Handling letter notices

One of the trending topics that generate interest among the players in the business world is the trouble-free resolution to Letter Notices (LN) issuances. This is so true, both to taxpayers and the Bureau of Internal Revenue (BIR). For the taxpayers, these LN issuances might be burdensome considering the voluminous documents they need to produce to respond to the LNs. For the BIR, the LNs are a means of realizing the idealistic principle of good governance through speedy and proper collection of taxes.

In general, an LN informs a taxpayer of a discrepancy of sales/purchases for a particular taxable period, which discrepancy arises from a matching system of the BIR. The LN supposedly gives detailed information as to the source or basis of the discrepancy in the amount of sales/purchases. 

Lately, the discrepancies pertain to the amount of sales/purchases reported by the recipient of the LN per its tax returns as compared with the amount of purchases/sales of its customers/suppliers per the latter’s summary lists of purchases/sales or per alphalists of payees. In brief, the LN results from the matching of the data available in the system of the BIR, gathered from the LN recipient and its customers/suppliers. 

As distinguished from a Letter of Authority (LA), an LN merely shows a discrepancy in sales/purchases but an LN may ripen to an LA if not resolved in its initial phase. An LA, on the other hand, notifies the taxpayer that an officer of the BIR has been authorized to examine, validate and scrutinize a taxpayer’s books and records in relation to his internal revenue tax liabilities for a particular period. An LA may mature into a tax assessment where a Preliminary Assessment Notice and Final Assessment Notice may be issued. In any case, an LN may be argued to have the effects of an LA in the sense that it prohibits a taxpayer to amend its tax returns covering the period for which the LN was issued.  

An LN recipient is given the opportunity to refute the discrepancy raised by the LN within the allowed period. Usually, the period given to the recipient is 10 days within which to respond and to submit its supporting documents. It is likely, however, that a different period will be provided depending on the specific office issuing the LN. 

The recipient may submit its summary list of sales/purchases, sworn certification of its amount of sales/purchases, official receipts/invoices or contracts and agreements evidencing the transaction, and other available documents to substantiate its reported amount of sales/purchases. Thereafter, the BIR officer handling the LN should verify the correctness of these supporting documents submitted by the LN recipient. 

Unlike in the case of LA-initiated investigations, where the procedures for the submission of supporting documents are more or less fixed, there is no clear set of guidelines governing LNs in general. There are, however, several guidelines applicable to LNs for different taxable years. A perusal of all these guidelines point to what appears to be the BIR’s framework for handling LNs. For one thing, these guidelines require the BIR officer to request from the customers/suppliers of the LN recipient their summary lists of purchase/sales and/or sworn certifications on the amount of purchase/sale from/to the LN recipient. Where the customers/suppliers fail or refuse to cooperate with the request, the BIR officer may consider the LN as true and correct. In the alternative, the BIR officer handling the LN may recommend the issuance of an LA or even the filing of a perjury case against such customer/supplier for declaring overstated purchases/understated sales.

It has been recognized, however, that the LN recipient is expected to produce not only its supporting documents to prove the correctness of its sales/purchases, but also to submit documents to disprove the correctness of the information gathered from its customers/suppliers under the matching system. Consequently, LN recipients resort to requesting from its customers/suppliers the latter’s certificates of purchases/sales. This course of action is often resorted to where the documents submitted by the LN recipient are considered self-serving by the BIR. 

The burden imposed upon the LN recipient may be considered unfair to some. Aside from possibly damaging its relationship with its customers/suppliers, the LN recipient is in a way forced to produce documents which are outside its control or custody. Not to mention that possible reasons for the discrepancy found in the LN may be brought about by plain erroneous encoding of tax identification numbers by customers/suppliers or of amounts of purchases/sales or by timing differences in the recording of purchases/sales by the customer/supplier. These are factors which the LN recipient may not be able to address.

In order, however, to minimize the burdens attendant in handling the LN or at least to reduce the discrepancies resulting from an LN, it is advisable for any taxpayer to foster and maintain good and strong relationships with customers/suppliers. Banking on this relationship, the LN recipient might find it easier to confirm if its customers/suppliers report the correct amount of purchases/sales, at the right time, and with the correct supporting documents. It is also always advisable for any taxpayer to ensure compliance with the documentation or approval requirements of the BIR - i.e. correct registration of receipts and invoices, procuring permits to use computerized accounting system, receiving on a timely basis the appropriate certificates of taxes withheld and receipts and invoices. These practices may help in addressing concerns that may be raised by subsequently issued LNs, and perhaps lessen the possibility of being subjected to an LN.

Charity Jimenez is a Supervisor from the Tax practice of Manabat Sanagustin @ Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMH in the Philippines. For comments or inquiries, please email [email protected] or [email protected]