In focus: Tax audit of professionals and sole proprietors

For the past years, the Bureau of Internal Revenue (BIR) has issued guidelines on how Revenue District Offices, Large Taxpayers Audit Divisions and the National Investigation Division will conduct and prioritize the audit for a specific year. On March 8, 2013, the BIR issued Revenue Memorandum Order (RMO) No. 4-2013 setting the policies and guidelines to be observed in the continuing tax audit of 2012 onwards.

While it provides that all taxpayers are considered as possible candidates for audit, it has also provided list of taxpayers who will be priority for tax audits. As compared to previous year’s policies and guidelines wherein specific professionals such as lawyers, doctors, engineers, and accountants were identified for priority audit, RMO No. 4-2013 has set a “benchmark” and has prioritized professionals and sole proprietors whose reported income tax liability is less than P200,000 per annum; reported gross revenue is less than 40 percent compared to its previous year’s reported gross revenue; and tax payment for each type is less than 35 percent as compared to the previous year’s tax payment.

There seems to be an apparent shift from specific taxpayers to setting a criteria based on the taxpayer’s reported income tax due for the year, gross revenue, and tax payments for the current compared to previous year. It will be interesting to know the basis of the implication that professionals and sole proprietors across the board has increased its business in 2012 or 2013 by at least an average of 40 percent, resulted to income tax and value-added tax payments to have increased by 35 percent.

Also, included in the list for priority in tax audit are importers/manufacturers/wholesalers/retailers of wrist watches and jewelry; and petroleum/gasoline dealer; hotels, motels, pension houses/lodging houses/inns, dormitories/boarding houses; real estate industry; schools, particularly for foreigners and review centers; contractors of NGAs, LGUs and government owned and controlled corporations; retailers/wholesalers; restaurants, fast food chains, catering services, bars, coffee shops; hospitals, clinics, medical/dental laboratories; establishments/clinics for beauty enhancements; manufacturers/dealers of beauty and health supplement; amusement/entertainment/event centers; advertising agencies; business processing outsourcing companies; e-commerce industry; manpower and other recruitment services agencies; other industries peculiar to the area of jurisdiction of the district office.

Schools for foreigners and e-commerce industries are included in the above enumeration probably because these are emerging industries. There have been a lot of schools which cater to this demand thus making it one of the industries which has a high probability for tax collection. Moreover, in this age of modernization, transactions can often involve the internet. Online sales of goods or services are now becoming common, which admittedly is difficult to monitor absent self-reporting. In this regard, e-commerce industry has been put on the list to monitor their compliance.

Finally, the RMO includes taxpayers who fall below the established benchmarks of tax compliance and those who maintained an ending inventory with value of 100% or more of its gross sales as priority for tax audits.

Income tax reporting for most Philippine taxpayers ended last April 15, 2013. It will be interesting to observe the effect of RMO No. 4-2013 on upcoming tax audit for the period 2012.

Olivia P. Taganas is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&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 MS&Co. For comments or inquiries, please email [email protected] or [email protected].