Tax Assessments: The burden might not be on you

Tax investigations are burdensome affairs. This is primarily because

tax assessments arising from deficiencies are presumed correct and
made in good faith. This means that, once you are issued a tax
assessment, there is a prima facie presumption that you owe the
tax as assessed. And the burden of proof is on you to rebut this
presumption, otherwise, the Bureau of Internal Revenue (BIR) wins
and you pay, or your assets get levied. Simply put, you are guilty,
until proven innocent.
I suppose you have wondered at some point that if the BIR accuses
taxpayers of failure to report taxable income, why shouldnt it bear the
burden of proof? After all, under the basic rules of logic and debate, the
burden of proof is always placed on the affirmative team. He who asserts
must prove. We can all agree that proving the non-existence of something is
very difficult.
A major reason for placing the burden of proof on the taxpayer is that our
system of taxation depends on voluntary compliance with the tax laws. The
self-assessing system governs Philippine internal revenue taxes and under
such a system, the taxpayer is responsible for determining his tax liability. By
placing the burden of proof on the taxpayer, the presumption of correctness
forces the taxpayer to produce competent and sufficient evidence to rebut
the accuracy of the assessment. Thus the taxpayer is required to maintain
adequate records of income and deductions. Ultimately, the tax liability is
based on facts and figures within the control of the taxpayer.
However, of late, there have been instances when revenue examiners,
burdened with steep revenue collection targets and with threats of dismissal
from service in case of underperformance, tend to issue assessments that
have no factual or legal basis. In such cases, the BIR merely informs the
taxpayer of the details of discrepancies, demands payment of tax
deficiencies (which can be incredibly huge at times), and then waits for the
taxpayer to prove that the assessment is incorrect or for the taxpayer to
settle.
As early as 1962, the Supreme Court made a doctrinal pronouncement in the
case of Collector of Internal Revenue vs. Benipayo, G.R. No. L-1365 where it
held that the presumption of correctness of assessment being a mere
presumption cannot be made to rest on another presumption; hence,
assessment should not be based on mere presumptions no matter how
reasonable or logical said presumptions may be.

For the first two months of this year alone, the Court of Tax Appeals (CTA)
struck down a number of assessments on the basis of the doctrine laid down
in the Benipayo case. Let me cite two interesting cases.
First is CTA Case No. 8367, Farcon Marketing Corporation vs. BIR issued last
February. The BIR requested the taxpayer to submit its accounting records
for BIR examination. However, the taxpayer explained that it cannot do so as
its accounting books and records were lost or destroyed by reason of
typhoons Ondoy and Pepeng. The BIR then issued the taxpayer a deficiency
assessment, which the latter contested by filing a letter protest and
attaching reconstructed worksheets and schedule of purchases and
expenses.
When the case reached the CTA, the CTA held that the BIR could have
determined petitioners tax liability through estimates, considering the
absence of the latters accounting records. Such estimates should be based
on sufficient evidence. Specifically, the BIR has the power to make an
assessment based on the best evidence obtainable pursuant to Section 6 (B)
of the 1997 Tax Code, as amended. However, the records of the case show
that the BIR failed to present any evidence which it used as basis or
foundation for the subject deficiency assessment. Consequently, the CTA
found the assessment void for lack of factual basis.
Another case is CTA EB No. 1054, Commissioner of Internal Revenue vs.
Agrinurture, Inc. issued January of this year. Although this case has already
been widely discussed, let me cite the relevant facts of the case for the
benefit of those who are unfamiliar. In the Agrinurture case, the BIR issued
an assessment to the taxpayer for deficiency income tax and value-added
tax (VAT). The assessment was based on the taxpayers alleged underdeclaration of purchases, as suggested by reconciliation of data from the
Bureau of Customs as against the taxpayers purchases per returns filed.
Essentially, the BIR argued that since the purchase of merchandise did not
appear in respondents returns nor reflected in its inventory or capital
expenditures, there can only be one necessary conclusion -- that this
undeclared purchase of merchandise was eventually sold thereby resulting in
income which was not reported. In short, the BIR presumed that the
undeclared purchase translated into income.
However, the CTA en banc affirmed the prior ruling of the CTA Division,
holding that the assessment has no factual or legal basis. According to the
CTA en banc, income tax is imposed, not when there is an undeclared
purchase, but only when there was an income, and such income was
received or realized by the taxpayer. Even granting that there was an
undeclared purchase, the same is not prohibited by law. After all, for income
tax purposes, a taxpayer is free to deduct from its gross income a lesser
amount, or not claim any deduction at all. What is prohibited by the income

tax law is to claim a deduction beyond the amount authorized. As to the VAT,
it was held that VAT is imposed when one sells, not when one purchases.
Note also that the CTA Division in the Agrinurture Case emphasized how the
prima facie correctness of a tax assessment does not apply upon proof that
an assessment is utterly without foundation, meaning it is arbitrary and
capricious. Where the BIR has come out with a naked assessment, i.e.,
without any foundation character, the determination of the tax due is without
rational basis.
As you can see, when issued a tax assessment, do not lose hope for
taxpayers have recourse too. The burden of proof is not always on you.
The issue of who bears the burden of proof is important -- even if your case,
like most, does not go to court. In many cases, this burden makes taxpayers
decide to settle their tax assessments rather than go through the ordeal of
tax litigation. The party having the burden of proof will always feel at a
disadvantage, and will feel greater pressure to concede in negotiations. But
before you write that settlement check, know that the burden is not always
on you. Before you concede in the negotiations, weigh your chances
carefully.
Know that jurisprudence provides that even as we concede the inevitability
and indispensability of taxation, it is a requirement in all democratic regimes
that taxation be exercised reasonably and in accordance with the prescribed
procedure; if it is not, then the taxpayer has a right to complain, and the
courts will then come to his succor.
Furthermore, know that courts recognize that the BIR has expansive powers.
In the case of Agrinurture, the CTA rightly observed: The BIR cannot feign
ignorance of taxpayers records. It is a well-settled jurisprudential principle
that the BIR ought to know the records of all taxpayers. After all, the BIR has
been vested with ample powers to know the records of taxpayers and assess
the correct amount of taxes. With these powers, there seems to be less
reason now for the presumption of correctness. The BIR must also prove that
its assessment is not arbitrary or capricious. Taxpayers deserve no less.