Is Your Cooperative Being Audited by the BIR?

Is your cooperative being audited by the BIR?

As a cooperative, you know that the Bureau of Internal Revenue (BIR) can audit your business at any time. This process can be stressful and overwhelming if you don’t know what to do.

You need to make sure that all your financial records are in order and up-to-date, or else you could face hefty fines or even criminal charges.

But how do you prepare for an audit? It’s not easy to stay on top of the ever-changing regulations and filing requirements set by the BIR.

This post has your back covered.

Here is a guide on what your cooperative would expect if it gets audited by the BIR.

Is Your Cooperative Being Audited by the BIR? Here’s What To Do.

Is there a legal basis for the audit of cooperatives?

Republic Act (RA) No. 10963, otherwise known as the “Tax Reform for Acceleration Inclusion” (TRAIN) Law, has amended Section 6(4) of the National Internal Revenue Code under RA No. 8424.

It now authorizes the Commissioner of the BIR or his duly authorized representative to examine any taxpayer, including cooperatives, and assess the correct amount of tax.

This is notwithstanding any law requiring the prior authorization of any government agency or instrumentality .

Pursuant to the TRAIN Law, the BIR is no longer required to secure authorization from the Cooperative Development Authority (CDA) before the examination of the books of accounts and other accounting records of a cooperative.

What covers the audit of Philippine Cooperatives?

Revenue Memorandum Order No. 7-2020 covers the issuance of electronic Letters of Authority (eLAs) for the audit/investigation of cooperatives.

Objectives of the Audit of Cooperatives

  • To guarantee the accuracy of cooperatives’ availment of tax exemptions and incentives as mandated by Republic Act No. 9520, and
  • To effectively monitor tax compliance of cooperatives

Scope of Tax Audit on Cooperatives

In general, all taxpayers are considered possible candidates for audit. An electronic Letter of Authority (eLA) shall be issued to cover such audit or investigation.

Basis for Selection of Taxpayers to Be Audited:

  1.  Mandatory Cases
  2. Priority Taxpayers/Industries
  3. Other priority audit that may be identified by top management

Which Cooperatives are Prioritized for Audit?

The BIR shall issue Electronic Letters of Authority (eLAs) for the audit of cooperatives and shall prioritize the following cooperatives:

  1. Cooperatives that transact business with both members and non-members whose accumulated reserves and undivided net savings is more than Ten Million Pesos (Php 10,000,000.00); and
  2. Cooperatives with income not related to their principal business under their Articles of Cooperation.

Handling of the Audit of Cooperatives:

  • The Revenue Officer (RO) assigned to the case shall present or serve the electronic Letter of Authority (eLA), which shall contain the names of the RO and Group Supervisor; tax types and taxable period covered, to the taxpayer or its authorized representative in accordance with existing regulations.
  • In requesting for documents to be presented, the RO shall mark in the Checklist of Requirements (as attached to the eLA) the documents or records which are applicable and relevant in the audit.
  • The taxpayer must submit documents within ten (10) days from date of receipt of LA and Checklist of Requirements.
  • Failure to submit within ten (10) days, the BIR issues 1st Notice.
  • If the subject cooperative fails to submit the required documents within ten (10) days after 1st Notice, the BIR issues 2nd & Final Notice.
  • Failure of the taxpayer to submit despite repeated requests will result to the recommendation by the RO for the issuance of the Subpoena Duces Tecum (SDT).

Under the TRAIN law:

“Sec. 232. Keeping of Books of Accounts . — Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts – All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep and use relevant and appropriate set of bookkeeping records duly authorized by the Secretary of Finance wherein all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the year.

Provided, That corporations, companies, partnerships or persons whose gross annual sales, earnings, or receipts exceed Three million pesos (₱3,000,000) shall have their books of accounts audited and examined yearly by an independent Certified Public Accountant and their income tax returns accompanied with a duly accomplished Account Information Form (AIF) which shall contain, among others, information lifted from certified balance sheets, profit and loss statements, schedules listing income-producing properties and the corresponding income therefrom and other relevant statements.

Notice of Discrepancy

  • If the cooperative is found liable for deficiency tax or taxes in the course of investigation conducted by the Revenue Officer, the taxpayer shall be informed through a Notice of Discrepancy (NOD). 
  • The issuance of the Notice of Discrepancy (NOD), as detailed in Revenue Regulations (RR) No. 22-2020, aims to fully afford the taxpayer with the opportunity to present and explain his side on the discrepancies found during audit.
  • The NOD aims to fully afford the taxpayer with the opportunity to present and explain his side on the discrepancies found during audit.
  • The NOD shall specify the date for the scheduled “Discussion of Discrepancy” which will be within five (5) days from receipt of the NOD.
  • If the taxpayer disagrees with the discrepancy/discrepancies detected during the audit/investigation, the taxpayer must present an explanation and provide documents to support his explanation. The documents must be submitted during the discussion.
  • Should the taxpayer need more time to present the documents, he may submit such documents after the discussion but shall in no case extend beyond thirty (30) days after receipt of the NOD.
  • If, despite the submission of documents in support of the explanations made by the taxpayer, it is still found that the taxpayer is still liable for deficiency tax or taxes and the taxpayer does not address the discrepancy through payment of the deficiency taxes or the taxpayer does not agree with the findings, the investigating office, shall endorse the case to the reviewing office of the Revenue Regional Office, for issuance of a deficiency tax assessment in the form of a Preliminary Assessment Notice within ten (10) days from the conclusion of the Discussion.

Note: Assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption.

Remedies available to the Taxpayer Cooperative

What should a cooperative do in case it receives a Preliminary Assessment Notice (PAN), Formal Letter of Demand/Final Assessment Notice (FLD/FAN), or a Final Decision on Disputed Assessment (FDDA) from the BIR?

The cooperative’s receipt of a Preliminary Assessment Notice (PAN), an FLD/FAN (Formal Letter of Demand/Final Assessment Notice), or an FDDA (Final Decision on Disputed Assessment), as the case may be, is not the finality of a tax assessment.

Like an ordinary taxpayer, under Section 228 of the NIRC of 1997, as amended, and its implementing rules and regulations, the cooperative has the following remedies – if it believes it has factual and legal grounds – to question the tax assessment:

  • Upon receipt of the Preliminary Assessment Notice (PAN), the taxpayer cooperative has a period of fifteen (15) days to respond to it; otherwise, it will be considered in default, in which case a Formal Letter of Demand/Final Assessment Notice (FLD/FAN) shall be issued.
  • Upon receipt of the Final Letter of Demand/Final Assessment Notice (FLD/FAN), the cooperative has a period of thirty (30) days to protest it either by filing a motion for reconsideration or reinvestigation; otherwise, the assessment shall become final, executory and demandable;
  • Upon receipt of the Final Decision on Disputed Assessment (FDDA), the cooperative has a period of thirty (30) days either to appeal to the Court of Tax Appeals or to protest it by filing a request for reconsideration to the Commissioner of Internal Revenue; otherwise the assessment shall become final, executory and demandable.
  • Upon receipt of the Decision of the Commissioner of Internal Revenue on its administrative protest, it has a period of thirty (30) days to appeal to the Court of Tax Appeals; otherwise, the assessment shall become final, executory, and demandable.

The audit of cooperatives by the BIR is an essential part of ensuring compliance with tax laws.

It is important for cooperative organizations to be aware of their obligations and ensure that they are following all applicable regulations. This audit process can help uncover any areas where a cooperative may not be in full compliance, allowing them to take corrective action before it’s too late.

By taking proactive steps such as this one, cooperatives can protect themselves from costly fines or penalties down the road. The BIR provides valuable resources and guidance on how best to comply with taxes which should be taken advantage of by every organization operating within its jurisdiction.

Marie is the knowledgeable voice behind Tax Maven Ph, a trusted Philippine blog simplifying tax matters for individuals and businesses. As a Certified Public Accountant with extensive experience at the country's premier tax collecting agency, Marie shares her expertise on various tax topics, demystifying tax laws and helping readers navigate the tax system with confidence. Stay informed and gain valuable insights by connecting with Marie through Tax Maven Ph, your go-to resource for navigating the complexities of the Philippine tax system.