A taxpayer’s right to receive notice of assessment
In one of the episodes of Suits when Mike Ross was being tried for fraud, for impersonating a lawyer, Donna Paulsen was questioned by Anita Gibbs. When asked if she knew whether Mike went to Harvard Law School, this question caught her off guard and prompted her to invoke the Fifth Amendment. While watching this episode, I was amazed that even on TV shows, the characters know their rights. It’s hard not to make comparisons to taxpayers in terms of understanding rights. In tax assessment cases, many taxpayers may be unaware of their basic rights. As such, this article will briefly discuss one of the substantive requirements in assessment cases — The Notice of Informal Conference (NIC) or Notice of Discrepancy (NoD).
WHAT IS NIC?
As a rule, the BIR has 240 days (for large taxpayers) and 180 days (for taxpayers registered with Revenue District Offices) from the date of issuance of the electronic Letter of Authority (LoA) to complete the examination of the taxpayer’s books of account and other accounting records.
After the examination is completed, the BIR issues the NIC to the taxpayer. It is a written notice issued to the taxpayer that informs him of the details of the initial tax findings made by the authorized Revenue Officers of the BIR. The taxpayer is given 15 days to submit explanations for the tax findings and supporting documents.
The issuance of the NIC is part of the due process requirement in the issuance of a deficiency tax assessment, as outlined by Revenue Regulations (RR) No. 12-99 to implement the provisions of the National Internal Revenue Code of 1997 (Tax Code), as amended.
WHAT IS NOD?
However, in RR No. 18-13, the NIC was removed from the due process requirement to expedite the assessment process and prevent corruption by limiting interaction between the taxpayer and the revenue case officers. Recognizing that the NIC is an integral part of the due process, the BIR reinstated the NIC at the beginning of 2018 through RR No. 7-2018. Further amendment by RR No. 22-2020 renamed the NIC to NoD.
The discussion of the NoD should not exceed 30 days from the taxpayer’s receipt of the notice. During the discussion, the taxpayer is given the opportunity to present its side of the case, explain any discrepancies found during the investigation of the Revenue Officers, and submit supporting documents explaining its arguments.
ABSENCE OF NIC VIOLATES RIGHT TO DUE PROCESS
In Court of Tax Appeals (CTA) En Banc (EB) Case No. 2229, dated March 27, 2023, the CTA had the opportunity to rule on the importance of the NIC. In that case, the tax authorities contested the Court’s decision to cancel deficiency tax assessments for the taxable year 2008, on the grounds that the taxpayer’s right to due process had been violated. The tax authorities argued that the assessment notices and even the Final Decision of Disputed Assessment (FDDA) issued to the taxpayer were properly served to the taxpayer’s registered addressed and authorized persons, contrary to the taxpayer’s claim. The Court agreed with the argument of the tax authorities that the assessment notices and FDDA were properly served. However, the Court noted that an NIC was not issued prior to the issuance of the assessment notices and FDDA, resulting in a violation of due process.
Considering the importance of the NIC/NoD, the Court emphasized the mandatory and corresponding due process requirement in the issuance of a deficiency tax assessment. In the aforementioned case, the CTA ruled in favor of the taxpayer by reaffirming its decision, prohibiting the collection of assessed deficiency tax by the tax authorities against the taxpayer for violation of the right to due process. In the case at bar, the tax authorities did not issue an NIC but issued a Post Reporting Notice (PRN).
The tax authorities contend that there is no violation of due process since the PRN and the NIC serve the same purpose of informing the taxpayer of deficiency taxes and providing an opportunity to explain its side before the issuance of the Preliminary Assessment Notice. However, the Court rejected the tax authorities’ arguments and explained that the issuance of the NIC has been recognized as part of the due process requirement from the time of the 1977 Tax Code. The implementing regulation of the 1977 Tax Code, RR No. 12-1985, states that the BIR must send the taxpayer an NIC. This requirement was retained in RR No. 12-99 when the Tax Code of 1977 was amended by the Tax Code of 1997, as amended. Although the issuance of RR No. 18-2013 removed this requirement, it was later reinstated by RR No. 7-2018. Furthermore, at the time the PRN was issued, the governing regulation was RR No. 12-99, and there was no indication that an NIC was issued by the tax authorities. The Court was not convinced by the tax authorities’ argument that the PRN issued to the taxpayer served as the NIC required under RR No. 12-99 because the PRN did not include an invitation to schedule a conference or discussion between the tax authorities and the taxpayer.
In a similar vein, the Supreme Court ruled in G.R. No. 172598 that a taxpayer is deprived of due process when the tax authorities fail to issue an NIC as required by RR No. 12-99.
Based on the above rulings, it is clear that the NIC, now NoD, is an integral part of due process. An assessment case is considered void if the taxpayer’s due process rights are violated. When it comes to the power of the State to tax versus an individual’s right to due process, the scale favors the taxpayer’s right to due process. As taxpayers, it is crucial that we are aware of our basic rights and equipped with knowledge so that we are not deprived of our rights and placed at a significant disadvantage in tax assessment cases.
Luckily for Donna, she knew her rights. Let us be reminded that we should know ours too.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Lorenzo Miguel A. Soriano is a senior in charge from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.