Formal tax assesssment as a pre-requisite to a criminal complaint for tax evasion

Is a tax assessment required before the Department of Justice can file a criminal complaint for tax evasion against a taxpayer?

In the May 21, 2009 case of  Lucas G. Adamson, et al. vs. Court of Appeals, et al./Commissioner of Internal Revenue vs. Court of Appeals, et al., the Supreme Court, citing Section 222 of the Tax Code, ruled in the negative.  Section 222 provides:

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 after the collection of such tax may be begun without assessment, at any time within ten 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 collection thereof…

The Supreme Court ruled:

The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax may be begun without assessment. Here, the private respondents had already filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not been paid for VAT-liable sale of services for the third and fourth quarters of 1990. Arguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud.

Citing Mertens, the Supreme Court stated:

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government’s failure to discover the error and promptly to assess has no connections with the commission of the crime.

On the issue of whether a letter of the Commissioner of Internal Revenue addressed to the Secretary of the DOJ recommending the filing of criminal complaints against the taxpayers for fraudulent returns and tax evasion constitutes a formal assessment, the Supreme Court also ruled in the negative. According to the Supreme Court:

In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a revenue officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiner’s findings is not an assessment since it is yet indefinite.

We rule that the recommendation letter of the Commissioner cannot be considered a formal assessment. Even a cursory perusal of the said letter would reveal three key points:

1.     It was not addressed to the taxpayers.

 2.     There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein.

 3.     The letter was never mailed or sent to the taxpayers by the Commissioner.

In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that the taxpayers had violated Section 45 (a) and (d), and 110, in relation to Section 100, as penalized under Section 255, and for violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code.

On the issue of whether the CTA has jurisdiction to take cognizance of both the criminal and civil cases, the Supreme Court ruled that Republic Act No. 1125, as amended by Republic Act No. 8424 and Republic Act No. 9282 “expanded the jurisdiction of the CTA” but “they did not change the jurisdiction of the CTA to entertain an appeal only from a final decision or assessment of the Commissioner, or in cases where the Commissioner has not acted within the period prescribed by the NIRC. In the cases at bar, the Commissioner has not issued an assessment of the tax liability of private respondents.”

Lucas G. Adamson, et al. vs. Court of Appeals, et al./Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. Nos. 120935/124557,  May 21, 2009.