BIR orders early pre-audits to improve collections

MANILA, Philippines - The Bureau of Internal Revenue (BIR) is initiating a pre-audit of taxpayers’ income and business taxes in 2007 in a bid to improve collections. BIR Commissioner Lilian B. Hefti, in Revenue Memorandum Order 20-2008, ordered the preliminary assessment of taxpayer compliance before full-blown audits are launched. The pre-audit, she said, will involve classifying corporate and individual taxpayers by industry or profession and obtaining the ratio of their income or business tax payments to their gross sales, revenues or receipts. Benchmarks per industry or profession will be established, after which taxpayers who fall below these benchmarks will be singled out for audit. Joel Tan-Torres, a tax partner at SGV & Co., said the BIR, which needs to collect P844.95 billion this year — 18.41% more than its P713.60 billion take last year — appeared to be serious in intensifying enforcement activities and enhancing audits. "It is quite clear the BIR wants to fast-track the audit of 2007 tax returns. Before, their pre-audit rules would come out towards the latter part of the year," he said. "Now it is issuing them as early as May or June. It is fast-tracking the audit of 2007 tax returns presumably because it wants to collect the deficiency taxes as early as possible." Tax bureau collections were 17.9% higher year-on-year in April compared to a year ago, helping the government to post a P25.8-billion surplus, the highest since 1986. Recently, the BIR issued an order prescribing the mandatory use of Computer Assisted Audit Tools and Techniques within the bureau in the audit of taxpayers The pre-audit, Ms. Hefti said in her order, will focus on the following: * the computation of the tax due and the tax payment; * the correctness of the application of the minimum corporate income tax; * the validity of claims for income tax holiday, tax exemption and other claimed tax incentives that resulted in the nonpayment or reduced payment of taxes; * the validity of interest, contribution and representation expense deductions that reduced the gross income; * the accuracy of claimed creditable withholding taxes; * the correct use of tax credit certificates; * the correct application of excess income tax carry-over or excess input tax carry-over; and * the correct application or offsetting of partial tax payments before the due date of the tax. Taxpayers who fall below industry or profession benchmarks in the course of the pre-audit will be issued either letters of authority or tax verification notices. In a separate order — Revenue Memorandum Order 19-2008 — Ms. Hefti also specified minimum audit goals for bureau officials, putting them under more pressure to improve collections. "The audit goal/target is set at a minimum of 1% for the investigating offices under the LTS (Large Taxpayers Service) and 2% for the revenue district offices using the applicable formula," the order read. The goal is based on the audit effort ratio, or the collections from audit as percentage of the assigned collection goals. - Ruby Anne M. Rubio, BusinessWorld