Based on the National Internal Revenue Code of 1997, the Bureau of Internal Revenue (BIR) has a period of three years after the last day prescribed by law for the filing of the return to assess internal-revenue taxes. Beyond this period, any assessment issued will be considered invalid. The exception is when there is a finding of fraud or falsity in the return filed or when no return was filed, in which case the applicable prescriptive period is 10 years.
It is, therefore, not unusual that when there is failure to make an assessment within the normal three-year prescriptive period, the BIR would attribute a finding of fraud, falsity or nonfiling as justification for the application of the 10-year prescriptive period. This was the case in one assessment case, which was decided in CTA EB 1338.
In said case, the BIR assessed the taxpayer for deficiency internal-revenue taxes beyond the three-year prescriptive period. The BIR claimed that the 10-year prescriptive period applied because the taxpayer failed to file the required returns. It was, however, proven that the taxpayer filed the returns. Nonetheless, a division of the tax court still upheld the applicability of the 10-year prescriptive period, on the ground that there was fraud in the filing of the returns. The tax court en banc, in reversing the decision of its division, ruled that it was erroneous to apply the 10-year prescription because of fraud.
As a rule, assessments made by the BIR are presumed to be correct and valid. The taxpayer bears the burden of proving the illegality of the assessment. The taxpayer must prove not only that the commissioner of internal revenue (CIR) is wrong but that the taxpayer is right. However, in this case, the court reiterated the principle that, while it is true that the burden of proof is on the taxpayer contesting the validity, the same does not apply when there are allegations of fraud. In civil tax-fraud cases, the burden of proof is always on the CIR to prove that the taxpayer committed fraud intentionally.
The court reminded that fraud is never presumed and that it must be proved. The court said fraud is a state of mind; its presence can only be determined by the attendant circumstances. As such, the intentional acts to deceive and deprive the government of correct taxes must not only be specifically alleged but must be proven accordingly.
The court also found erroneous the use of preponderant evidence to prove fraud. To prove the existence of fraud, the degree of proof required is clear and convincing evidence, mere preponderance of evidence not being adequate. Thus, the existence of proof must not be merely alleged and speculated upon. The court further stressed that in civil tax-fraud cases, the burden of proof is always on the CIR to prove that the taxpayer committed
fraud intentionally.
Finally, it is important to determine the existence of fraud not only because it merits the applicability of the 10-year prescriptive period. If fraud is found to exist, instead of the normal 25-percent surcharge, a higher rate of 50 percent of the deficiency tax is imposable.
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The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member- firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at ayesha.matanog@bdblaw.com.ph or call 403-2001 local 170.