VAT audit checklist for non-large taxpayers

VAT audit checklist for non-large taxpayers by: Joanna Grace P. Manuel

AFTER THE END of a taxable year, especially after filing the annual income tax return, taxpayers are usually anxious to check their compliance based on the filed tax returns. This year, because of the mandatory disclosure of the details of paid taxes in audited financial statements, it has become easier for taxpayers to check their compliance with tax regulations. One can easily check if a company will receive a Letter of Authority (LA) from the Bureau of Internal Revenue (BIR) by simply comparing its records of sales/expenses to its filed tax returns. This is precisely how the BIR will determine the list of taxpayers that shall undergo value-added tax (VAT) audit for 2012.

The BIR has recently issued Revenue Memorandum Order No. (RMO) 20-2012 for the VAT audit program which would be piloted for taxpayers under revenue regions of Caloocan, Manila, Quezon City and Makati for the pilot roll-out. The program aims to:

• increase collection and enhance voluntary compliance by focusing on quality audit of VAT returns;
• broaden the tax base by identifying buyers and sellers of goods and services subject to VAT and
• provide audit trail for transactions of VAT taxpayers.

The taxpayers will be selected based on the following criteria:

• VAT compliance is below the established 2010 or 2011 industry benchmarks;
• VAT returns for the succeeding quarters show a substantial decrease in tax payment;
• VAT returns reflect substantial input taxes from importations and local purchases, such as when the total purchases   claimed exceed 75% of the total sales;
• no VAT return filed in any quarter or all of the quarters in 2011;
• VAT returns reported as "No operations" wherein ocular inspection will be conducted to verify whether the business   exists;
• taxpayers with a history of declaring excess input tax carry over for all quarters of 2011;
• Non-submission of summary list of sales and purchases for any of the quarters in 2011;
• substantial sales but showing net loss;
• significant under declaration of sales uncovered as a result of the Tax Compliance Verification Drive and/or other   programs;
• those with declared exempt sales due to the availment of tax incentives or tax exemptions and
• other taxpayers selected by the head of the VAT audit team subject to approval by the regional director.

The selection will be performed by a VAT audit team (one team per revenue region), which is composed of at least 25 Revenue Officers -- Assessment including Group Supervisors who is headed by the Chief of the Assessment Division. Authorization to conduct the audit will be given only to the VAT audit team. The team will submit a list of taxpayers to be audited for the first two quarters to the regional director for approval with markings on which selection criteria each taxpayer is qualified in. For qualified taxpayers, the LA will be issued for each taxable quarter or for two quarters through the recommendation of the VAT audit head.

If the selected taxpayer has been previously selected in the Revenue District Office (RDO) for regular audit of all internal revenue taxes in 2011 or any prior year, significant findings on the audit of VAT is to be communicated to the Chief -- Assessment Division for risk identification. On the other hand, if the LA for the VAT audit and subsequently the taxpayers becomes a candidate for regular audit in the RDO based on the selection criteria under the annual audit program, the request for LA for regular audit should not include the VAT liability. In this case, the VAT audit team should transmit a copy of the VAT audit findings to the RDO conducting the regular audit to determine their relevance and effect to other tax liabilities.

All the basic audit procedures for VAT audit prescribed in different Revenue Audit Memorandum Orders are to be strictly observed by the revenu e officers involved in the audit. Regular audit procedures, such as understanding the nature of the business through observation and interviews, are also to be undertaken by the BIR. Included in the procedures is the sampling and cross checking of the details of sales/output tax and purchases/input tax against the books and records of the buyer and seller/supplier. This is the normal audit procedure conducted by the BIR in coming up with computation of tax deficiencies wherein a comparison is made between the amounts declared per tax returns and the amounts recorded in the taxpayer’s books of accounts.

Although one of the criteria for being included in the list of taxpayers to be audited is the non-submission of summary list, taxpayers who failed to submit summary lists will still be required by the Revenue District Office to submit diskettes or hard copies containing the information on their suppliers and buyers for the 1st and 2nd quarter of 2012.

The same with the regular audit, the VAT audit cases may also be referred to Legal Division for the issuance of Subpoena Duces Tecum for failure to submit documents, issuance of legal opinion for difficult legal issues, or for filing or criminal action.

With the release of the VAT audit program, the BIR underscores the key role of tax compliance in avoiding tax assessments. Accordingly, taxpayers should check their VAT compliance by reviewing the returns filed so they could determine the necessary course of action.