Notice of Discrepancy under the National Internal Revenue Code of 1997 (NIRC), as Amended by the TRAIN Law (R.A. No. 10963) and the Ease of Paying Taxes Act (R.A. No. 11976)

In the Philippines, the tax assessment process is governed by the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and further by the Ease of Paying Taxes Act (R.A. No. 11976). The Notice of Discrepancy (NOD) plays a significant role in this process. This document is an initial step in the assessment process by the Bureau of Internal Revenue (BIR) and is critical for both taxpayers and tax authorities as it sets the stage for subsequent assessments and potential tax liabilities.

1. Legal Basis and Purpose of the Notice of Discrepancy

The TRAIN Law and subsequent amendments like the Ease of Paying Taxes Act aim to simplify tax compliance, expedite revenue collection, and ensure that tax obligations are accurately assessed. The Notice of Discrepancy is a mechanism introduced to provide a taxpayer an opportunity to explain and reconcile any inconsistencies or deficiencies that the BIR finds in their tax returns and records before a formal tax assessment is issued.

The NOD procedure is part of the BIR’s due process requirements and seeks to:

Alert taxpayers of potential issues or discrepancies in their reported income, deductions, or tax payments.
Encourage voluntary compliance by giving taxpayers a chance to reconcile and address issues before formal assessments.
Ensure transparency and accountability in tax administration by communicating specific findings to taxpayers in advance of a formal assessment.

2. Key Features of the Notice of Discrepancy

The Notice of Discrepancy serves as a precursor to a more formalized assessment. Its issuance does not constitute an actual assessment, meaning it does not carry with it a formal demand for payment. Instead, it allows the taxpayer to:

Understand the basis for potential adjustments or discrepancies.
Have the opportunity to present counter-evidence or explanations.

Key elements of the Notice of Discrepancy include:

Identification of Discrepancies: The NOD must specify the type and details of the discrepancies identified during the BIR’s preliminary review.
Non-Finality of the Notice: A NOD is not yet a final assessment, so it does not impose any immediate tax liabilities or penalties. Instead, it’s an invitation for discussion or clarification.
Basis for Potential Deficiencies: The NOD should clearly state the reasons for the identified discrepancies, providing a transparent basis for any suggested adjustments.

3. The Process Following a Notice of Discrepancy

Upon receipt of a Notice of Discrepancy, the taxpayer is expected to participate in a reconciliation process with the BIR. This process is detailed below:

Issuance of the Notice of Discrepancy: The BIR issues the NOD to the taxpayer, detailing the discrepancies identified in their filed returns, books of accounts, or other tax-related documents.
Explanation and Reconciliation Period: The taxpayer is given a specific period, typically 30 days from receipt of the NOD, to respond. During this period:
- The taxpayer may submit additional documents or explanations to support the correctness of their filings.
- The BIR and taxpayer may engage in a reconciliation meeting to address the discrepancies.
Reconciliation Meeting: The taxpayer and the BIR’s examining officer may conduct a face-to-face meeting or communicate through other agreed-upon means to discuss the findings. During this meeting:
- The taxpayer may provide explanations or present counter-evidence to resolve the discrepancy.
- Both parties aim to reach a mutual understanding on any potential deficiencies in tax liability or reporting errors.
Resolution or Escalation: After the reconciliation process, there are two possible outcomes:
- Resolution: If discrepancies are satisfactorily explained and resolved, the BIR may issue a Clearance or terminate the audit.
- Escalation to a Formal Assessment: If discrepancies remain unresolved or if additional taxes are deemed due, the BIR will proceed with a formal assessment by issuing a Preliminary Assessment Notice (PAN), followed by a Final Assessment Notice (FAN) if necessary.

4. Legal Implications of Failing to Respond to a Notice of Discrepancy

Failure to respond to a NOD within the prescribed time frame may lead to the BIR’s issuance of a Preliminary Assessment Notice (PAN), effectively escalating the case into a formal assessment stage. This formal assessment includes:

Potential Liabilities: The BIR may determine a specific amount of deficiency taxes, inclusive of penalties and surcharges.
Limitations on Further Recourse: The taxpayer may lose the opportunity to explain or adjust discrepancies outside of the formal administrative protest procedures if the matter escalates to a PAN and eventually a FAN.

5. Due Process and Legal Recourse

Under both the TRAIN Law and R.A. No. 11976, taxpayers are afforded the right to due process in tax assessments. The Notice of Discrepancy is a crucial element of this due process, as it serves as a preliminary step where taxpayers can engage with the BIR in a less adversarial manner. Taxpayers have the right to:

Be Informed: Taxpayers must be clearly informed of the specific nature of the discrepancies.
Be Heard: Taxpayers have the opportunity to present evidence and counterarguments in response to the NOD.
Appeal Formal Assessments: If the process escalates and results in a formal assessment (through a PAN and then a FAN), taxpayers retain the right to file a protest within 30 days from receipt of the FAN, as stipulated under the NIRC.

6. Recent Reforms under R.A. No. 11976

The Ease of Paying Taxes Act (R.A. No. 11976) further reinforces the rights of taxpayers to transparent communication from the BIR and aims to simplify tax compliance. Under R.A. No. 11976, the Notice of Discrepancy process has been reinforced as a mandatory pre-assessment step to:

Prevent undue tax assessments without due process.
Reduce administrative burden by potentially resolving discrepancies early.
Facilitate improved taxpayer-BIR relations through enhanced communication.

This law strengthens taxpayers' rights by formalizing the NOD process, ensuring it is followed uniformly by the BIR as part of its assessment protocol.

7. Conclusion

The Notice of Discrepancy is a significant procedural step in the Philippines' tax assessment process. Its purpose is to foster voluntary compliance, facilitate transparency, and promote effective communication between the BIR and taxpayers. By engaging in the NOD process, taxpayers can potentially avoid formal assessments and resolve discrepancies amicably. The recent amendments to the NIRC, particularly under the TRAIN Law and the Ease of Paying Taxes Act, underscore the importance of this process in ensuring a fair, transparent, and efficient tax system.

In summary:

The NOD is an essential part of the due process requirements in tax assessments.
Taxpayers have a defined period and procedure to respond, explain, and potentially resolve discrepancies.
Failure to respond to a NOD can lead to escalation in the assessment process.
Recent reforms have strengthened the process to support taxpayer rights and ease compliance.

Understanding and effectively responding to a Notice of Discrepancy is critical for taxpayers in managing their tax obligations and avoiding unnecessary liabilities in the Philippines' tax system.