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Tax audit automation

Tax audit automation by: Romualdo V. Murcia III

In the days leading up to May 10, many people were doubting the success of the first automated elections in our country.

They had numerous reasons and explanations for the perceived failure of this exercise, but most of these fears were grounded on the fact that votes would automatically be counted through the precinct count optical scan (PCOS) machine.

Despite some glitches during the actual election day, the country’s first automated election was considered generally successful. With the aid of PCOS machines in the automatic counting of the votes, the election results were determined in a matter of days -- not weeks or months -- and the board of election inspectors no longer needed to spend hours manually counting the votes.

With the resounding success of the automated elections, many people and business entities have now recognized that automating certain processes facilitates timely completion of tasks and eases the load of employees. 

This is as good a time as any for the Bureau of Internal Revenue (BIR) to consider conducting their tax assessment entirely through computerized audit.

Actually, some of the operations of the BIR are already done electronically, such as the filing of receipts of tax returns and payments through the Electronic Filing and Payment System (eFPS). The BIR has also recognized that in today’s business environment, the use of computers and accounting applications to process business transactions has become indispensable, even for SMEs.

The emergence of various technologies in data processing has changed the way a tax audit or examination can be efficiently and effectively done, prompting the BIR to issue Revenue Audit Memorandum Order (RAMO) 1-2008, providing guidelines to the BIR revenue officers or examiners on the use of computer-assisted audit tools and techniques (CAATTS).

In conducting an audit through CAATTS, BIR examiners use audit tools to analyze and evaluate the financial transactions of the taxpayers. The BIR acknowledged that ignoring the computer, treating it as a black box, and auditing around it is no longer feasible.

I noted, however, that for most of my clients, the tax assessments done by the BIR were still conducted manually.

But I have no doubt that in the future, all tax assessments will be performed through computerized audit once the BIR revenue officers or examiners fully embrace the use of audit tools.
In recent BIR issuances and pronouncements, it is apparent that the BIR is gearing towards computerized audit.

On December 23, 2009, the BIR issued Revenue Regulations (RR) 9-2009 - Maintenance, Retention and Submission of Electronic Records - mandating all large taxpayers to maintain computerized accounting systems (CAS) and utilize electronic formats in all books of accounts and accounting records of the large taxpayers. The large taxpayers are required to register their CAS not later than December 31, 2009. Moreover, RR 9-2009 requires taxpayers who are not classified as large taxpayers but keep accounting records in both electronic and hardcopy formats to make the records available to the BIR in electronic format upon request of the Commissioner of the Internal Revenue.

RR 9-2009 also requires that electronic records used to establish tax compliance contain sufficient transaction level detail information. Even in Revenue Memorandum Order 36-2010 issued last March 26, 2010, providing the audit program for the audit of conglomerates, the BIR enjoins its revenue officers or examiners to fully utilize CAATTS in examining the accounting records of the conglomerates. 

With all this hype on the use of computerized audit, the next question is, what would be the benefit to the BIR and to the taxpayers? 

On the part of the BIR in general, the use of computerized audit will shorten the audit cycle, which would result in the timely submission of the reports of investigation. The BIR examiners will also be able to increase the number of taxpayers who are examined in a given year. Moreover, the tax examination will be focused on critical aspects of the taxpayer’s financial operations – i.e., the operations or processes with critical tax issues -- which would ensure that a quality audit has been conducted.  

On the part of the BIR examiners in particular, the use of computerized audit will enable them to concentrate on analyzing, interpreting and evaluating the reports generated from the computerized audit rather than doing the non-analytical procedures. As an audit practitioner myself, the use of audit tools has helped me profoundly in reducing the time spent conducting an audit without sacrificing the quality of the audit; in fact, it helps enhance the quality. I believe that the BIR examiners will truly welcome such opportunities.

Conducting an audit using electronic records would also save on cost for taxpayers in producing the required documents, and they don’t have to worry about the documents getting lost (which some taxpayers have experienced) since these will be submitted electronically.

Also, the tax findings of the BIR examiners will hopefully arise from valid tax issues. A lot of taxpayers have complained that the tax findings of the BIR examiners have no legal basis and would be eliminated had the BIR examiners done the necessary analysis and reconciliation. As a result, the taxpayers have to perform the necessary reconciliation and explanation and in the process incur unnecessary costs.

Moreover, with the use of audit tools, the tax examination will be completed faster, enabling the taxpayers to focus on their business operations rather than the BIR examination. 

The BIR’s use of computerized audit should be an eye-opener for taxpayers in terms of ensuring compliance with tax laws and regulations.

The use of audit tools has broadened the scope of the BIR tax audit. RAMO 1-2008 provides guidelines on how to use CAATTS for different accounts (sales, inventory, payroll, receivables, fixed assets, and payables) and for different industries (manufacturing, retail, insurance, banking and other financial institutions, telecom, etc.).

With the  effort of the BIR to strictly implement compliance with tax rules and regulations as a means of increasing revenue taxes, I believe that the BIR will fully adopt computerized audit as a tool in generating tax assessments. Thus, the taxpayers should now be serious and honest in evaluating whether their current tax practices are compliant with tax rules and regulations. 

With the use of computerized audit, I do hope tax audits will now be completed in weeks and not in months or even in years.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Romualdo.Murcia@ph.gt.com.  For other tax concerns, please check out our other tax services.