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TAXATION - Filing of Returns + Tax Penalties and Remedies

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THE CPA BOARD EXAMS OUTLINES by John Mahatma G. Agripa, CPA

TAXATION

FILING OF TAX

RETURNS +

PENALTIES AND

REMEDIES

Supplementary discussions based on lectures by Atty. Christopher Llamado and

Atty. Dante de la Cruz, CPA (CPAR)

Note: The following discussion is incomplete and only contains the most salient points. Referral to tax books and handouts is advised

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FILING OF TAX RETURNS: INDIVIDUALS

 In general, individuals subject to tax under the tax code (resident citizens on income within and without, aliens on income within) are

required to file, except for the following:

o Those with incomes exceeding his personal/additional exceptions. Individuals have personal exceptions of Php 50,000 with additional Php 25,000 on every dependent (maximum of 4)

o Those earning purely on compensation subject to substituted filing (except those with more than one employer)

o Those earning solely on income subject to final withholding tax (since final taxes are not reportable on the income tax return)

o Those minimum wage earners and tax-exempt individuals

 The following are some rules in the individual filing of tax returns:

o Income of unmarried minors from property received from his parents shall be included in the joint filing of his parents, except when donor’s tax on the property is paid

o Income tax returns are filed in duplicate as per the tax code,

but in practice this is made in triplicate

o Quarterly gross income earners in excess of Php 150,000 have to attach supporting financial statements certified by a CPA

o Submitted returns may still be amended within three years of filing, provided that the returns have not been subjected to any investigation

 Taxpayers may opt to pay their dues in installments, if their tax due

is more than Php 2,000. This shall only be made in two equal payments – the first upon filing (deadline: April 15), and the second on or before July 15 of the same year.

If the taxpayer fails to pay on the first installment, the whole amount shall be due, including corresponding penalties (discussion below)

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All tax credits and other deductions on the tax due shall be

deducted in full against the first installment payment

FILING OF TAX RETURNS: E-FILING SYSTEMS

 There are two e-filing systems in use, in which some entities are mandated to file instead of going personally to BIR branches. The

following are required to file through eFPS:

o Large taxpayers

o Corporations with paid-up capital of at least Php 10,000,000 and those using an electronic records system

o Entities operating in PEZA, Clark zone and other economic zones

o Government offices when remitting their withholdings Any document necessary with the filing shall be submitted within 15 days to the revenue district office where registered

 The following entities are likewise required to file using

eBIRFORMS:

o One-time transaction taxpayers (those paying excise tax, donor’s tax, and capital gains tax)

o Government owned and controlled corporations o Local government units

o Those filing ‘no payment’ returns such as general professional partnerships (GPPs are except from income tax, but are still required to file ITR for information purposes. Income of the GPP is taxed through the personal capacities of the partners)  Failure to comply will result to payment of Php 1,000 per return,

25% surcharge, and being branded as a non-compliant taxpayer. Payment made through these electronic means are acknowledged

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PENALTIES:

SURCHARGE AND INTEREST

 A 25% surcharge on the tax payable is imposed on the taxpayer in

the commission of any of the following:

o Failure to pay the tax within the prescribed deadline, when the payment was made before the receipt of notice from BIR (regardless of reason behind such failure)

o Filing at the wrong venue (includes failure to pay electronically if required so)

o Failure to pay in time any deficiency taxes

A 50% surcharge is likewise imposed on the following faults: o Failure to pay the tax within the prescribed deadline, when the

payment was made after the receipt of notice from BIR o Filing of false and fraudulent returns

It is important to note that the surcharges are applied on every single offense made

 In addition to the surcharge, a 20% interest per annum on the

basic unpaid tax is applied from the time the tax should have been paid until fully paid

 If the taxpayer requests for an extension on the deadline, the

surcharge is no longer applied if the request is made before the deadline. Otherwise, the surcharge will remain. In both instance, the 20% interest is applied on the basic tax payable

 Deficiency taxes occur when BIR uncovers taxes still outstanding from the taxpayer. Deadline for payment of such taxes are relayed to the taxpayer with an assessment, together with the applicable surcharge and interest charges. If the taxpayer fails to pay on the date stated, further surcharges and interest are imposed (on the amount already charged with surcharges and interest)

 Other penalties for taxpayer disobedience are as follows: o Failure to attach required documents (Php 1,000 per

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document)

o Failure of withholding agents to withhold and remit taxes (the amount of tax not withheld, in addition to the taxes to be paid)

STATE TAX REMEDIES

 The state can collect taxes from an evader through assessment

and collection. Assessment involves the determining of the correct

tax due and giving demand of the tax liability to the taxpayer

Generally, BIR is given three years from the date of filing or the

filing deadline (whichever is later) to assess taxpayers. If the case

involves fraudulent returns or failure to file, they are given ten years

from discovery

 The following are the prescribed steps in the assessment, though actually not performed in practice:

o Submission of Notice of Informal Conference to the taxpayer, to be replied by him within 15 days

o Submission of Preliminary Assessment Notice containing the tax assessments, to be replied within 15 days

o Submission of Formal Letter of Demand to taxpayer, at which point the tax demand becomes executory if not protested within 30 days

 When demand becomes executory, BIR can collect the tax within 5

years (or 10 years out of fraud or omission of filing) through either distraint of personal property or levy of real property or court action. Deficiencies less than Php 1,000,000 are dealt with in municipal courts while those greater are in the Court of Tax

Appeals. These actions may be performed simultaneously and at

several instances until the tax due is collected

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TAXPAYER REMEDIES

 Once a formal letter of assessment is received, the following actions are available to the taxpayer:

o Protest for either a motion for reconsideration or motion for reinvestigation within 30 days of receipt. Failure to do so causes the assessment to become final and executory o If a motion for reinvestigation is filed, supporting documents

must be filed within 60 days of protest

o If denied by the Commissioner or not acted upon in 180 days after protest, protest to the Court of Tax Appeals and/or file another motion for reconsideration within 30 days of denial or passing of 180 days

o If denied by the CTA, taxpayer may file to the Supreme Court within 15 days

 If the taxpayer wishes for a tax refund for a cause of merit, the

following are his course of action:

o Appeal straight to the Court of Tax Appeals two years within payment of tax; or

o File claim to BIR within two years after payment

o File claim to CTA within 30 days of denial by the BIR (this period is within two years after payment of tax)

If approved, the taxpayer is issued a refund check, which is valid

only for five years. In practice, refunding taxes is very hard, which is

why applying the refund to other taxes outstanding (tax credit certificate) is recommended

STATE AND TAXPAYER REMEDIES

 The State and the taxpayer may enter in mutual remedies as follows:

o Compromise is the settlement entered by BIR and the taxpayer over tax dues. Lack of financial ability to pay is among the few reasons for a compromise to flourish. In this

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case, the taxpayer allows BIR to waive bank secrecy. The

compromise shall be at least 10% of the assessed tax. For

other reasons, the compromise shall be at least 40% of the tax due. Only tax dues more than Php 1,000,000 can be compromised. Cases involving fraud cannot be compromised o If the taxpayer proves that the imposition of tax upon him is

unjust, the BIR may cancel his tax liability. But this cancellation is only on the surcharges, interest and other penalties

References

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