How to Handle BIR Audits for Newly Registered Businesses

How to Handle BIR Audits for Newly Registered Businesses

Taxes| Accounting
May 23, 2024•5 min read

Published Date: May 23, 2024

Published By: Jac Cantos, Upcloud Accounting

As a newly established business in the Philippines, facing a Bureau of Internal Revenue (BIR) audit can feel daunting. However, understanding the audit process and taking proactive steps to ensure compliance can significantly ease the experience. This guide provides a comprehensive overview of handling BIR audits, focusing on the specific challenges faced by newly registered businesses. For comprehensive support in navigating these complexities, consider seeking professional guidance from firms specializing in Philippine tax compliance, such as Upcloud Accounting.

Understanding the BIR Audit Process

A BIR audit is a formal examination of your business's tax compliance. The BIR scrutinizes your financial records, tax returns, and supporting documents to verify the accuracy of income declaration, tax payments, and adherence to the National Internal Revenue Code (NIRC).

Why Newly Registered Businesses are Targeted

Newly registered businesses often attract BIR scrutiny due to their limited filing history, making compliance verification essential. The BIR aims to ensure accurate tax declaration and prompt correction of any errors. Additionally, it's part of the BIR's routine tax monitoring program.

Types of BIR Audits

There are three main types of BIR audits:

  • Tax Compliance Verification Drive (TCVD): This audit focuses on verifying the validity of invoices, receipts, and tax returns.

  • Letter of Authority (LOA): Issued by the BIR to conduct a full audit of your business operations, including income tax, Value-Added Tax (VAT), and withholding tax.

  • Post-Evaluation Audit: This audit is conducted after claiming tax incentives, refunds, or credits.


Handling a BIR Audit: A Step-by-Step Guide

  1. Understand the Audit Process:

    • Issuance of Letter of Authority (LOA): The BIR will send an LOA formally notifying your business of the audit. The LOA specifies the taxes and periods under review.

    • Submission of Documents: You are required to submit financial records, tax returns, and supporting documents within the specified timeframe.

    • Audit Examination: BIR examiners will review your documents to assess compliance.

    • Audit Findings: The BIR will issue a Preliminary Assessment Notice (PAN) if discrepancies are found.

    • Resolution: If you disagree with the findings, you can respond with supporting evidence or file an appeal.

  2. Prepare the Required Documents:

    • Books of Accounts: General Ledger, Cash Receipts Book, Cash Disbursements Book.

    • Official Receipts and Sales Invoices: Ensure these are properly documented and readily available.

    • Income Tax Returns (ITRs): Include supporting schedules.

    • VAT or Percentage Tax Returns: Provide supporting records.

    • Withholding Tax Returns: Include BIR Form 2307 or 2316.

    • Bank Statements and Reconciliation Records: Maintain accurate records of all transactions.

    • Payroll Records: Include proof of remittance for Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG) contributions.

  3. Ensure Proper Record-Keeping:

    • Accurate and Complete Records: Maintain detailed records of all financial transactions.

    • BIR-Registered Accounting System: Use a BIR-registered accounting system or manual Books of Accounts. Proper record-keeping is crucial, and professional assistance can ensure compliance.

    • Regular Reconciliation: Reconcile your tax returns with your financial records regularly.

  4. Respond to the Letter of Authority (LOA):

    • Review Carefully: Understand the scope of the audit.

    • Acknowledge Promptly: Acknowledge receipt of the LOA and provide the requested documents promptly.

    • Seek Professional Assistance: If unsure how to proceed, engage a tax professional or accountant. Upcloud Accounting offers expertise in this area.

Common Mistakes to Avoid During a BIR Audit

  • Incomplete or Disorganized Records: Ensure all required documents are properly organized and readily available.

  • Inconsistent Declarations: Reconcile discrepancies between financial statements, tax returns, and invoices.

  • Ignoring the LOA: Failure to respond to an LOA can result in fines or further investigation.

  • Issuing Invalid Receipts: Use only BIR-authorized receipts and invoices to avoid penalties.

Penalties for Non-Compliance

Failure to comply with BIR regulations or an audit can lead to:

  • Fines and Surcharges: 25% surcharge for late filing or payment, 12% annual interest on unpaid taxes.

  • Compromise Penalties: Vary based on the type and severity of the violation.

  • Business Closure: The BIR can suspend or close your business for repeated non-compliance.

Tips for Successfully Handling a BIR Audit

  • Maintain Tax Compliance from Day One: File and pay taxes on time to avoid discrepancies during audits.

  • Keep Open Communication with the BIR: Cooperate fully with the audit team and provide requested documents promptly.

  • Hire a Tax Professional: Engage an accountant or tax lawyer to guide you through the audit process.

  • Be Proactive: Conduct internal audits regularly to identify and correct potential issues before a BIR audit occurs.

How to Dispute Audit Findings

If you disagree with the audit findings, you can:

  • Respond to the PAN: Submit a formal reply with supporting evidence within 15 days.

  • Appeal to the Commissioner of Internal Revenue: File a protest if the BIR issues a Final Assessment Notice (FAN) and you disagree with the assessment.

  • Seek Legal Remedies: Elevate the case to the Court of Tax Appeals if unresolved.

Upcloud Accounting: Virtual Outsourced Accounting and Bookkeeping Services in the Philippines

Upcloud Accounting offers accounting, bookkeeping, tax compliance, and business licensing services specializing with startups and SMEs in the Philippines.

Our goal is to increase efficiency, automation, and transparency across the accounting and finance functions of our clients with our cutting-edge technology. If you want to move your company’s finance function online, contact our Team of Expert Accountants and Bookkeepers directly via [email protected] or visit www.upcloudaccounting.com to learn more about how Upcloud Accounting accounting services can support your PH business!

Disclaimer: This article or blog is only for general knowledge and guidance and is not a substitute for an expert opinion. For technical advice, please consult your tax / legal advisor for your specific business concerns. For comments, suggestions, and feedback, feel free to email us at [email protected].

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