Five truths about tax fraud

The way to reform the habitually guilty is through a tax fraud case. The prospects of paying a tax bill that depletes one’s funds can bring sadness, to say the least. That should be fair because consequences catch up sooner or later. And the best way to harass any taxpayer is through a tax fraud case. Pay the assessed bulked-up amount, or bear the bigger stress of fighting a criminal case that begins with the Department of Justice (DOJ).

Huge tax bill, DOJ, jail time, bad press – take that for breakfast and you will lose your excitement over omelette or sunny-side up eggs. The truth is, you can make tax fraud examinations therapeutic. If you are a patient person, then you can test your patience. You can make your heart stronger if shock doesn’t kill your heart first. And if you have peace of mind, then you can begin anew to find peace.

All levity aside, I share with small or medium-sized enterprises (SMEs) and fellow taxpayers what the Bureau of Internal Revenue (BIR) can or cannot do. Hopefully, this knowledge will help you find your footing when tax fraud examination crisis strikes.

1. The BIR can look at your books beyond three years, only if they have “prima facie evidence” of fraud.

A number of taxpayers early last year received a notice from the BIR that they were to be examined (or re-examined) going back six years or so, including past years already examined, settled and closed. If you receive these kinds of attempts, then you must understand that the BIR only has three years from the date of the filing of the return to go over your books and make an assessment (unless you agreed in writing to waive that three-year period). They can only do these examinations if they are tax fraud examinations where the BIR’s right to assess is virtually imprescriptible. And they can perform these tax fraud examinations only if they have “prima facie evidence” of fraud. They cannot conduct fraud examinations to find fraud or engage in illegal fishing expeditions.

2. The informant’s info or table audit discrepancy is not prima facie evidence of fraud.

The law says if it is found that you underdeclare your revenue or income by 30 percent, that is prima facie evidence of fraud. The thing is, that “prima facie evidence” must be based on facts. It cannot be an unverified informant’s accusation, and it cannot be merely based on the BIR’s RELIEF (Reconciliation of Listings for Enforcement) or matching system. If someone’s reported purchase from you does not appear to match your sales declaration, that discrepancy is not yet prima facie evidence. There could be a timing difference, or even mistakes that create the discrepancy. Thus court decisions say that it is not conclusive and still needs to be verified to have weight.

3. If they can’t accuse you of fraudulent returns, they can’t accuse you instead of false returns.

I give it to earlier Court decisions that have caused the confusion. The Court previously distinguished fraudulent return with intent to evade tax from false return, and considered both to have the effects of tax fraud. So if you are not guilty of tax fraud, you can be guilty of falsity in your return. The only thing the BIR needs to do then is to allege falsity and they can examine your books 10 years from the discovery of the falsity.

Later court decisions, however, already clarified that in falsity, the intent to evade tax must be present to be considered fraud. This makes sense. Because otherwise, there will be no regular examinations anymore, no three-year prescriptive period, and everything will be fraud cases – because every wrong thing in a tax return can be considered a falsity.

4. Fraud is criminal in nature and thus you can confront your accusers.

The right to confront your accusers in a criminal case is constitutionally protected. It should not be forgotten that tax fraud is criminal in nature. Hence, anyone being accused of tax fraud should be able to confront witnesses or examine evidence against him. One being subjected to tax fraud examination cannot be compelled to take the BIR’s word on faith that there is evidence of fraud. The taxpayer has the right to confront the informer or disgruntled employee or otherwise dispute the evidence put forward. In a criminal case, the accused has all these rights. The taxpayer in a tax fraud case should not be treated as a lesser citizen.

5. Compliance may be a sweeter pill than the bitter tax fraud bill.

In lieu of using underdeclaration or under recording as a tax plan, taxpayers in general should seriously look at the cost of actual compliance; look at the business plans that can minimize costs. If one records his business expenses, maintain the right receipts, and claim all input taxes, would the compliant tax bill be expensive but bearable? If one uses the 40 percent optional deduction, would the tax bill be an acceptable price tag for peace? If tax is higher because of compliance, can you plan around more cost-effective business structures to remain compliant and competitive?

I am not naïve. I know that it’s an issue of survival. Everyone has to live, and live everyone must. But the hard, inconvenient question that I dare ask, and I ask this with all due respect, is: when do you know if it’s for survival or need, vs. for accumulation or greed?

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Alexander Cabrera is the chairman of the Integrity Initiative Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. And he is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.