Distraint and Levy | Administrative Remedies | Government Remedies | Tax Remedies | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

In the Philippines, the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Ease of Paying Taxes Act (R.A. No. 11976), grants the Bureau of Internal Revenue (BIR) various remedies to enforce tax collection and recover unpaid taxes. One of the primary government remedies under the NIRC, specifically among administrative remedies, is the power to undertake Distraint and Levy. Here’s a detailed discussion on this topic:

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I. Legal Basis

The distraint and levy remedies are embedded in the National Internal Revenue Code of 1997, specifically under Sections 207 to 219. These provisions authorize the BIR to pursue collection through administrative means when a taxpayer fails to pay their tax obligations. The authority to levy and distraint is intended to provide a quick and effective way to secure unpaid tax liabilities, without needing to file a lawsuit in court.

II. Definitions

1. Distraint:

   • Distraint is the process by which the BIR seizes personal property, tangible or intangible, of a taxpayer to enforce the collection of delinquent taxes. Personal property includes assets such as cash, receivables, inventories, or equipment.
   • Distraint can be divided into:
     • Actual (or Physical) Distraint: Involving the physical taking of the taxpayer’s property.
     • Constructive Distraint: Where the taxpayer’s property is placed under control and supervision of the BIR, but not physically removed.

2. Levy:

   • Levy refers to the seizure of real property (e.g., land, buildings) to satisfy unpaid taxes. Unlike distraint, which targets personal property, levy specifically targets real estate assets of the taxpayer.

III. Grounds for Distraint and Levy

The BIR may implement distraint and levy actions if:

• A taxpayer has an unpaid tax liability, which has become final, executory, and demandable.
• The taxpayer fails to pay such liability despite receiving a formal demand from the BIR.

IV. Procedures for Distraint and Levy

A. Distraint of Personal Property (Section 207)

1. Issuance of Warrant of Distraint:

   • A Warrant of Distraint is issued by the BIR to authorize the seizure of personal property of the delinquent taxpayer. This document is typically served by the Revenue Officer assigned to the taxpayer’s case.

2. Service of Warrant:

   • The Warrant is served upon the taxpayer or their authorized representative. If the taxpayer refuses to surrender the property, the BIR has the right to enter the taxpayer’s premises and take possession of the assets.

3. Inventory and Appraisal:

   • After distraint, the BIR officer prepares a comprehensive inventory of the seized property. An appraisal of the property’s value is also conducted to ensure that the BIR realizes the highest value possible in case of sale.

4. Public Auction or Private Sale:

   • Seized property is sold in a public auction. The BIR is required to publish a notice of sale, including the time, date, and location, at least twenty days before the auction. If there is no competitive bidding, the property may be sold through private sale. Proceeds are used to satisfy the tax liability, and any excess is returned to the taxpayer.

B. Constructive Distraint (Section 206)

1. Circumstances for Constructive Distraint:

   • Constructive Distraint can be used to secure taxpayer assets when the BIR perceives a risk that the taxpayer may conceal, dispose of, or transfer their property to avoid payment.

2. Procedure for Constructive Distraint:

   • The Revenue Officer notifies the taxpayer of the constructive distraint, taking physical custody or supervision over the property without removing it.
   • The taxpayer is restricted from selling, transferring, or disposing of the property without BIR authorization.

C. Levy on Real Property (Section 207)

1. Issuance of Warrant of Levy:

   • For unpaid taxes, a Warrant of Levy is issued on the taxpayer’s real property. The property must be registered in the taxpayer's name, and the BIR records the levy with the Register of Deeds.

2. Publication of Notice of Sale:

   • The BIR publishes a notice of sale for the levied property in a newspaper of general circulation. This notice must be published at least once a week for three consecutive weeks.

3. Public Auction of Real Property:

   • After publication, the property is sold at public auction to the highest bidder. The proceeds from the sale are applied to the unpaid taxes, and any surplus is returned to the taxpayer.

V. Due Process Requirements

The BIR must strictly follow due process requirements, which include:

• Issuing a demand letter to the taxpayer to settle the outstanding obligation.
• Giving notice of the distraint or levy, including serving the warrant properly.
• Complying with publication and auction requirements for public sales.

Failure to observe due process can invalidate the distraint or levy and may result in the BIR’s loss of entitlement to the tax claim.

VI. Limitations and Exemptions

1. Prescription:

   • The right to enforce collection through distraint or levy is subject to prescription periods. Generally, the BIR has five years from the date of tax assessment to initiate distraint or levy. After this period, the right to collect through these administrative remedies prescribes.

2. Exempt Property:

   • The following are exempt from distraint and levy:
     • Tools and implements necessary for the trade or profession of the taxpayer.
     • Household items used for daily living.
     • Wages and salaries necessary for the taxpayer’s subsistence.

VII. Redemption of Property Sold at Auction (Section 214)

After a public auction, the taxpayer or their representative has the right to redeem the property within one year from the date of sale by paying the amount for which it was sold plus interest. This right of redemption applies only to real property levied upon, not to personal property distrained and sold.

VIII. Penalties and Interests

Upon failure to settle the tax obligation even after distraint or levy, additional penalties and interest accrue until the debt is fully satisfied. Furthermore, the taxpayer may face additional penalties under the NIRC for non-compliance with tax laws, and repeated failure to pay taxes may subject the taxpayer to criminal prosecution.

IX. Summary of Key Steps and Legal Implications

1. The BIR issues demand letters and serves warrants for both distraint and levy.
2. Proper procedures for inventory, appraisal, notice, and sale must be adhered to, or the action may be invalid.
3. The taxpayer’s right to redeem real property allows them a one-year period to reclaim ownership post-sale.
4. Distraint and levy expedite tax recovery while minimizing court intervention, though the BIR is required to uphold strict due process standards to ensure the enforceability of these measures.

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In conclusion, distraint and levy are powerful administrative remedies designed for efficient tax enforcement under the Philippine tax code. The BIR’s compliance with due process, proper issuance of warrants, and strict adherence to procedural requirements are essential for the validity and effectiveness of these remedies.