REVENUE MEMORANDUM ORDER NO. 12-2007 issued on July 6, 2007 prescribes the 2007 Audit Program for Revenue District Offices (RDOs). The Audit Program covers audit/investigation of 2006 internal revenue tax returns, including those of fiscal period taxpayers whose taxable year ended on any month after June 30, 2006 but before December 31, 2006. No audit of 2005 tax returns shall be initiated, except for cases involving claims for tax credit/refund, estate tax returns and requests for tax clearance of taxpayers due to retirement of business which have to be acted upon immediately, unless prior written approval is secured from the Commissioner, through the Deputy Commissioner, Operations Group. Letters of Authority (LAs)/Audit Notices (ANs) shall be issued to cover the audit/investigation of taxpayers falling under the following selection criteria: a. Mandatory a.1 Taxpayers With Claims For Income Tax refund or issuance of Tax Credit Certificate (TCC) or Income Tax Returns showing carry-over of excess withholding tax or Income Tax payments where the amount of claim/carry-over exceeds P= 100,000.00 and/or where the gross sales/receipts exceed P= 10,000,000.00 for taxpayers in Revenue Region Nos. 5, 6, 7 and 8 (Valenzuela, Manila, Quezon City and Makati), except RDO Nos. 35 – Romblon, 36 – Puerto Princesa and 37 – San Jose, Occidental Mindoro, and amount of claim/carry-over exceeding P= 100,000.00 and/or where the gross sales/receipts exceed P= 5,000,000.00 for all other Regions, including the RDOs aforementioned as exceptions, which will require the audit/investigation of all internal revenue tax liabilities for the covered period (Selection Code: ITR for tax refund, ITC for TCC and ITE for Income Tax returns showing carry-over of excess withholding tax or Income Tax payments); a.2 Taxpayers with claims for Value-Added Tax (VAT) refund or issuance of TCC or VAT returns showing excess input tax at the end of the taxable period where the amount of claim or excess input tax exceeds P= 100,000.00, which will require the specific audit/investigation of the VAT liabilities only for the covered period (Selection Code: VTR for VAT refund, VTC for VAT credit certificate and VTE for returns showing excess input tax); a.3 Estate tax returns with other tax liabilities where the gross sales/receipts from business and/or gross estate exceed P= 10,000,000.00 for Revenue Region Nos. 5, 6, 7 and 8, except RDO Nos. 35, 36 and 37, and gross sales/receipts and/or gross estate exceeding P= 5,000,000.00 for all other regions, including the RDOs mentioned as exceptions (Selection Code: EOT); a.4 Estate tax returns with no other tax liabilities where the gross estate exceeds P= 10,000,000.00 for Revenue Region Nos. 5, 6, 7 and 8, except RDO Nos. 35, 36 and 37, and gross estate exceeding P= 5,000,000.00 for all other Regions, including the RDOs mentioned as exceptions (Selection Code: EST); a.5 Request for tax clearance of taxpayers due to retirement/cessation of business with gross assets and/or gross sales/receipts exceeding P= 10,000,000.00, which will require the audit/verification of all internal revenue tax liabilities for the immediately preceding year and the year of retirement of the taxpayer pursuant to Section 52 of the Code (Selection Code: RET); and a.6 Request for tax clearance of taxpayers undergoing merger/consolidation/splitup/spin-off and other types of corporate reorganizations with gross assets exceeding P= 10,000,000.00, which will require the audit/verification of all internal revenue tax liabilities for the immediately preceding year and the year of corporate reorganization of the taxpayer, specifically, those whose juridical personality will cease (Selection Code: MCS). b. Top Priority Taxpayers b.1 Hotels and other tourism-related establishments (Selection Code: HOT); b.2 Stockbrokers, lessors/lessees and sellers/dealers/buyers/brokers of real properties (Selection Code: REA); b.3 Hospitals, clinics, medical and dental laboratories (Selection Code: MED); b.4 Professionals (Selection Code: PRF); and b.5 Contractors of government agencies, instrumentalities, local government units and government corporations (Selection Code: CON). c. Other Priority Taxpayers c.1 Taxpayers with Income Tax due of less than 2% of gross sales/revenues or total VAT due of less than 3% of gross sales/revenues (Selection Code: LOW); c.2 Taxpayers with the lowest percentage of Income Tax due based on the ratio of Income Tax due over the gross sales/receipts of the top three (3) industries within the respective areas of jurisdiction of the RDO, as determined by the Revenue District Officer and approved by the Regional Director (Selection Code: TOP); c.3 Taxpayers with no Income Tax return filed (Selection Code: NOR); c.4 Taxpayers who are reporting/filing “No Operations” Annual Income Tax Returns (Selection Code: NOP); Prior to the selection of the taxpayer, an ocular inspection shall be conducted to verify whether the business exists and to determine if the volume of business transactions warrants the issuance of a LA/AN. c.5 Taxpayers reporting net loss or no taxable income in their tax returns (Selection Code: LOS); c.6 Taxpayers filing exempt tax returns due to availment of tax incentives or tax exemptions including foundations and selected cooperatives (Selection Code: EXP); c.7 Taxpayers who are included in the nationwide list of Top 10,000 corporations under the jurisdiction of the respective RDOs (Selection Code: TEN); c.8 Taxpayers newly covered by VAT under RA 9337 (Selection Code: VAT). d. Revenue District Officers’ Discretion (Selection Code: RDO) The Revenue District Officer is given the opportunity to select taxpayers which do not fall within the guidelines established above but the total selected audit candidates shall not exceed 20% of the total number of taxpayers to be audited by the district office, without including in the basis the number of mandatory cases under paragraph III.A.1 hereof. The verification/processing of the following cases shall be covered by Tax Verification Notices (TVNs): a. Cases below the threshold as defined under paragraphs III.A.1.1 to A.1.4 of this Order; b. Claims for tax credit/refund of Excise Tax under Title VI of the 1997 NIRC, regardless of amount; c. Claims for tax credit/refund on erroneous/double payment of taxes, regardless of amount; d. Taxpayers who are retiring from business, undergoing merger/ consolidation/splitup/spin-off and other types of corporate reorganizations with gross assets of P= 1,000.000.00 up to P= 10,000.000.00; e. Protested cases/cases for reinvestigation; f. Pre-audit, with resulting discrepancy of the following 2006 Income Tax returns not selected for issuance of LA/AN under this Order, subject to the following scope only: f.1 Tax returns with resulting discrepancies after pre-audit by the RDOs; f.2 Corporate Income Tax returns on the applicability of the Minimum Corporate Income Tax; f.3 Tax returns claiming the following deductions from gross income subject to limits under existing law and regulations: f.3.1 Interest expense; f.3.2 Contributions; and f.3.3 Representation expense. f.4 Tax returns with advance payment of taxes credited and creditable withholding taxes claimed against tax due to determine correct substantiation of the claims through the certificates attached to the returns. The Regional Directors (RDs) and Revenue District Officers shall ensure that the collection from audit shall be equivalent to at least 3% of the total collections from voluntary compliance in accordance with the agreed set target for 2007 under the Office Performance Measurement System. However, in case the desired goal from audit cannot be attained due to justifiable reasons but the overall collection goal of the district office was met, the nonattainment of the 3% audit goal will not be a basis for demerit of the concerned Revenue Officers and Officials. All LAs/ANs shall be prepared, approved and signed by the RD for 2006 tax returns, unless otherwise directed by the Commissioner. The RD shall issue the LA/AN only when the duplicate copy of the tax returns of the taxable year to be covered by the LA/AN is attached thereto, except in cases where the taxpayer was found to have failed to file the applicable tax returns and pay the corresponding taxes thereon. In cases where no return has been filed, the RD may assign the case to the Revenue District Officer having jurisdiction over the taxpayer or to the Special Investigation Division (SID), as the case may be. In the pre-audit of 2006 Income Tax returns to be covered by TVNs, the following shall be observed: a. The RD shall issue TVNs on tax returns with discrepancies after pre-audit by the RDOs. b. TVNs shall be prepared by the RDOs and shall be approved and signed by the RD only when the duplicate copy of the tax return and the computation of the discrepancies found therein are attached to the TVN. c. The pre-audit shall not be construed as a regular audit/investigation since the Revenue Officer (RO) shall limit his verification on the mathematical computation of the tax liability on the face of the return, determination of completeness of certificates of creditable withholding tax claimed and of proof of payment of advance taxes claimed/credited per return, and compliance with RR Nos. 9-98, 13-98, 13-2000 and 10-2002 as to the limitation for deductibility of expense items as reflected/claimed on the tax returns filed. No fieldwork in relation to the pre-audit of tax returns prescribed in this Order shall be allowed. Taxpayers who have been examined for the prior year shall not be investigated for the immediately succeeding period by the same RO and/or Group Supervisor, except in cases mentioned in paragraph IV.11 of the Order or when there is only one Group Supervisor or at most 4 ROs in one district. The policy on the simultaneous investigation of all liabilities of the taxpayer shall be followed. One LA/TVN shall be issued for each taxable year or period to include all internal revenue tax liabilities of the taxpayer. For estate tax cases with other tax liabilities, three (3) separate LAs shall be issued as follows: one for the Estate Tax liability, one for other internal revenue tax liabilities covering the year immediately preceding the death of the taxpayer, and another LA for internal revenue tax liabilities covering the short period return. One RO shall be assigned to handle the Estate Tax liability as well as the other internal revenue tax liabilities of the immediately preceding year and short period return. In the issuance of LA/TVN covering the audit/verification of tax liabilities of taxpayers retiring from business, and taxpayers undergoing merger/consolidation/split-up/spin-off and other types of corporate reorganizations, two separate LAs/TVNs shall be issued to the same RO for the audit/verification of the immediately preceding year tax returns and the short period returns. The Certificate Authorizing Registration (CAR) for Estate Tax cases covered by LAs shall be issued only after review of the Estate Tax case and other internal revenue tax liabilities by the Assessment Division and approval of the RD of the reports of investigation and payment of deficiency tax(es), if any. Thus, the reports of investigation on the other internal revenue tax liabilities must be submitted within the timeframe prescribe under paragraph IV.29 of this Order, otherwise, the concerned RO shall be administratively liable in case of failure to collect the tax liabilities arising therefrom. The Revenue District Officer must see to it that the tax dockets of Estate Tax cases with LAs together with the other tax liabilities are transmitted to the Assessment Division within two (2) days from the payment of deficiency tax, if any. In case the report of investigation on the other tax liabilities is not completed within the prescribed period to audit and the taxpayer insists that the CAR be issued even without the results of the audit on the other tax liabilities, the CAR may be issued provided that the exe cutor or administrator or any of the legal heirs of the decedent shall post a bond, either through a bonding company or a cash bond, which shall be used to settle any deficiency tax liability that may arise after the completion of the audit. In all instances, the concerned RO is mandatorily required to prepare the proposed assessment on the other tax liabilities, which shall be the basis of the bond to be posted by the executor/administrator/heirs of the decedent. No CAR on Estate Tax cases covered by LAs shall be issued by the Revenue District Officer unless the approved tax docket has been officially transmitted to him by the Chief, Assessment Division. Subsequently, the approved tax docket shall be transmitted to the Regional Administrative Division for safekeeping. For Estate Tax cases covered by TVNs, the CAR shall be issued prior to review by the Assessment Division. In instances where there are other tax liabilities involved, the CAR shall be issued only after the submission of report of verification by the RO on the Estate Tax as well as the other internal revenue tax liabilities, and after payment of deficiency tax liabilities, if any. Notwithstanding the issuance of CAR prior to review, the docket of Estate Tax cases covered by TVN shall be submitted to the Assessment Division within two (2) days from release of the CAR, and the mandatory review thereof shall not be beyond five (5) days from receipt thereof by the Assessment Division. In case the report of verification on the other tax liabilities is not completed within the prescribed period and the taxpayer insists that the CAR be issued, the RDO shall observe the requirement on the posting of bond under paragraph IV.12 of this Order. The practice of issuing mission orders, correspondence letters, referral memoranda or any other similar orders for the purpose of audit examination and assessment of internal revenue taxes is strictly prohibited. For purposes of surveillance, stocktaking, Tax Compliance Verification Drive (TCVD) or any similar purpose, the issuance of mission orders shall be governed by the pertinent revenue issuances issued for that purpose. Only ROs–Assessment Group shall be authorized to conduct audit and investigation of tax cases, whether in a principal or assisting capacity. The audit output of every district should be at least 30% of the total number of corporate and individual business taxpayers. Cases covered by TVNs and LN cases which were automatically converted to LAs shall be excluded from the count. Cases to be covered by LAs/ANs shall be classified according to either gross assets or gross sales/receipts as of the end of the applicable taxable period based on the following: Case Classification Gross Sales/Receipts or Gross Assets Small Not more than P 5,000,000.00 Not more than – P 10,000,000.00 Medium P 5,000,000.01 – P 50,000,000.00 P 10,000,000.01 – P100,000,000.00 Large P 50,000,000.01- P 100,000,000.00 P 100,000,000.01 – P 200,000,000.00 Very Large Over – P 100,000,000.00 Over – P 200,000,000.00 Reports of investigation of all cases covered by LAs/ANs/TVNs shall be submitted by the RO within the following prescribed number of calendar days from the date of LAs/ANs/TVNs: Case Classification No. of Days Cases other than VAT claims for refund/credit : Very Large/ Large 120 Medium 90 Small/TVN 60 Cases covering claims for VAT refund/credit 120 days from the submission of complete documents For offices where the LA Monitoring System (LAMS) is already rolled out, the concerned offices shall encode the LAs/ANs issued and update the status of the said LAs/ANs in the LAMS. In addition to audit cases arising from denunciation by bona fide informers and fraud and similar cases referred to by higher authorities, the concerned RDO may refer the following cases for audit to the Special Investigation Division: a. Taxpayers with substantial reduction in gross sales/receipts/tax payments and/or substantial increase in cost of sales and expenses. For this purpose, the phrase “with substantial reduction in gross sales/receipts/tax payments” shall mean more than 30% reduction in current year’s gross sales/receipts/tax payments from that of the immediately preceding year while “with substantial increase in cost of sales and expenses” shall mean more than 30% increase in claimed cost of sales and expenses of the immediately preceding year with no corresponding increase in the reported sales; b. Taxpayers found understating the correct sales/income by more than 30% as a result of authorized surveillance/stocktaking/tax mapping activities and third party information; c. Taxpayers who are identified through the TCVD as consistent violators for nonissuance of receipts/invoices, etc. as recommended by TCVD Coordinators, or those discovered to have violated the invoicing and registration requirements through the Premyo Sa Resibo (PSR) and other programs. For this purpose, a taxpayer is considered a “consistent violator” if he has a record of at least three (3) offenses against registration, invoicing and bookkeeping requirements.