FAN without PAN violates due process

Since taxation is a power that is susceptible to abuse, it is subject to certain limitations to avoid its arbitrary exercise. One such limitation is the observance of due process.

Due process requires the right to a notice and hearing. In the tax sphere, particularly in tax assessment cases, this means the taxpayer has the right to be informed of his liability for deficiency taxes through a Preliminary Assessment Notice (PAN) and a Final Assessment Notice (FAN), and the right to answer these notices, to present his case and to adduce supporting evidence.

The pertinent issue here is: Does the non-service of PAN before FAN violate the due process?

This issue was put to rest in the recent case of Commissioner of Internal Revenue (CIR) v. Metro Star Superama, Inc. GR 185371, Dec. 8, 2010, wherein the Supreme Court ruled that Section 228 of the Tax Code clearly states that the taxpayer must be informed of his liability for deficiency taxes through a PAN.

Section 228 provides that a pre-assessment notice should be issued by the CIR or his duly authorized representative when he/she finds that the proper taxes should be assessed, except in certain cases enumerated therein.

This requirement was likewise confirmed under the provisions of Revenue Regulations No. (RR) 12-99. Section 3.1.2 of RR 12-99 provides that after review and evaluation of the Assessment Division or by the Commissioner or his duly authorized representative, if it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the Bureau of Internal Revenue (BIR) shall issue to the taxpayer, at least by registered mail, a PAN for the proposed assessment, showing in detail the facts and the law on which the assessment is based. The use of the word, “shall” in subsection 3.1.2 suggests the mandatory nature of the service of PAN.

The case of Commissioner of Internal Revenue v. Menguito GR 167560, Sept. 17, 2008 cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot be applied to the case of Metro Star.

The issue therein was the noncompliance with the provisions of RR 12-85 which sought to interpret Section 229 of the old tax law. In the said case, the Supreme Court held that while the lack of a post-reporting notice and pre-assessment notice is a deviation from the requirements of Sections 1 and 2 of RR 12-85, the same cannot detract from the fact that formal assessments were issued to and actually received by the respondents in accordance with Section 228 of the National Internal Revenue Code, which was in effect at the time of assessment.

Under the old tax law, the stringent requirement that an assessment notice be satisfactorily proven to have been issued and released or served on the taxpayer applies only to formal assessments but not to post-reporting notices or pre-assessment notices.

As discussed in the case of Menguito, a post-reporting notice and pre-assessment notice do not bear the gravity of a formal assessment notice; hence, lack of such notices inflicts no prejudice on the taxpayer for as long as the latter is properly served a formal assessment notice.

Section 229 of the Tax Code on protesting an assessment was amended by Republic Act No. 8424 in 1998.

The law now requires that the taxpayer must be informed of the facts and the law upon which the assessment is made through the sending of PAN.

It is a substantive, and not a mere formal requirement. As compared to the old law, the PAN now has a greater significance in the process of assessment. Failure to strictly comply with the requirement of sending a PAN before a FAN is tantamount to denial of due process.

Conversely, the only instances wherein a PAN shall not be required include the following cases:

(a) when the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or

(b) when a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent;

(c) when a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

(d) when the excise tax due on exciseable articles has not been paid; or

(e) when the article locally purchased or imported by an exempt person — such as, but not limited to, vehicles, capital equipment, machineries and spare parts — has been sold, traded or transferred to non-exempt persons.

Accordingly, both the sending of the PAN and the FAN is required to inform the taxpayer of his liability for deficiency taxes.

If only the FAN is issued, the requirements of due process are deemed unsatisfied and the assessment shall be deemed void ab initio.

Taxpayers are advised to be cautious when they are under audit and examination for deficiency taxes.

A careful consideration of the notice of assessment being transmitted by the BIR should be made. If the notice received lacks the factual and legal basis of the assessment, it does not amount to the required PAN. If the only notice received contains a computation of tax liabilities and demand for payment, this amounts to a FAN without PAN.

On this note, taxpayers may avail of the defense of lack of due process, resulting in a void assessment and, thus, may avoid the hassle of filing a protest for a void assessment.