The Bureau of Internal Revenue (BIR) audit procedure is a process that examines the financial records and documents of a business, organization, and even an individual. It is used to determine if the entity properly complies with accounting rules, standards, regulations, and laws.
Philippine Law requires that external auditors conduct audits—those independent of the company and often hired or accredited by the BIR. This is done to ensure that the analysis and examination of records are impersonally and objectively done, providing an honest overview of a company’s financial state. Financial statements that go through this external auditing process include Statement of Cash Flows, Balance Sheet, the Statement of Financial Position (SFP), and Income Statement, also known as Statement of Comprehensive Income (SCI).
To learn more about the auditing process conducted by the BIR and understand the implications on your business, here are the procedures and documentation that need to be done.
1. Choosing Taxpayers for Audit
The office of the Bureau, namely, Regional Offices, Chiefs, Taxpayer Assessment Divisions, Policy Cases, Excise Taxpayer Division, and Tax Fraud Division, are responsible for conducting audits. Likewise, these offices are responsible for preparing the list of individuals and enterprises who fit the selection criteria.
Note that taxpayers may also be selected if the Bureau notices anomalies in records, suspicious activity, fraud, and tax evasion. Thus, a business or person can be subject to auditing more than once. You may also request a re-investigation of your accounts if you are unsatisfied with the first investigation for any reason.
2. Serving the Letter of Authority
The Auditing process of both individuals, partners, and enterprises begins when a Letter of Authority is issued to a taxpayer who the BIR selected for audit. This Letter of Authority is an official government document that gives Revenue Officers the power to scrutinize a taxpayer’s accounting books and records. This ensures that the taxpayer provides accurate financial information, thus enabling the Bureau of Internal Revenue (BIR) to tax them accordingly.
The Letter of Authority for investigation or audit under the National Office must be issued and approved by the Commissioner of Internal Revenue. For taxpayers under the dominion of a Regional Office, a Regional Director must issue the Letter of Authority. The Letter must be submitted within thirty days of its issuance. If submitted later than the given time frame, the Letter will be considered invalid, and the entity being called for investigation may refuse such. However, this Letter can be re-validated by the Commissioner (twice) or Regional Director (once).
3. Submission of Records and The Audit
Upon receiving the Letter of Authority, the entity in question must present the required financial records to the Revenue Officer. Officers are only given one hundred twenty days to complete the audit, from the date of a receipt of the Letter of Authority from the taxpayer to the audit itself, down to submitting a final investigative report. If the Officer fails to finish after 120 days, the progress report must be submitted to the Office Head, and the Letter of Authority must be surrendered for re-validation.
4. Imposing Penalties If Found Negligent or Erroneous
Suppose the individual of business is found to have been engaging in fraudulent acts, intentionally understating or overstating accounts, or to have anomalies. In that case, the Bureau Offices may then impose punitive actions, including penalties, forced business foreclosure, revoke business licenses and registration, total bans from engaging in business in areas under office jurisdiction, and even lawsuits and imprisonment. The BIR has a harsh Oplan Kandado tenet to catch those who intentionally file erroneous taxes.
The Final Word
Thus, it is vital to keep an accurate record of all your transactions. You must be diligent in bookkeeping and accounting for all of your income and expenses, including pertinent receipts that you can use as your tax deductibles. Though it may seem easy to do, anyone who is not well-versed with the best accounting practices can make mistakes. Unfortunately, these mistakes will subject you to a BIR audit. Even honest oversights are not excused in the eyes of the law.
For best results, it would be prudent to consult a certified public accountant (CPA). You need a professional to oversee your books and help you file your taxes to make sure everything is in order. In this way, in case the BIR asks for clarifications, you have an expert at your disposal to help you with the process. Remember, tax avoidance via deductibles is legal, but tax evasion is punishable by law. Knowing their nuances can make a big difference in your taxes.
If you want to ensure that you don’t make mistakes, pay stiff penalties, or face tax evasion charges, seek professional assistance. You can call our team as we can help you deal with a BIR investigation and audit. We can also assist you with regular bookkeeping and accounting services so your documents do not pile up. Don’t hesitate to get in touch with us as we give free 30-minute consultations.