3-year Period of Limitation Upon Assessment and Collection
What is the magic in having three (3) years pass? Well, it’s the prescriptive period all taxpayers should love. Under Section 203 of the National Internal Revenue Code, after this period has elapsed, this serves as a bar against any tax assessment or collection after the expiration of this period reckoned from the time of filing of the return:
SECTION 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day."
Read in conjunction with Section 235, the NIRC appears to provide that books of account need only be kept for three (3) years:
“SECTION 235. Preservation of Books of Accounts and Other Accounting Records. - All the books of accounts, including the subsidiary books and other accounting records of corporations, partnerships, or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. xxx
Any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the Bureau of Internal Revenue for purposes of ascertaining
compliance with the conditions under which they have been granted tax exemptions or tax incentives and their tax liability, if any.”
Under the above provisions, once three years have passed, this BIR must forever hold its peace.
New 10-year period for keeping Books of Accounts
However, a new Revenue Regulation will make the taxpayer wait much, much longer before he can rest easy on his past transactions. REVENUE REGULATIONS No. 17 Series of 2013 is entitled “Presentation of Books of Accounts and Other Accounting Records” and extends the period of retention of books to ten (10) years -
“SECTION 2. RETENTION PERIODS. - All taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting records, for a period of ten (10) years reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts.
The term "other accounting records" includes the corresponding invoices, receipts, vouchers and returns, and other source documents supporting the entries in the books of accounts. They should also be preserved for a period of ten (10) years counted from the date of last entry in the books to which they relate.
The term “last entry’ refers to a particular business transaction or an item thereof that is entered or posted last or latest in the books of accounts when the same was closed.
The foregoing notwithstanding, if the taxpayer has any pending protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case, the taxpayer is required to preserve his/its books of accounts and other accounting records until the case is finally resolved.
Finally, unless a longer period of retention is required under the NIRC or other relevant laws, the independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of ten (10) years from the due date of filing the annual income tax return or the actual date of tiling thereof, whichever comes later.”
Ironically, the basis for extending this period relates to fraud. In a sense, a taxpayer is bound to keep the records that will incriminate him in the future. As cited in the regulation, Section 203 also refers to Section 222 of the NIRC which provides for exceptions to the three (3)-year period of limitation of assessment:
“SECTION 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
(b) lf before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.”
The BIR cites as one basis for the extended period is the fact that a taxpayer’s accounting records shall be needed beyond the three (3)-year period if there is an investigation by the BIR for any falsity, fraud or omission in the returns which would be conducted “within ten (10) years after the discovery of the falsity, fraud or omission.”
These records are subject to examination upon demand by the BIR:
“SECTION 3. EXAMINATION AND INSPECTION. - All books, registers and other records, and vouchers and other supporting papers required by the BIR shall be kept at all times at the place of business of the taxpayer, subject to inspection by any internal revenue officer, and upon demand, the same must be immediately be produced and submitted for inspection (Section 20 of Revenue Regulations No. V-1).
They may be examined and inspected for purposes of regular audit or extraordinary audit, requests for exchange of information by a foreign tax authority under Sections 6 and 71 of the NIRC, and in the exercise of the Commissioner's power to obtain information under Section 5 of the NIRC, among others.
Examination and inspection of books of accounts and other accounting records shall be done in the taxpayer's office or place of business or in the office of the BIR.”
Any failure to comply will make a party liable for penalties:
“SECTION 4. PENALTIES. - Any violation of the provisions of these regulations shall be subject to penalties provided in Sections 266, 275, and other pertinent provisions of the NIRC; and Section 6 of Republic Act No. 10021 (the “Exchange of information on Tax Matters Act of 2009").”
This means that taxpayers and auditors have to set aside some space for ten years’ worth of records. And like the sword ordered by Dionysius to hang over Damocles, the records will continue to hang over taxpayers until the ten years lapse.
Cicero is said to have once remarked “Does not Dionysius seem to have made it sufficiently clear that there can be nothing happy for the person over whom some fear always looms?” The BIR does not seem to care about that lesson.