Tax Administration Income Taxation

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Topic 2 TAX Administration (income taxation)
Bs accountancy (Mindanao State University)
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ADMINISTRATIVE AGENCIES
The Department of Finance (DOF) is principally responsible for the fiscal policies and general management of the
government’s financial resources. It has the executive supervision and control of the following agencies:
1. Bureau of Internal Revenue – It is the government agency primarily responsible to assess and collect all national
taxes and charges imposed by the NIRC, other tax laws and regulations.collect, assess, enforce and execute
2. Bureau of Customs and Tariff Commission – They are the main agencies tasked to enforce the Tariff and
Customs Code (TCC). The BC also collects the taxes on imports embodied in the NIRC. import/export of products
3. Land Transportation Office (LTO) – This office is responsible to collect registration fees and motor vehicle tax.
4. Duly ad Lawfully Authorized Collectors – These are persons, agencies or duly accredited banks authorized by
the BIR, BC, TC and LTC to collect.
5. Local Offices in Charge to Enforce Local Taxation – These are the Provincial Treasurers, City and Municipal
Treasurers, Provincial and City Assessors, Provincial and City Board of Assessment Appeals, and Central Board
of Assessment Appeals.
ORGANIZATION AND COMPOSITION

The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its
powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees,
and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the
execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The
Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other
laws (NIRC Sec. 2).
The Bureau of Internal Revenue is divided into:

1. National Office solely for supervision and governance of these regional office
Its function is confined to general direction, guidance and control of the entire operations of internal revenue
services, national policy formulation and program planning for the efficient and effective implementation of
internal revenue laws and regulations. It consists of the Commissioner, the six (6) Deputy Commissioners, and
the constituent units of the Bureau (4 Deputy under Section 3 of the NIRC and 2 under the Executive Order
430 by the former President Arroyo). The deputy commissioners are assisted by fourteen (14) assistant
commissioners.
a. Commissioner of Internal Revenue

The Commissioner (CIR) is the chief executive of the Bureau (NIRC Sec. 3). He is appointed by the President
of the Philippines upon recommendation of the Secretary of Finance. He formulates the policies and
administers the activities of the Bureau. He is given full authority in matters of discipline and appointment
of internal revenue personnel. With the approval of the Secretary of Finance, he may make necessary rules
and regulations as may be needed to delineate the authority and responsibility of the various groups and
services of the Bureau.
b. Deputy and Assistant Commissioners

They assist the Commissioner in supervising the administrative and operational activities of the Bureau.
They are appointed by the President of the Philippines upon the recommendation of the Commissioner
and with the approval of the Secretary of Finance.
The Bureau shall be composed of the following groups and offices:
a. Office of the Commissioner d. Resource Management Group
b. Legal and Inspection Group e. Operations Group
c. Information System Group
2. Field Offices responsible for execution and implementing the rules of national office
For an effective administration and control, the Philippines has been divided into Regional Offices (ROs) which
directly execute and implement the national policies and programs prescribed by the National Office for the
enforcement of the internal revenue taxes. A regional office covers several provinces (including cities). Each
regional office is responsible for directing and coordinating the operation of the following divisions:
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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 1096 3

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TAX ADMINISTRATION
computation of proper taxes of

a. Assessmenttaxpayer nga mali ang pag compute e. Human Resource
b. Collection f. Finance
c. Monitoring g. Administrative Divisions
d. Legal
Each regional office is headed by a Regional Director (RD). He administers and enforces internal revenue laws
and regulations within his assigned regional area, in conformity with the delegation of authority from the
they are
the one Commissioner. He is assisted by the Assistant Regional Director (ARD).
in the
field Under the regional offices are the Revenue District Offices (RDOs) headed by the Revenue District Officers who
operation are under the direct control and supervision of the Regional Director. The revenue district offices implement
programs, methods and procedures necessary for the efficient, effective and economical assessment and
collection of internal revenue taxes in the revenue district in accordance with the policies, standards and
guidelines prescribed by the National Office and Revenue Regional Offices. Each of the revenue district office
is composed of fieldmen and examiners performing assessment work and collection agents and clerks
performing collection work. They are the personnel having direct contact in dealing with the taxpayers.
AUTHORITY AND POWERS OF THE COMMISSIONER

The Commissioner of Internal Revenue, in discharge of his duties and responsibilities, is granted the following
powers as provided in the Tax Code. interpretation must be approved by the
Pres. before implement and execute
cannot be delegated to
1. Power of the Commissioner to interpret tax laws and to decide tax cases (NIRC Sec. 4) lower positions
The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals. court only step in when the BIR/Commissioner can't settle
such cases
2. Power of the Commissioner to obtain information, and to summon, examine, and take testimony of persons
(NIRC Sec. 5) can be delegate to lower position
a. To examine any book, paper, record, or other data which may be relevant or material to such inquiry;
b. To obtain on a regular basis from any person other than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or officer of the national and local governments,
government agencies and instrumentalities;
c. To summon the person liable for tax or required to file a return, or any officer or employee of such person,
or any person having possession, custody, or care of the books of accounts and other accounting records;
d. To take such testimony of the person concerned, under oath, as may be relevant or material to such
inquiry;
e. To cause revenue officers and employees to make a canvass from time to time of any revenue district or
region and inquire after and concerning all persons therein who may be liable to pay any internal revenue
tax, and all persons owning or having the care, management or possession of any object with respect to
which a tax is imposed.
3. Power of the Commissioner to make assessments and prescribe additional requirements for tax administration
and enforcement (NIRC Sec. 6) can be delegate to lower position
a. Examination of returns and determination of tax due.
b. Failure to submit required returns, statements, reports and other documents.
c. Authority to conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts.
d. Authority to terminate taxable period.
e. Authority of the commissioner to prescribe real property values
f. Authority of the commissioner to inquire into bank deposit accounts and other related information held
by financial institutions
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g. Authority to accredit and register tax agents

h. Authority of the commissioner to prescribe additional procedural or documentary requirements.
4. Authority of the Commissioner to delegate power (NIRC Sec. 7) can be delegate to lower position
a. The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the
Bureau;
c. The power to compromise or abate
5. Duty of the Commissioner to ensure the provision and distribution of forms, receipts, certificates, and
appliances, and the acknowledgment of payment of taxes (NIRC Sec. 8) can be delegate to lower position
ASSESSMENT OF TAXES
Tax administration refers to the manner or procedures of assessing and collecting or enforcing tax liabilities. Thus,
tax administration is composed of: (1) assessment, and (2) collection. In this section, only the assessment is
discussed. Complete discussion on the prescriptive period for assessment and collection is discussed in ‘Tax
Remedies’ material.
Assessment computation or audit of tax
An assessment, in the context of taxation, may refer to the official action of an officer authorized by law in
ascertaining the amount of tax due under the law from a taxpayer. This action necessarily involves:
a. The computation of the tax due tax due is the total amount of tax need to pay by the taxpayer
b. Giving of notice to the taxpayer (Preliminary Assessment Notice or Final Assessment Notice)
c. The making, simultaneously with or sometime after the giving of notice, of demand upon him for the
payment of tax or deficiency (Formal Letter of Demand)
The authority to make assessments of taxes is vested by law on the Commissioner. He may delegate this authority
to subordinate officials, but he cannot delegate the power to make final assessment to his subordinates as he
himself is the one entrusted by law to make final assessments. Assessments made by the subordinate shall likewise
be effected as that issued by the Commissioner.
Assessments are always presumed to be done in pursuant with the law, making it legally valid and enforceable
against the taxpayer, unless the taxpayer protests. The burden of proving the illegality of any assessment, as the
case may be, shall rest upon the taxpayer.
Tax Return Failure to file a return on the part of the taxpayer shall not prevent the Commissioner from authorizing the
is a
document examination of the taxpayer. The tax or any deficiency tax so assessed shall be paid upon notice and demand from
of taxpayer the Commissioner or his duly authorized representative. within 3 years
containing
financial Any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn.
information Within three (3) years from the date of such filing, the same may be modified, changed or amended provided no
notice for audit or investigation of such return, statement, or declaration has been actually served upon the
taxpayer (Sec. 6[a]). tax return cannot we withdrawn but can be modified or changed within 3 years if and only if
the authorities does not investigate of such tax return
RR 12 – 99, as amended by RR 18 – 2013, provides that the Commissioner or his duly authorized representative
shall issue the Preliminary Assessment Notice (PAN), Final Assessment Notice/Formal Letter of Demand (FAN/FLD),
and Final Decision on Disputed Assessment (FDDA). Accordingly, taxpayers shall submit or file their responses to
the PAN and protests (either reconsideration or reinvestigation) to the FAN/FLD with the duly authorized
representative of the Commissioner who signed the PAN and FAN/FLD. Prior to the issuance of the PAN, the
taxpayer may be allowed to make voluntary payments of probable deficiency taxes and penalties (RMC No. 11 –
2014). PAN, FAN, and FDDA only issue by the commissioner if the tax payer has tax deficiency or any other
tax defaults
When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings thru the issuance of Preliminary Assessment Notice (PAN). However, in some
cases, PAN is no longer necessary under the following circumstances:
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1. When the deficiency tax is a result of mathematical errors in the computations appearing on the face of the
return;
2. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the
withholding agent;
3. When a taxpayer who opted to claim tax refund or credit of excess creditable withholding tax for a taxable
period was determined to have carried over and automatically applied the same amount against the estimated
tax liabilities for the taxable quarter or quarters of the succeeding taxable years;
4. When the excise tax due on excisable articles has not been paid;
5. When an article locally purchased or imported by an exempt person has been sold, traded or transferred to
non-exempt persons.
The Commissioner may terminate the taxable period any time by sending such decision to the taxpayer and
demand immediate payment of the tax due thereon when:
1. The taxpayer is retiring from business subject to tax;

2. The taxpayer is intending to:
a. Leave the Philippines; or
b. Remove his property therefrom; or
c. Hide or conceal his property.
Deficiency
is the 3. The taxpayer is performing any act tending to obstruct the proceedings for the collection of the tax for the
amount past or current quarter or year.
short of
the full tax Deficiency Assessment
due
A deficiency assessment is one made by the Commissioner or any authorized subordinate officer after an
Delinque examination and inspection of the taxpayer’s return or records or after an independent investigation, in which a
ncy is the deficiency is found. Deficiency means the amount by which the tax imposed by the law exceeds the amount as
failure of computed and shown in the return filed by the taxpayer. If no amount is shown as the tax due of the taxpayer on
paying
his return, or if no return was made by the taxpayer, then the amount as computed in pursuant of the law is the
the tax
due. NO deficiency tax. Tax Penalties
AMOUNT Tax Remedy
was paid. Civil Tax Amnesty
Criminal
PENALTIES AND SURCHARGES 1) Surcharge 2) Interest 3.) Failure
The additions to the tax or deficiency tax prescribed by the Tax Code shall apply to all taxes, fees and charges
imposed by the Code. The amount so added to the tax shall be collected at the same time, in the same manner
and as part of the tax.
If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a
government-owned or controlled corporation, the employee thereof responsible for the withholding and
remittance of the tax shall be personally liable for the additions to the tax prescribed herein.
1. Civil Penalties (Sec. 248) 25% or 50% x Tax Amount Due = Amount of Penalty
Taxpayer file a return before the notice from the BIR to file a return but there is a problem in the
a. Simple Neglect (25%) taxpayers file of return
There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five
percent (25%) of the amount due, in the following cases:
o Failure to file any return and pay the tax due thereon as required by the Code, or rules and regulations
on the date prescribed late of actual filing of return but still you file before the notice
o Filing a return with an internal revenue officer other than those with whom the return is required to
be filed; or filing a return in a wrong place, wrong officer
o Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment;
o Failure to pay the full or part of the amount of tax shown on any return required to be filed under the
provisions of the Code or rules and regulations, or the full amount of tax due for which no return is
required to be filed, on or before the date prescribed for its payment.
b. Willful Neglect (50%) Taxpayer received a notice from the BIR before the actual filing
Under the following cases, the penalty imposed is equivalent to fifty (50%) percent of the amount due:
o Willful neglect to file the return within the period prescribed by this Code or by rules and regulations,
o False or fraudulent return is willfully made the taxpayer file a return but in a fraudulent way
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o Substantial underdeclaration of taxable sales, receipts or income (i.e. failure to report sales, receipts
or income in an amount exceeding thirty percent (30%) of that declared per return)
o Substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent
return (i.e. claim of deductions in an amount exceeding (30%) of actual deductions)
Example 1:
Charish’s income tax for 2016 was P 50, 000, as shown in her income tax return (ITR). She filed her return only
on July 15, 2016 and paid the total amount upon filing the return. Since there is only a late filing of return, the
surcharge applicable shall be 25%, thus P 12,500. The total amount due shall be P 62,500.
When the taxpayer files and pays the tax prior to the BIR’s assessment notice, but after the deadline prescribed
by law, such is considered as simple neglect only.
Example 2:
Assuming given in the previous example, Charish deliberately ignore the payment of the tax with the intention
to evade its payment, but was discovered, the surcharge applicable shall be 50%, thus P 25,000. The total
amount due is P 75,000.
When the taxpayer files and pays the tax after the BIR’s assessment notice, such is considered as willful neglect.
Example 3:
Chenee, a resident of Butuan, filed her income tax for 2017 amounting P 100, 000, as shown in her income tax
return (ITR). She filed her return only on August 1, 2017 in Cagayan de Oro, and paid the total amount upon
filing the return.
In this case, there are two violations subject to the imposition of surcharge: (1) late filing, and (2) wrong RDO.
For every violation, there shall be imposed 25% or 50% per violation. Hence, Chenee shall pay a total of 50%
(25% + 25%) based on the tax due. The total amount due and payable is P 150,000.
Example 4:
Assuming given in the previous example, but Chenee was found to have deliberately overstated the expenses
by more than 30%, and paid her income tax due thereon amounting P 100, 000 on August 1, 2017 in Cagayan
de Oro, Chenee shall be subject to: (a) 50% surcharge on the fraud committed by overstating the expenses,
(b) 25% on the late filing of return which Chenee should have filed on April 15, 2017, and (c) 25% on filing the
return on wrong RDO. Thus, Chenee, aside from the basic assessed tax of P 100,000, shall also pay a total of
100% penalty for all charges mentioned.
In all cases in the three examples above, interest shall also be imposed upon the taxpayers as discussed below.
2. Interest (Sec. 249)

In general, there shall be assessed and collected on any unpaid amount of tax, interest at the rate of 20% per
annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for
payment until the amount is fully paid.
a. Deficiency Interest
Deficiency is the amount still due and collectible from the taxpayer upon audit or investigation. Any
deficiency in the tax due, as the term is defined in the Tax Code, shall be subject to the interest at the rate
of 20% per annum, which interest shall be assessed and collected from the date prescribed for its payment
until the full payment thereof.
The formula is:
Deficiency Interest = (Deficient Tax) (20%) (No. of Days or Months)

Total No. of Days or Months in a year
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b. Delinquency Interest
Delinquency is the non-payment of tax on time as prescribed in the FLD and FAN. Delinquency interest is
computed in case of failure to pay:
o The amount of the tax due on any return required to be filed, or
o The amount of the tax due for which no return is required, or
o A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and
demand of the CIR, there shall be assessed and collected on the unpaid amount interest at the rate of
20% per annum until the amount is fully paid, which interest shall form part of the tax.
The formula is:
Delinquency Interest = (Deficient Tax) (20%) (No. of Days or Months)

Total No. of Days or Months in a year
Example 5:
A taxpayer filed her income tax of P 100,000 on April 15, 2017 for the taxable year 2016. Upon BIR’s
investigation, the correct total amount due should have been P 250,000, the discrepancy is due to material
overstatement of claimed deductions, thus fraudulent. The taxpayer was assessed and demanded to pay
the additional P 150,000 plus interest and surcharges on or before July 15, 2018 as provided in the FAN.
The interest shall be computed as follows:

Basic Assessed Tax P 250,000
Less: Tax paid on April 15, 2017 ( 100,000)
Deficiency Tax P 150,000

Multiplied (20% x 15 mos. /12 mos.) 0.25
Deficiency Interest P 37,500

Add: Penalty (Fraudulent) 75,000
Deficiency Interest 37,500
Total amount due P 262,500
Example 6:
Assuming the same given above, but the taxpayer failed to file on the date provided in the FAN, and pay
the tax due thereon on November 25, 2018, the total amount due is computed as follow:
Deficiency Tax (Becoming Delinquent) P 150,000

Total Deficiency Interest P 47,500

Delinquency Interest (July 15 to November 15) P 10,000

Add: Penalty (Fraudulent) 75,000
Total Deficiency Interest 47,500
Delinquency Interest 10,000
As observed in Example 5, deficiency interest originally ran from April 15, 2017 to July 15, 2018 (15
months) coupled with surcharge of 50% for the fraudulent act committed by the taxpayer. The BIR issued
a Final Assessment and Formal Letter of Demand to the taxpayer demanding the payment to be made not
later than July 15.
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However, in the assumption under Example 6, the taxpayer failed to pay the tax on due time as provided
in the FAN/FLD paying the same only on November 15, 2018 – four months after July 15, 2018. As such,
the taxpayer shall be burdened to pay additional delinquency interest equivalent to 4 months running
from July 15 up to November 15, 2018 based on the original amount of tax which became delinquent upon
non-payment on July 15, 2018. Moreover, aside from the delinquency interest, the taxpayer shall also be
burdened to pay the deficiency interest which was originally computed only until July 15, 2018. Due to
non-payment on the date prescribed, additional four (4) months or a total of nineteen months (19)
counted from April 15, 2017 up to November 15, 2018.
The imposition of delinquency interest no longer necessitates the imposition of another surcharge on the
delinquent tax.
c. Interest on extended payment or installment payment of tax)

If any person required to pay the tax is qualified and elects to pay the tax on installment under the
provisions of the Tax Code, but fails to pay the tax or any installment thereof, or any part of such amount
of installment on or before the date prescribed for its payment, or where the CIR has authorized an
extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed
and collected interest at the rate of 20% per annum on the tax or deficiency tax or any part thereof unpaid
from the date of notice and demand until it is paid.
The following rules shall be observed:

o The taxpayer’s request for extension of the period within which to pay is made on or before the
deadline prescribed for the payment of the tax due.
o When the tax due is in excess of two thousand pesos (P 2,000), the taxpayer other than a corporation
may elect to pay the tax in two equal installments (April 15 and July 15).
o When the deadline for payment has been duly extended, the 25% surcharge shall not be imposed for
the late payment of the tax. However, the 20% interest per annum for the extended payment shall be
imposed, computed based on the diminishing balance of the unpaid amount.
o If the request for extension is made after the deadline prescribed for payment, the taxpayer shall
already be treated late in payment, thus a 25% surcharge shall be imposed, even if payment of the
delinquency be allowed in partial amortization.
Example 7:
The taxpayer filed his income tax return on April 15, 2017, the tax due thereon amounted to P 4,500. The
taxpayer, being a non-corporate taxpayer, may request for installment payment of the income tax which
is paid in two equal installment – that is, P 2,250 each on April 15 and July 15, 2017. No interest is imposed
since the taxpayer pays the installment on the dates prescribed by the law.
Example 8:
taxpayer had withholding taxes amounting to P 3,000 previously paid.
The taxpayer, being a non-corporate taxpayer, may request for installment payment of the income tax
which is paid in two equal installment since the tax due exceeds P 2,000. Therefore,
Due on April 15, 2017:

Tax Payable (P 5,000/2) P 2,500
Less: Withholding tax ( 3,000)
Excess due ( 500)
Tax Due on April 15, 2017 None
Due on July 15, 207:

Tax Payable (P 5,000/2) P 2,500
Less: Excess withholding tax ( 500)
Tax Due on July 15, 2017 P 2,000
Again, there is no interest imposed in this case since the taxpayer pays the tax due on time.
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Example 9:
taxpayer had withholding taxes amounting to P 1,000 previously paid. Qualified to pay the tax in two equal
installments, the taxpayer promised to pay the remaining balance on or before July 15. However, the
taxpayer failed his promise, and pay the tax on October 15, 2017.
The computation of the interest shall be:

Tax Payable (P 5,000/2) P 2,500
Less: Withholding tax ( 1,000)
Tax Due on April 15, 2017 P 1,500
Due on October 15, 207:

Tax Payable (P 5,000/2) P 2,500
Less: Withholding tax ( 0)
Tax Supposedly Due on July 15, 2017 P 2,500
Add: Interest on Extension
(P 2,500 x 20% x 3/12) 125
Total amount due on October 15, 2017 P 2,625
The counting of interest runs from the time the taxpayer failed to pay the tax on the date prescribed until
such time the tax due is fully paid. The installment payment of tax is only applicable to individual taxpayers
(including estates and trusts), and not to corporate taxpayers.
Example 10:
Bagani Corporation requested the Bureau of Internal Revenue to be allowed to pay its tax liability per
return for the calendar year 2016, in the amount of P 500,000 in four equal monthly installments, starting
April 15, 2017.
The total amount due per installment is computed as follow:

First installment (P 500,000/4) P 125,000
Due on May 15, 2017:

Second installment (P 375,000/3) P 125,000
Add: Interest (20% x P 375,000 x 1/12) 6,250
Due on June 15, 2017:

Third installment (P 250,000/2) P 125,000
Add: Interest (20% x P 250,000 x 1/12) 4,167
Due on July 15, 2017

Fourth installment (remaining balance) P 125,000
Add: Interest (20% x P 125,000 x 1/12) 2,083
It is important to note that corporate taxpayers are not allowed to amortize the payment of tax like that
of individual taxpayers (Examples 7, 8, and 9). However, they may ask for extension of the payment of tax
as in Example 10.
3. Failure to File Certain Information Returns (Sec. 250)

In the case of each failure to file an information return, statement or list, or keep any record, or supply any
information required by the Tax Code or by the Commissioner on the date prescribed therefor, unless it is
shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid by the person
failing to file, keep or supply the same, one thousand pesos (P 1,000) for each failure. However, the aggregate
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amount to be imposed for all such failures during a calendar year shall not exceed twenty-five thousand pesos
(P 25,000).
4. Failure of a Withholding Agent to Collect and Remit Tax (Sec. 251)

Any person required to withhold, account for, and remit any tax imposed by this Code or who willfully fails to
withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or
the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable upon
conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted.
METHODS OF DETERMINING UNREPORTED INCOME

In the absence of adequate records, the CIR may reconstruct gross profit by ascertaining the total sales or receipts
and then applying an average of gross profit to such sales or receipts. He may also reconstruct taxable income by
applying an average percentage of taxable income to gross income. Such average may be taken from the return
filed or from figures reflecting gross profit and net profit of the business similar to that of the taxpayers.
In which case, the income of the taxpayer may be ascertained using the following formula (Net Worth Method):
Net worth as of the end of the taxable year xxx

Less: Net worth as of the beginning of the taxable year (xxx)
Increase in net worth xxx
Add: Non-deductible disbursements xxx
Less: Non-taxable income per NIRC (xxx)
Net Income subject to tax xxx
Less: Statutory Exemptions (xxx)
Taxable Income xxx
The above formula may also be used in reconciling accounting income and taxable income. Examples of non-
deductible disbursements are disallowed representation or travelling expenses; while examples of non-taxable
receipts are the PCSO Lotto winnings not exceeding P 10,000. Some income items are already subjected to final
tax, thus no longer subject to graduated tax.
Example 11:
Pedro was alleged to have under-declared his income during the previous year. An examiner conducted an
evaluation of Pedro based on his statement of assets and liabilities. The following information were available:
Declared asset, beginning of the year P 400,000

Discovered undeclared assets existing at the beginning of the year 500,000
Declared liabilities, beginning* 200,000
Ending assets as evaluated, inclusive of discovered undeclared assets 1,000,000
Ending liabilities as evaluated 150,000
*40% was discovered unsupported and apparently fictitious
In the same period, Pedro donated a parcel of land out of its declared asset with a declared value of P 200,000.
Pedro also presented a lists of his personal and family expenditures aggregating P 150,000 during that year. Using
the net worth method, how much is Pedro’s possible income?
Solutions:
Beginning balances:
Corrected Asset Balance, (P 400,000 + P 500,000) P 900,000
Corrected Liabilities Balance (P 200,000 x 60%) ( 120,000)
Equity, beginning balance P 780,000
Ending balances:
Ending Assets Balance P 1,000,000
Ending Liabilities Balance ( 150,000)
Equity, ending balance P 850,000
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Increase of Net Worth:

Equity, ending balance P 850,000
Equity, beginning balance ( 780,000)
Increase during the year P 70,000
Add: Non-deductible expenditures (family expenditures) 150,000
Taxable Income P 220,000
In the solution, there is no need to deduct the P 200,000 donated assets from the ending asset balance of P
1,000,000 because such amount is already evaluated and even already inclusive of the undeclared assets. Also,
there is a need to add back the personal and family expenditures since such amount is deducted in arriving the
increase in net worth, although such amount is not allowed to be deducted under the Tax Code.
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Topic 2 TAX Administration (income taxation)

Bs accountancy (Mindanao State University)

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ORGANIZATION AND COMPOSITION

The Bureau of Internal Revenue is divided into:

a. Commissioner of Internal Revenue

b. Deputy and Assistant Commissioners

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computation of proper taxes of

AUTHORITY AND POWERS OF THE COMMISSIONER

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g. Authority to accredit and register tax agents

Assessment computation or audit of tax

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1. The taxpayer is retiring from business subject to tax;

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2. Interest (Sec. 249)

The formula is:

Deficiency Interest = (Deficient Tax) (20%) (No. of Days or Months)

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The formula is:

Delinquency Interest = (Deficient Tax) (20%) (No. of Days or Months)

The interest shall be computed as follows:

Deficiency Tax P 150,000

Deficiency Tax P 150,000

Deficiency Tax P 150,000

Deficiency Tax (Becoming Delinquent) P 150,000

Deficiency Tax (Becoming Delinquent) P 150,000

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c. Interest on extended payment or installment payment of tax)

The following rules shall be observed:

Due on April 15, 2017:

Due on July 15, 207:

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The computation of the interest shall be:

Due on April 15, 2017:

Due on October 15, 207:

The total amount due per installment is computed as follow:

Due on May 15, 2017:

Due on June 15, 2017:

Due on July 15, 2017

3. Failure to File Certain Information Returns (Sec. 250)

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4. Failure of a Withholding Agent to Collect and Remit Tax (Sec. 251)

METHODS OF DETERMINING UNREPORTED INCOME

Net worth as of the end of the taxable year xxx

Declared asset, beginning of the year P 400,000

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Increase of Net Worth:

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