Author: Clarita M. Alarin
Date: September 1996
Presented to: The Faculty of the Graduate School, Urios College, Butuan City
Thesis title: THE IMPLEMENTATION OF SELECTIVE AUDIT PROGRAM, Bureau of Internal Revenue, District Office No. 103, Butuan City Fiscal Year 1994-1996
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A. On Profile of Violation Committed by Taxpayers
1. A total of 25 types of tax violations involving 272 frequency counts were committed during the fiscal years 1993 and 1994. The average gross amount of the violations in two years was P 5, 565, 250.00.
2. The top five tax violations committed in two years were the following: 61 disallowed expenses, 40 unsupported expenses, 36 understatements of sales, 29 unrecorded sales, and 27 disallowed input tax.
3. There were nine tax violations with substantial percentage of non-repeaters in 1994. These were: understatement of sales subject to VAT 100%, unsupported purchases 80%, understatement of sale/receipt 70.58%, unsupported expenses 68.42%, over claimed expenses 66.66%, disallowed expenses 63.64%, unreported sales/receipt 55.56% and vat sales were recorded as Non-VAT sales 60%. The average percentage of non-repeaters of tax violations is 67.39%.
4. Tax violations committed in 1993 reduced by 32.61% in 1994 due to voluntary compliance.
B. Extent of Implementation of Selection Audit Program
1. The Revenue District Officer rated the Phase I activities of Selective Audit Program as average. However, he rated the assigning of tax cases to revenue to examiners as very effective.
2. The tax examiners rated Phase II activities of Selective Audit Program as very effective. Of the 11 program components, five were very effective, one average and five very much effective.
3. The components rated very effective were: pre-audit analysis of return, work planning, and contact with tax payer, preliminary evaluation of miscellaneous records, initial examination techniques and performance of quality work.
4. The components rated average only was evaluation of internal control.
5. The components rated very much effective were: Sending post audit report to tax payers, preparation of investigation reports, submission of investigation reports, submission report to RDO and submission of reports to Regional Office.
6. The taxpayers rated the Phase III activities as very effective. These are receipt of Letter of Authority, submissions of books of accounts, payment for deficiency taxes, and receipt of termination letter.
7. The tax reviewers rated the Phase IV activities as very effective particularly the assigning of case to reviewers, 90% accuracy of investigation report approved by the assessment division and issuance of termination paper.
Based on the findings obtained in the study, the following conclusion drawn:
1. There is evidence that the amounts involved in tax violations are substantial since it reaches by P5.5 million a year. This amount could be used to support the various social development services of the government.
2. The interviews with taxpayers have revealed that they lack the technical knowledge and skills to understand the intricacies of the tax system. Hence, they leave the responsibilities to their accountants. This point to the need for a vigorous education campaign for taxpayers.
3. The accountants in turn manipulate the tax entries so their clients could not pay the correct taxes for their benefit but defrauding the government of needed revenues.
4. When subjected to selective audit, taxpayers would rather negotiate with the examiners for reduced assessment. Such negotiation may involve the bribery of revenue officers.
5. The implantation of the tax system is dependent on the dynamics of the taxpayers, accountants and revenue officers. Since the system is manual, there is relative ease for violations.
6. The lack of personnel and the lack of time made it difficult to finish the cases for selective audit within 120 days. Hence, the government losses millions of potential revenue.
7. To a large extent, the selective audit program has reduced the repetition of violations by almost one-third on the succeeding year.
Having the facts gathered through surveys conducted on the four phases of activities of investigation, the following are recommended for inclusion and revision of the program:
1. That the criteria for the selection of cases on the priority for audit should not be the same category for those taxpayers within the Metro Manila areas. There are lines of businesses which are regarded as major business in one locality but not on another locality.
2. That in the investigation of estate tax cases, only one Letter of Authority be issued for the estate tax returns and the three years of income tax returns prior to taxpayer??™s death.
3. That the prescriptive period of investigation will be 150 days from date of issue of Letter of Authority.
4. That a law be enacted directing a taxpayer to give the revenue examiners access on the following:
a. Actual count of cash on hand and in bank.
b. Records of internal control.
This is for an efficient evaluation of records and collection of the correct amount of taxes due.
5. That a periodic seminar and examination be given to Revenue Examiners to update their knowledge on the new laws and regulations issued.
6. That the Bureau of Internal Revenue be exempt from the provision of attrition law prohibiting government agency to hire employees in order for the Bureau to hire competent, efficient and more qualified investigators.
From the conclusions generated in the study, it is hereby recommended that the proposed intervention program be adopted to strengthen the Selective Audit Program.