NOTHING BEATS HONESTY when it comes to declaring and paying taxes to forego tax audits which would cost the business/individual much more aside from the stress of being hassled and penalized by tax auditors.
The sales-related red flags include:
- Declaring much lower sales compared to industry averages (benchmarking).
- Mismatch between reported sales and VAT returns (for example underdeclaring VATable sales).
- POS/e-invoicing record not matching tax declarations.
- Big fluctuations in sales without valid reasons (for example sudden huge drops)
Expense-related red flags are:
- Unusually high expense ratios in declaring 80% expenses vs. 20% income
- Submitting fake or recycled receipt/invoices
- Large “miscellaneous” or vague expenses
- Claiming personal expenses as business expenses (for example family travel, luxury items)
VAT and withholding tax issues are:
- Mismatch between input VAT(claimed by the buyer) and output VAT (declared)
- Consistently excessive input VAT vs. output VAT
- Failure to remit withheld taxes (2307/1601E/1601C, etc).
Payroll & Employee red flags:
- Declaring very low salaries for tax purposes compared to industry standards
- Mismatch between SSS/PhilHealth/Pag-IBIG remittances and BIR 2316 declarations
- Paying employees “off the books” to reduce tax
Cash & Bank Transactions
- Large unexplained deposits in bank accounts (BIR can request bank info via Court of Appeals approval)
- Declaring low sales but having lavish lifestyle or big asset acquisitions
- Inconsistent cash flow vs. declared income
The BIR also included income tax payments below 2 percent of gross sales, substantial sales accompanied by net losses, and a sharp increase in assets despite reported losses, according to the Business World .
Filing taxes with Online Software are covered by Revenue Memorandum Order No. 22-2026, which calls for priority cases to be electronically selected using tax returns and other information available to the BIR. These cases will be covered by electronic Letters of Authority (eLAs).
Still other indicators include a drastic decline in reported sales or value-added tax payments, a significant increase in exempt or zero-rated sales, discrepancy notices, and input tax claims exceeding 75% of total output tax.
Taxpayers operating for more than five years without being audited, claiming losses from natural calamities or inventory obsolescence, and reporting income or shared expenses involving related companies may also be selected.
The order categorized audit cases as either mandatory or priority based on the nature and risk profile of the taxpayer.
Mandatory cases include taxpayers found to have underdeclared sales or income, or overstated expenses or deductions, by at least 30%.
Taxpayers flagged through third-party information or system-generated discrepancies and those claiming tax refunds or credits, among others, are also covered.
The BIR said all taxpayers are deemed potential candidates for audit for the purpose of determining the correctness of their internal revenue tax liabilities.
It clarified, however, that “audits or verifications shall be conducted only upon the issuance of a valid eLA, Tax Verification Notice, or Mission Order, and any audit or verification undertaken without such authority shall be deemed unauthorized.”
“Audit cases shall, as far as practicable, be assigned through an anonymized process, whereby the identity of the taxpayer remains concealed during the selection and assignment stages until the audit case is finalized in the system,” it added.
The BIR set a 180-day period for the submission of investigation reports involving regional cases and 240 days for cases involving large taxpayers.
The BIR said it sealed or confiscated 297 betting machines, computerized betting units, servers and other devices during simultaneous enforcement operations at 11 cockpits on Aug. 8.
The operations, conducted with the National Bureau of Investigation, covered equipment without the required Permit to Use and devices that did not appear in BIR records.
“Betting transactions must be properly recorded, and the machines used for them must be properly registered with the BIR. We will continue checking cockpit operations nationwide and take appropriate action when we find violations,” said Internal Revenue Commissioner Charlito Martin R. Mendoza said.
“We are expanding these operations nationwide. I have directed all Revenue Regions and Revenue District Offices to identify and verify operational cockpit arenas in their areas,” he added.