order to collect the correct amount of tax.

In one instance, an investigation was rendered invalid when a Letter of Notice (LN) was
issued, instead of an LOA. In this case, the taxpayer was informed through an LN that a
computerized matching conducted by the BIR via its RELIEF system revealed
discrepancies in the information/data provided by third-party sources against the taxpayer’s
value-added tax (VAT) declarations. Consequently, Assessment Notices were issued by the
BIR against the taxpayer in reference to the LN.

The taxpayer argued that the BIR violated its right to due process, insisting that no LOA was
issued against the taxpayer and that no physical examination of books was performed as a
basis for the Assessment Notice.

In the instant case, it was clarified that the rationale of the LOA was needed regardless of
any BIR plan to first conduct a physical examination or not.

Further, an LN is not found in the Tax Code and its purpose is only to notify the taxpayer of
any discrepancy discovered through the BIR RELIEF System. Simply stated, there must be
a grant of authority before an RO can conduct his investigation.

In this particular case, since no authority was granted – i.e., no LOA was issued – the tax
assessment resulting from the unauthorized assessment was ruled void (Catering
Professionals, Inc. vs CIR, CTA Case No. 8852, dated November 28, 2017).

For an assessment to be valid, the proper authority must be explicitly granted. Moreover,
the CTA cited, in the case of Ithiel Corporation vs CIR, CTA Case No. 8689, dated
November 17, 2017, that the examination and assessment were void for lack of authority
granted to the examining RO.
In the above case, the tax investigation was reassigned to another RO by virtue of a
Memorandum of Assignment with a system-generated number duly signed by the Revenue
District Officer (RDO). The taxpayer insisted that the examination of the reassigned RO was
not accompanied by the necessary LOA. Evidence further showed that the official who
conducted the examination of the taxpayer’s books was different from the examiner
indicated in the LOA.

According to RMO 08-06 dated May 9, 2006, a case shall be reassigned to another RO and
GS within the same Revenue District Office if both the original RO and GS have
resigned/retired or transferred to another Revenue Region (RR). In case of reassignment, a
memorandum to that effect shall be issued by the head of the investigating office to the
concerned taxpayer and the concerned RO and GS.

Considering that the original examiners were not transferred to another RR nor
resigned/retired, the CTA canceled the deficiency tax assessment, which resulted from an
audit examination conducted without authority. The CTA further emphasized that a referral
memorandum for the purposes of audit examination is prohibited according to RMO 12-07
dated July 3, 2007, in contrast to RMO 08-06. The CTA cited the case of CIR vs Sony
Philippines, Inc., wherein the Supreme Court referred to Section 13 of the Tax Code, which
states that an LOA signifies an authority given to the appropriate RO assigned to perform
assessment functions. Thus, in the absence of such an authority, the assessment or
examination is a nullity.

It should be emphasized that, even if the required LOA was issued, the examining RO
should also be covered by the LOA. In a CTA case entitled CIR vs Metro Star Superama,
Inc., the SC ruled that at all times, the taxpayer shall be informed in writing of the law and
the facts on which the assessment was made.

Lastly, the case of CIR vs University of Santo Tomas Hospital, Inc., CTA EB No. 1328 re:
CTA Case No. 8298, dated November 28, 2016, cited that while the Director was
empowered to issue an LOA for the investigation of the taxpayers within the RR and
corresponding revenue district offices, it was held that the BIR may only do so for those
“under his jurisdiction.”

In this case, when the LOA was issued by the Director of RR 6, the taxpayer was already
under the jurisdiction of RDO 116, and no longer under the said Region nor of RDO 32.
Thus, the issuance of the LOA by the Director of RR 6 concerning the examination of the
taxpayer was deemed beyond his jurisdiction.

Due to the absence of authority, the CTA held that the LOA issued by the Director was,
therefore, void. Consequently, the tax assessment arising from the basis of the LOA was
likewise nugatory under the underlying principle that a tax assessment must proceed from a
solid authority.

In balancing the scales between (1) the State’s power to tax and the right to prosecute, and
(2) the constitutional rights of a citizen to due process and equal protection of the laws, the
scales must tilt in favor of the latter, for a citizen’s right is protected by the Bill of Rights [BIR
vs United Salvage and Towage (Phils.), Inc., dated July 2, 2014].
These cases underscore the fact that compliance with the notice requirements prescribed
under Section 228 of the Tax Code is not merely a procedural step but rather a mandatory
requirement of the law. Failure to establish a valid assessment in accordance with the Tax
Code clearly violates the taxpayer’s right to due process. Settled is the rule that a void
assessment bears no valid fruit.