Tax fraud cases: Basis and effects

Recently, headlines abound where famous personalities are being charged by the Bureau of Internal Revenue (BIR) for tax evasion for millions, if not billions, of pesos arising from tax fraud.  One may question, how does the BIR determine whether tax fraud exists or not?

Usually, the BIR conducts regular tax investigations of taxpayers and as a general rule, these investigations are subject to a period of limitation wherein taxes should be assessed within three years after the last day prescribed by law for the filing of the return. It is during such investigations that the BIR may discover false or fraudulent returns filed by the taxpayer or their failure to file a return. In these instances, the period for investigations will be subject to exception as provided by the National Internal Revenue Code (NIRC). In case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within 10 years after the discovery of the falsity, fraud or omission.

However, any allegation of fraud must be sufficiently established by the BIR. As a rule, assessments are prima facie presumed correct and made in good faith and in the absence of proof of any irregularities in the performance of official duties, an assessment shall not be disturbed. However, such presumption does not apply to allegations of fraud. The Supreme Court ruled in the case of Commissioner of Internal Revenue vs. Ayala Securities Corporation (G.R. No. L-29485 dated March 31, 1976) that fraud is a question of fact that cannot be presumed, but must be sufficiently established. It is never lightly presumed as it is a serious charge.

In a recent Court of Tax Appeals (CTA) case, ESS Manufacturing Company, Inc. vs. CIR (CTA Case No. 7958 dated Feb. 14, 2014), the BIR alleged that the tax returns filed by the taxpayer are false as the amounts indicated in the returns were deficient and did not disclose the truth regarding the correct amounts subject to tax. Thus, the assessment should be subject to the 10-year prescriptive period. However, the CTA disagreed citing the decision of the Supreme Court in the case of Aznar vs. Court of Appeals (G.R. No. L-20569 dated Aug. 23, 1974). In this latter case, the Supreme Court explained that it is quite easy for revenue officers to claim that there was falsity in the return filed by the taxpayer. However, the said court also cautioned that mere falsity of a return does not merit the application of the 10-year prescriptive period, unless it can be shown that the return was made with a design to mislead or deceive on the part of the taxpayer, or at the very least show culpable negligence. Hence, since the BIR could not substantiate its claim that the taxpayer’s return was false, the CTA ruled that the three-year prescriptive period should be applied. The CTA noted that the BIR merely relied on the tax returns, financial statements and trial balance to substantiate the claim that the returns were false, but failed to prove the same. Such falsity must be established by clear and sufficient evidence.

However, it should be noted that there is still an instance where fraud may be deemed prima facie to exist by the BIR. Where during an assessment, the BIR finds that there is a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions, said underdeclaration or overstatement shall constitute prima facie evidence of a false or fraudulent return. Substantial underdeclaration or overstatement means that more than 30% of the taxable sales, receipts or income was not reported and more than 30% of the deductions exceeded the actual deductions.

Also, it should be noted that an allegation of fraud by the BIR may involve both civil and criminal cases against the taxpayer who allegedly committed such act.

Given the current trend by the BIR to pursue alleged tax evaders, it is but proper for the common taxpayer to be mindful of the different taxes to be paid and to keep the proper records of its transactions. This practice will aid the taxpayer in reconciling discrepancies and dispute any allegation of fraud by the BIR.

Valerie Jill Reyes is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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