How to Handle BIR Audits for Newly Registered Businesses

As a newly registered business in the Philippines, it’s essential to be prepared for a Bureau of Internal Revenue (BIR) audit. BIR audits are routine checks to ensure your business complies with tax laws and regulations. While the thought of an audit can be intimidating, proper preparation and understanding of the process can help you navigate it smoothly.

This blog provides a comprehensive guide on handling BIR audits for newly registered businesses, including tips to stay compliant and avoid penalties.

What is a BIR Audit?

A BIR audit is an official examination of your business’s tax compliance, including your financial records, tax returns, and supporting documents. The goal is to verify that you have accurately declared income, paid taxes correctly, and complied with the National Internal Revenue Code (NIRC).

Why Does the BIR Audit Newly Registered Businesses?

Newly registered businesses are often subject to audits because:

  • They have limited filing history, making compliance verification necessary.
  • The BIR wants to ensure accurate tax declaration and prompt correction of errors.
  • It is part of routine checks under the BIR’s tax monitoring program.
Types of BIR Audits
  1. Tax Compliance Verification Drive (TCVD):
    • Focuses on verifying the validity of invoices, receipts, and tax returns.
  2. Letter of Authority (LOA):
    • Issued by the BIR to conduct a full audit of your business operations, including income tax, VAT, and withholding tax.
  3. Post-Evaluation Audit:
    • Conducted after claiming tax incentives, refunds, or credits.
How to Handle a BIR Audit
1. Understand the Audit Process

The BIR audit process typically involves the following steps:

  • Issuance of Letter of Authority (LOA):
    • The BIR will send an LOA to formally notify 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

The BIR may request the following documents during an audit:

  • Books of Accounts (e.g., General Ledger, Cash Receipts Book, Cash Disbursements Book).
  • Official Receipts and Sales Invoices.
  • Income Tax Returns (ITRs) and supporting schedules.
  • VAT or Percentage Tax Returns and supporting records.
  • Withholding Tax Returns and BIR Form 2307 or 2316.
  • Bank statements and reconciliation records.
  • Payroll records and proof of remittance for SSS, PhilHealth, and Pag-IBIG contributions.
3. Ensure Proper Record-Keeping
  • Maintain accurate and complete records of all financial transactions.
  • Use a BIR-registered accounting system or manual Books of Accounts.
  • Reconcile your tax returns with your financial records regularly.
4. Respond to the Letter of Authority (LOA)
  • Review the LOA carefully to understand the scope of the audit.
  • Acknowledge receipt of the LOA and provide the requested documents promptly.
  • Seek legal or accounting assistance if you’re unsure how to proceed.

Common Mistakes to Avoid During a BIR Audit

  1. Incomplete or Disorganized Records:
    • Ensure all required documents are properly organized and readily available.
  2. Inconsistent Declarations:
    • Reconcile discrepancies between financial statements, tax returns, and invoices.
  3. Ignoring the LOA:
    • Failure to respond to an LOA can result in fines or further investigation.
  4. 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

  1. Maintain Tax Compliance from Day One:
    • File and pay taxes on time to avoid discrepancies during audits.
  2. Keep Open Communication with the BIR:
    • Cooperate fully with the audit team and provide requested documents promptly.
  3. Hire a Tax Professional:
    • Engage an accountant or tax lawyer to guide you through the audit process.
  4. 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:

  1. Respond to the Preliminary Assessment Notice (PAN):
    • Submit a formal reply with supporting evidence within 15 days.
  2. 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.
  3. Seek Legal Remedies:
    • Elevate the case to the Court of Tax Appeals if unresolved.

Final Thoughts

BIR audits are an integral part of running a business in the Philippines, especially for newly registered entities. By maintaining proper records, filing taxes on time, and understanding the audit process, you can handle audits effectively and avoid penalties.

Preparation is key—stay compliant from the start and seek professional assistance when needed to navigate the complexities of tax compliance.

Navigating the business landscape in the Philippines can be both rewarding and intricate. Whether you’re embarking on a new venture or scaling up, ensuring that your corporate endeavors are in line with local regulations is paramount.

At CBOS Business Solutions Inc., we pride ourselves on simplifying these processes for our clients. As a seasoned professional services company, we offer comprehensive assistance with SEC Registration, Visa processing, and a myriad of other essential business requirements. Our team of experts is dedicated to ensuring that your business is compliant, well-established, and ready to thrive in the Philippine market.

Why venture into the complexities of business registration and compliance alone? Allow our team to guide you every step of the way. After all, your success is our commitment.

Get in touch today and let us be your partner in achieving your business goals in the Philippines.

Email Address: gerald.bernardo@cbos.com.ph

Mobile No.: +639270032851

You can also click this link to schedule a meeting.


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