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It’s election time, watch out for LOAs

(Article published in the Oct 13,2003 issue of TODAY, Business Section)

When President Gloria Macapagal Arroyo declared her intention to be a candidate for president in the 2004 elections, she signaled the informal start of the election season.  And just as the rainy season brings with it a host of illnesses and disasters, the election season spawns a multitude of fund-raising activities by those legitimately running for office as well as by those just taking advantage of the situation.

Some of these activities undoubtedly are lawful, such as the Php 10,000- a-plate dinners with celebrities; others are less than lawful, such as kidnapping, extortion, and, in the case of incumbents seeking election, pork and patronage, and, in the extreme, the use of the governmental powers to compel contribution or to neutralize one’s influence.  Naturally, the targets of such fund-raising activities are those who have the funds, the large estate owners who wittingly or unwittingly, by mien or demeanor, have exposed to the public their deep pockets.

It is easy enough for large estate owners to protect themselves from kidnapping and extortion.  Simple prudence, such as avoiding a lavish lifestyle or refusing to be repeatedly mentioned in the news or society pages as a person of wealth, plus reasonable measures of personal security are usually sufficient protection.  But trickier is dodging fund solicitation done through the manipulation of legal process.  Not only does the shakedown have the aura of authority, it also, when undertaken by those in government, enjoys the presumption of regularity that effectively disguises the operation.

Over the years, Letters of Authority (LoA) from the Bureau of Internal Revenue have been recognized as one of the instruments of fund solicitation.  The LoA had acquired such notoriety that, over the years, it has become the practice for the Bureau of Internal Revenue to refrain from issuing LoAs during the Christmas season, which in our country begins from All Saints Day on November 1 and ends no earlier than Valentine’s Day on February 14.  Because several incumbents are expected to run for office in the 2004 elections, it may be a good idea for the Department of Finance, if only to set the right tone, to extend that practice to the election season.

But until the good Secretary Jose Isidro Camacho and his good Commissioner of Internal Revenue Guillermo Parayno have done so, it is will be beneficial for estate owners to understand what they are up against when they are confronted with a LoA.  For reasons of space, I would like to focus on the LoA issued in the process of a tax fraud investigation, rather than the more common LoA used in the routine examination of a taxpayer’s tax returns.  The tax fraud LoA is the more dangerous one.

The government’s right to collect taxes ordinarily does not prescribe. However, “for the purposes of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law [the National Internal Revenue Code] provides a statute of limitation in the collection of taxes.” (Commissioner v. B.F. Goodrich Phils. Inc., 303 SCRA 546). Thus, as a general rule, no internal revenue taxes are required to be assessed within three (3) years from the last day prescribed for the filing of the tax return and no proceeding in court without assessment for the collection of taxes could be begun after the expiration of said three (3) years.

However, the three (3) years is lengthened to ten (10) years and the starting point for the time period is not from the filing of the return or the deadline for payment of the tax, but from discovery by the Bureau of Internal Revenue of the failure to file a return or the filing of a false, or fraudulent return with intent to evade tax.  Since there is no time limit for when the BIR discovery may be made, a fraud assessment is, for all practical intents and purposes, also not subject to prescription.

In addition, fraud, if proven, gives justification for the imposition of the 50% surcharge, attracts the imposition of criminal penalties that include imprisonment and fine, forecloses the possibility of compromise with the Commissioner, and, in case of the VAT, paves the way for suspension and temporary closure of the taxpayer’s business operations.

Because of the gravity of a fraud case, the Bureau of Internal Revenue, to its credit, in 1995 laid out detailed guidelines for its personnel, particularly the examiners of the Tax Fraud Division, in the investigation of tax fraud cases.  The major document is Revenue Memorandum Order No. 15-95, issued on 09 June 1995, and amended, in certain areas, by subsequent issuances.

Perhaps the portion most relevant to estate owners is procedure laid out. Revenue Memorandum Order No. 15-95, as amended, particularly by Revenue Memorandum Order No. 23-97, speaks of a two-stage process.

It talks of an initial phase called “a Preliminary Investigation” to establish the “indication of fraud”.  The previous wording of the purpose was “to establish the prima facie existence of fraud”.  The omission of the qualifying “prima facie” means, under rules of statutory construction, the imposition of the stricter quantum of evidence required.  Prima facie is no longer sufficient.  The fact of the existence of indications of fraud (39 non-exclusive indications are listed) must thus be established in the initial stage.

This is to be done through “verification of the allegations in the confidential information and/or complaints filed, and the determination of the schemes and the probable extent of fraud perpetrated by the subject taxpayers, through access to records and surveillance, without contact, personal or otherwise, with the taxpayer.”

Once the “indication of fraud” is duly established by the examiner and the requisite internal review by the appropriate supervisors are conducted, the Regional Tax Fraud Committee confirms the report and an LoA is issued. Then and only then, perhaps does the taxpayer realize that he had been all along under investigation. The LoA authorizes the examination of the books of account of the taxpayer that starts the formal investigation proper, known as Formal Tax Fraud Investigation.  This is where the taxpayer is given the opportunity to defend himself. Too late, if I may say so.

It is a taxpayer’s right, I maintain, to require, prior to honoring the LoA, proof that the preliminary investigation phase has in fact been conducted, precisely because it is an essential step to prevent the LoA from becoming an instrument of oppression, harassment, or even extortion.

The signatory to the LoA ought to be made to answer for the compliance of the initial step for without such a warranty, as it were, the entire investigation becomes a mockery of due process. An LoA issued to harass, by its mere issuance, shall have, by that time and irrespective of the result of the formal investigation, attained its purpose.

       In this season of election, it is important that taxpayers receiving LoA that is preparatory to a fraud assessment exercise a good measure of activism and vigorously insist on being satisfied that a preliminary investigation has in fact been conducted and an indication fraud was in fact established.  If they shirk from this responsibility, they have only themselves to blame if they are considered sitting ducks this election season.