Missing Letters of Authority in tax audits

TAXWISE OR OTHERWISE

- JANNELLE ROXAS

The intricate balancing act between the state’s power to tax and the constitutional rights of taxpayers, particularly the right to due process, forms the backbone of fair taxation. Every tax audit tries to keep these competing interests in check: the State’s right to collect what is legally due, and the taxpayer's right to be treated fairly and lawfully. This delicate equilibrium is evident in what has emerged as the Achilles’ Heel of tax audits: missing Letters of Authority (LoAs).

In a Court of Tax Appeals (CTA) decision (CTA Case No. 10951) promulgated this year, we see how the power to tax was once more tempered by the Constitutional right to due process. The CTA invalidated a tax assessment for the failure to issue a replacement LoA — a seemingly simple omission that rendered an entire assessment void from the start.

The case centered on a taxpayer who received an LoA in 2018, authorizing the assigned Revenue Officer (RO) and his Group Supervisor (GS) to audit the taxpayer’s 2017 books of account and other accounting records.

The audit continued to proceed through the Notice of Informal Conference (NIC), Preliminary Assessment Notice (PAN) until the Final Assessment Notice (FAN) stage. The taxpayer protested the FAN in a timely manner and thereafter submitted additional documents during the 60-day reglementary period of the request for reinvestigation. Seven months after the submission, the taxpayer received a new LoA authorizing a new RO and new GS to continue the investigation. A year later, the taxpayer received the Final Decision on Disputed Assessment (FDDA).

The taxpayer initially argued that the right to due process was violated on the grounds that the new RO conducted his audit without a valid LoA, and the belated issuance of the second LoA did not cure this defect. However, the CTA held that the new RO’s involvement in the reinvestigation process (after the FAN) no longer required a new LoA.