From pause to progress: Refined audit approach

Responding to widespread taxpayer concerns regarding audit procedures, the Bureau of Internal Revenue (BIR) took a decisive step by suspending tax audits in November. This strategic pause allowed the BIR to reevaluate and refine its audit approach to address the concerns effectively and redefine the landscape of tax audits.

In a news conference on Jan. 27, the BIR announced its readiness to resume audit operations as key reforms in the audit program are now in place.

After a two-month pause dedicated to identifying gaps and revising policies, the BIR issued Revenue Memorandum Circular (RMC) No. 8-2026, formally lifting the suspension of tax audits and other field operations, effective immediately.

THE REFINED APPROACH
The lifting of the suspension comes with the issuance of Revenue Memorandum Order (RMO) No. 1-2026, prescribing revised policies, controls, and procedures for tax audit and assessment, effective immediately. This revision signals a new era of streamlined processes, enhanced oversight, and seamless digital integration, fundamentally transforming the tax assessment framework.

The revised policies introduce several critical changes designed to increase efficiency and reduce subjectivity in audits.

Single-instance audit framework: Taxpayers will generally receive one electronic letter of authority (eLA) for a given taxable year covering all internal revenue taxes, thereby eliminating the necessity for, and burden of, separate tax audits. The issuance of multiple eLAs covering the same taxpayer and taxable year is strictly prohibited.

However, this framework excludes: (1) one-time transactions; (2) tax clearance requests; (3) cancellation of business registration; and (4) cases involving fraud and irregularities.

In line with this reform, the BIR also launched the LoA Verifier feature in the REVIE chatbot through RMC No. 5-2026. This feature provides taxpayers a reliable and secure verification mechanism for Letters of Authority (LoA).

This reform was already part of the 2023 updated BIR Audit Program but reintroduced in 2026 for strict implementation.

Consolidation of pending eLAs: Starting March 4, multiple eLAs covering the same taxpayer and taxable year shall be automatically consolidated into one eLA, unless the taxpayer specifically requests non-consolidation.

To opt out of consolidation, taxpayers must file a written request to the BIR office handling the audit of all its internal revenue taxes, except VAT, on or before Feb. 16. The taxpayer and the revenue officers have until April 30 to close the audits. Beginning May 4, any unresolved cases will automatically be consolidated, regardless of the assessment stage and the request for non-consolidation.

Nonetheless, even prior to the automatic consolidation on May 4, the taxpayers still have the option to voluntarily settle assessed deficiencies, regardless of audit consolidation status.

Audit selection and assignment: The selection of taxpayers for audit will follow a risk-based and system-assisted approach, effectively removing discretionary selection by BIR officials. The issuance of new eLAs will be based on system-generated, anonymized lists, following defined criteria, as provided in Annex A of the RMO.

This approach was also part of the 2023 updated BIR Audit Program where selection of taxpayers and assignment of cases was to be automated using the Internal Revenue Integrated System (IRIS) – Audit Module. The new audit program further enhances the approach by anonymizing the list and requiring the approval of the Commissioner of Internal Revenue (CIR).

To implement this, the Information Systems Group (ISG) will generate lists based on the approved criteria, subject to approval of the CIR prior to dissemination to respective revenue regions and/or large taxpayer offices for assignment. Despite this process, recommendations of taxpayers for audit may still be made subject to the following: (1) written recommendations/justifications by the appropriate approving authority; (2) validation against the approved criteria; and (3) approval of the CIR.

An eLA shall be issued only after completion of the system-assisted selection, centralized approval, and anonymized assignment process.

Full automation is yet to happen, so the BIR is set to issue further guidelines on this on or before April 16.

Shutdown of audit task forces: With the implementation of other reforms, the authority to conduct tax audits and assessment will now be limited to the appropriate regular offices of the BIR.

This resulted in the dissolution of the VAT Audit Sections and Large Taxpayers VAT Audit Unit by May 15.

Audit and assessment proper: In conducting the tax audit, authorized BIR officers are to observe the following:

To guarantee consistency in all tax audits, BIR examiners will adhere to a standardized audit checklist, as provided in Annex B of the RMO, except in cases where additional documents are deemed relevant to the audit or in cases where industry-specific documentation is needed, subject to future issuance of industry-specific checklists.

There is to be proper documentation of audit events and taxpayer interactions. Each audit event will be thoroughly documented by the officer conducting the audit, ensuring transparency and accountability at every step. Additionally, strict oversight mechanisms will be enforced throughout the entire assessment process.

When determining deficiency taxes after the Notice of Discrepancy (NoD) stage, the tax issues to be raised must be based only on issues that were not resolved during the discussion of discrepancies due to valid factual and legal bases. 

In case of voluminous records, the taxpayer has the option to choose whether the audit will be conducted at: 1) the BIR office and submitting certified true copies of the relevant documents; or 2) the taxpayer’s principal place of business subject to prior coordination with the handling revenue officer.

Sanctions: Administrative, civil, or criminal actions will apply to BIR officials who violate or fail to comply with the provisions of RMO No. 1-2026. The RMO also provided an avenue for taxpayers to raise their concerns in case a BIR official acts beyond his authority as provided in the RMO.

THOUGHTS ON THE REFINEMENTS
The single-instance audit framework addresses concerns about multiple eLAs for the same taxable year, which will ease the burden of handling an independent VAT audit. However, it is unclear whether the other major concern of receiving eLAs for consecutive years will be resolved by other reforms like the anonymized system-generated list for audit selection.

Further, while this reform is a significant change, certain BIR officials can still recommend taxpayers for audit, which might undermine the objectives of the new program. If recommendations are permitted, issuing guidelines on exceptional cases that warrant the recommendations would be helpful. Additionally, putting a maximum limit on the number of such recommendations could help maintain the objectivity and fairness in the selection process.

Overall, I believe this reform offers hope by addressing inconsistent audit procedures and exaggerated tax assessments. The BIR’s recognition of taxpayer grievances has laid the foundation for improved processes and signals a transformative shift toward restoring confidence and trust among taxpayers.

I hope that the new audit program will be implemented diligently, ensuring a balanced and fair audit approach. This way, revenue officers and taxpayers can work together as genuine partners in governance rather than operating as adversaries with competing objectives in tax administration.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.

Maria Alyssa Mae Panis is a manager at the Tax Services department of Isla Lipana & Co., a Philippine member firm of the PwC network.

maria.alyssa.mae.a.panis@pwc.com