The tax system of the Philippines is founded on discretionary deference. This means that it is up to the taxpayer to decide which taxes to pay, how to comply with various regulations, and pay attention when to pay certain tax dues. As a result, the BIR oversees an individual’s, a company’s, or organization’s financial records in the form of an audit.
According to tax services in Manila, the purpose of the BIR audit procedure is to ascertain whether the company complies with all applicable accounting regulations, standards, and laws. Every taxpayer must follow certain procedures and documentation processes based on their specific circumstances, such as business structure or whether they’re registered for VAT.
It would be very helpful if all business owners are aware of what transpires in a BIR audit. No one is exempted from this, as even those who make honest mistakes in calculations or compliance with forms are subject to investigations and audits of their accounts, receiving letters from the BIR. Learn more about the BIR’s auditing process and understand its implications for your business:
1. Deciding which taxpayers to audit
Auditing is the responsibility of the Bureau’s Regional Offices, Chiefs, Taxpayer Assessment Divisions, Policy Cases, Excise Taxpayer Division, and Tax Fraud Division. It is also their responsibility to compile a list of individuals or businesses who meet the selection criteria for an audit.
Keep in mind that taxpayers may also be chosen if the Bureau detects suspicious activity, fraud, anomalies in records, or tax evasion. For example, according to tax and audit services in the Philippines, even those who engage in legal tax avoidance measures can be audited if they don’t submit sufficient evidence or file for the correct deductibles. As a result, a company or individual may be audited multiple times. If both auditor or taxpayer is dissatisfied with the initial investigation for any reason, they can also request a re-investigation of the accounts.
2. Stay pro-active: gather documents to present
A letter known as the “Letter of Authority” grants the BIR revenue officers permission to examine an individual’s books of accounts and other accounting records for a specific taxable year. Some people call this as the “love letter” from the BIR. This signifies that the commissioner or his duly authorized representative has the authority to authorize taxpayer examination and correct tax assessment under the Tax Code.
According to accounting services in the Philippines, after the letter is issued, it must be submitted within thirty days. The letter will be deemed invalid if it is submitted after the deadline, and the organization that will be the subject of investigation may reject it.
Do take note that a checklist of documents that a taxpayer will be required to submit and present is included with a LOA issued by the BIR. Ledgers, journals, schedules for sales and purchases, official receipts, sales invoices, and lists of payables and receivables are all examples of these documents. Taxpayers are typically required to provide these documents to the BIR within ten days of receiving the LOA.
3. Penalties imposed if found negligent or incorrect
Assuming that the individual or the company is found to have committed fraud, intentionally understated or overstated accounts, unintentionally made errors in calculations, or to have anomalies, then adverse consequences await them based on the degree of their infractions. The BIR officers may then take punitive measures, such as penalties, forced business foreclosure, revoked licenses and registrations, complete prohibitions from conducting business in office-controlled areas, and even legal action and imprisonment.
As a result, keeping accurate records of all transactions is essential for all business owners. All your income and expenses must be meticulously documented in your bookkeeping, including relevant receipts that can be used as tax deductions. Even though it may appear simple, anyone who is not well-versed in the most effective accounting practices is susceptible to making errors.
Avoid a BIR Love Letter at All Cost
Bear in mind that your company will unfortunately be subject to a BIR audit as a result of these errors. In the eyes of the law, mistakes made, even with the best of intentions cannot be excused. More so, errors that are intentionally committed to avoid paying taxes.
If you need assistance, don’t hesitate to call our accounting services in Pasig, Metro Manila. Our team of CPAs is well-versed in the tax codes so we can help you with tax compliance. Professional input is essential, especially since the BIR is known for continually updating their revenue regulations and requirements. We can help you stay updated and assist you with implementing a proper accounting system to avoid mistakes that may result in a BIR Love Letter. Join the numerous business owners who have taken advantage of our free 30 minute consultation offer and have retained a long lasting relationship with our experts.
