Tax assessments can be a significant source of worry and concern for taxpayers. The process, from submitting the required documents to dealing with the multiple notices from the Bureau of Internal Revenue (BIR), can feel overwhelming. Certain provisions of the law, particularly regarding due process, can also be misunderstood, considering several amendments that have been introduced over the years. This may result in missed opportunities for both the taxpayers and the BIR at some stages of the assessment and collection process.
With respect to the collection process, the general understanding of most is that the BIR has five years from the date of issuance of the assessment to pursue collection, whether through the BIR’s issuance of a warrant of distraint or garnishment, or by a proceeding in court. The period is normally reckoned from the date of issuance of the Final Assessment Notice (FAN). However, as ruled by the Supreme Court (SC), certain instances may suspend the running of the period, or in some cases, a shorter period may apply.
In 2022, the SC held that the BIR is only given a three-year period to collect taxes, instead of the usual five-year period, if the assessment was duly issued within the three-year period. In the case that produced the ruling, the taxpayer received a FAN within the three-year period. Unfortunately, the taxpayer failed to timely file a protest and the BIR proceeded to issue the Final Decision on Disputed Assessment (FDDA). The taxpayer filed a request for reconsideration of the FDDA with the BIR, but the request was denied by the BIR five years later. Thereafter, the BIR proceeded to enforce collection of the assessment.
After taking into consideration the above timelines, the SC held that the CIR’s right to collect taxes had prescribed. Particularly in that case, the three-year period, rather than the five-year period, applies since the assessment was issued within the ordinary three-year prescriptive period. In its decision, the SC referred to a 2014 case, where the High Court clarified that in cases where assessments are issued within the three-year ordinary period, the CIR only has an additional three years to collect the taxes, either through distraint, levy, or court action. The three-year collection period starts when the assessment notice is released, mailed, or sent to the taxpayer.
Notably, the 2014 decision is anchored on Batas Pambansa Blg. (BP) 700, an old law which shortened the statute of limitations for both assessment and collection of taxes from five years to three years. However, the three-year period under BP 700 was subsequently reverted to five years upon the effectivity of the 1997 Tax Code, or Republic Act 8424. Unlike the 2014 case, which covered the taxable period 1992, the 2022 case covered the taxable period 2010, when the 1997 Tax Code was already effective. It is interesting that the SC similarly applied the three-year period in the latter decision. Considering that SC decisions form part of the law, it is important to take note of these to ensure that the parties observe the applicable due process requirements moving forward.
Lastly, in the 2022 case, the SC ruled that the FDDA cannot be considered as a collection letter. Collection efforts must be initiated by distraint, levy, or court proceedings. This requires the issuance of a warrant of distraint and levy, which must be served on the taxpayer, or the filing of a judicial action. In this case, no warrant of distraint or levy was served, nor were there any judicial proceedings initiated within the prescribed period. Therefore, the BIR’s right to collect the deficiency taxes had lapsed.
This case highlights the critical importance of strictly observing the prescriptive periods for both assessment and collection of taxes. It also serves as a cautionary tale for taxpayers and the tax authorities alike, emphasizing once again that for taxpayers that a timely filed protest to the FAN is critical, while for the BIR, delays or procedural lapses in enforcement can render even a valid tax assessment unenforceable. Understanding these legal timelines is essential in protecting their respective rights and resolving tax assessments.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Edelweiss Chua is a manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.