Taxation reviewer: Prescription on Government’s Right to Assess Taxes and its collection.
1. What is the General rule as to Prescription of Government’s Right to Assess Taxes?
èAnswer:
Internal Revenue Taxes shall be assessed within three years after the last day prescribed by law for the filing of the return or from the day the return was filed, in case it is filed beyond the period prescribed thereof. (Section 203 of the Tax Code).
2. When does the period of prescription commence to run if the tax returned is substantially amended? Jurisprudence?
è Answer:
In case a return is substantially amended, the government right to assess the tax shall commence from the filing of the amended return (CIR vs. Phoenix Assurance, May 20, 1965).
3. When does the computing the prescriptive period for assessment begin as to the notice?
è Answer:
In computing the prescriptive period for assessment, the latter is deemed made when notice to this effect is released, mailed or sent by the Commissioner to the correct address of the taxpayer. However, the law does not require that the demand/notice be received within the prescriptive period. (Basilan Estates, Inc. vs. Commissioner 21, SCRA 17).
4. Give the exception as to the general rule? Provide the law?
è Answer:
The following are the exception as to the general rule regarding prescription on the right of the government to make an assessment of tax:
1. Where no return was filed - within ten (10) years after the date of discovery of the omission.
2. Where a return was filed but the same was false or fraudulent – within ten (10) years from the discovery of falsity or fraud. (Section 222, Tax Code).
5. What is the nature of fraud in tax code?
è Answer:
Fraud is never presumed and the circumstances consisting it must be alleged and proved to exist by clear & convincing evidence (Republic vs. Keir, Sept. 30, 1966).
6-7. what are the badges of fraud in taxation?
è Answer:
The following are Badges of Fraud in taxation:
a. Intentional and substantial understatement of tax liability of the taxpayer.
b. Intentional and substantial overstatement of deductions of exemption
c. Recurrence of the foregoing circumstances.
8-9. Give 5 instances negating fraud?
è Answer:
Instances/Circumstances negating fraud:
a. When the Commissioner fails impute fraud in the assessment notice/demand for payment.
b. When the Commissioner failed to allege in his answer to the taxpayer’s petition for review when the case is appealed to the CTA.
c. When the Commissioner raised the question of fraud only for the first time in his memorandum which was filed the CTA after he had rested his case.
d. Where the BIR itself appeared, “not sure” as to the real amount of the taxpayer’s net income.
e. A mere understatement of income does not prove fraud, unless there is a sufficient evidence shaving fraudulent intent.
10. Give two additional exception of the rule on prescription of the right of the government to assess tax?
è Answer:
A. Where the commissioner and the taxpayer, before the expiration of the three (3) year period of limitation have agree in writing to the extension of said period.
B. Where there is a written waiver or renunciation of the original 3-year limitation signed by the taxpayer.
11. Give at least 3 imprescriptible assessments on taxation?
è Answer:
The imprescriptible assessment on taxation are:
A. Where the law does not provide for any particular period of assessment, the tax sought to be assessed becomes imprescriptible.
B. Where no return is required by law, the tax is imprescriptible.
C. Assessment of compensating and documentary stamp tax.
12. What is the prescriptive period of assessment with respect to the fraudulent filing?
èAnswer:
10 years from discovery of bad faith/fraud.
13. What is the prescriptive period of assessment with respect to the non-filing of tax return?
è Answer:
10 years from discovery of non-filing.
14. What is the prescriptive period of collection from the receipt of FAN by the taxpayer?
è Answer:
5 years from receipt of Final Assessment Notice by taxpayer.
15. What is the prescriptive period of collection from the receipt of FAN by the taxpayer; when the latter files fraudulent return or did not file any return?
èAnswer:
If taxpayer files fraudulent return or did not file any return, the BIR may collect without assessment within 10 years of filing of fraudulent return or discovery of non-filing.
16-17. Grounds for suspension of the prescriptive period for both the power to assess and and the power to collect?
èAnswer:
Grounds for suspension of the prescriptive period for both the power to assess and and the power to collect:
1. When taxpayer cannot be Located in the address given by him in the return.
2. When the taxpayer is Out of the Philippines;
3. When the Warrant of distraint and levy is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient discretion and no property is located;
4. Where the CIR is prohibited from making the assessment or beginning distraint or levy or a proceeding in court for 60 days thereafter, such as where there is a Pending petition for review in the CTA from the decision on the protested assessment;
5. Where CIR and the taxpayer agreed in writing for the extension of the assessment, the tax may be assessed within the period so agreed upon
6. When the taxpayer Requests for reinvestigation which is granted by the Commissioner;
7. When there is an Answer filed by the BIR to the petition for review in the CTA (Hermanos v. CIR, GR. No. L-2 4 9 7 2, 1969).
18. A Co., a domestic corporation, filed its 1995 ITR on Apr. 15, 1996 showing a net loss. On Nov. 10, 1996, it amended its 1995 ITR to show more losses. After an investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co., in a net income position. As a result, on Aug. 5, 1999, the BIR issued a deficiency income assessment against A Co.
A Co., protested the assessment on the ground that it has prescribed. Decide. (2002 Bar Exam)
èSuggested Answer:
The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). However, if the return originally filed is amended substantially, the counting of the three-year period starts from the date the amended return was filed (CIR v. Phoenix Assurance Co., 1965).
There is a substantial amendment in this case because a new return was filed declaring more losses, which can only be done either (1) in reducing gross income or (2) in increasing the items of deductions, claimed.
19. Q: Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 2004 ITR on Mar. 30, 2005. [Last day of Filing is April 15, 2005].
On Dec. 30, 2005, he left the Phil. as an immigrant to join his family in Canada. After investigation of said return, the BIR issued a notice of deficiency income tax assessment on Apr. 15, 2008. Mr. Reyes returned to the Phililippines as a balikbayan on Dec. 8, 2008. Finding his name to be in the list of delinquent taxpayers, he filed a protest against the assessment on the ground that he did not receive a notice of assessment and the assessment had prescribed. Will the protest prosper? (2000 Bar Exam).
èSuggested Answer:
No, the assessment has not yet prescribed since the BIR has a period of 3 years from the last day prescribed by law for the filing of the return.
The return was filed on March 30, 2005, that is, before the last day prescribed by law for its filing, hence the law considers it as being filed on the last day prescribed by law for the filing of the same, which is April 15, 2005.
The assessment issued on Apr. 15, 2008 is therefore within the three-year prescriptive period.
20. Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint ITR for 1997 on Mar. 15, 1998. After an audit of the return, the BIR issued on Apr. 20, 2001 a deficiency income tax assessment for the sum of 250,000 pesos inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on Aug. 19, 2001 warrants of distraint and levy to enforce collection of the tax.
If you are the lawyer of Mr. and Mrs. Sebastian, what possible defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax? (2002 Bar Exam).
è Suggested answer:
I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time (Sec. 203, NIRC).
The last day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on Apr. 20, 2001, the BIR's right to assess has already prescribed on April 15, 2001.
