Types of Tax Fraud Cases

Types of Tax Fraud Cases are as follows:

1. Criminal Fraud - A criminal tax fraud case results when all the elements of fraud can be proven beyond reasonable doubt. "Proof beyond reasonable doubt" does not mean such a degree of proof as absolute certainty, excluding possibility of error.

2. Civil Fraud - When all the elements of fraud cannot be proven beyond reasonable doubt, but these elements can be established by clear and convincing evidence amounting to more than a mere preponderance of evidence, civil fraud exists.

From routine examination of returns:

1. Keeping no records of inadequate records despite substantial transactions reflected in the returns;

2. Standard in living of the taxpayer, such as the possession of expensive cars and jewelries; or staying in luxurious mansion, and ownership properties whose values far exceed his probable sources of income as declared per return;

3. Records verified were not properly declared for the tax purposes;

4. False vouchers and receipts of the routine examination.

From information furnished by:

1. An informant who has knowledge of the transactions of the taxpayer which were not properly declared for tax purposes;

2. Referrals from other government offices or from other investigating units of the BIR.

Thru initiative of the investigating officers:

1. From newspaper reports;

2 Thru research of available government records such as from offices of the Register of Deeds, Bureau of Highways, and other government offices; and

3. In relation to an investigation of another taxpayer, where suspects that certain transactions were not declared for tax purposes.

Burden of Proof in Establishing Fraud

A tax fraud or evasion case is basically a criminal case. In the establishment of fraud, the burden of proof is on the BIR. The presumption that an officer of the government has performed his duty regularly, as in the case of the correctness of deficiency assessments, is not applicable in fraud cases. In criminal case, the burden of proof as to the offense charged lies on the prosecution.

Mere suspicions and doubts as to the intention of the taxpayer are not sufficient proof of fraud. Fraud is never presumed, it must be proved. As in felonies under the Revised Penal Code, the guilt of the accused for offenses under the Tax Code must be established beyond reasonable doubt.

Difference Between Tax Evasion and Tax Avoidance

Did you know that Evasion and Avoidance are sometimes used as synonyms in connection with tax matters?

A useful difference may, however, be drawn between them. Evasion should be applied to the escape from taxation accomplished by breaking the law - deliberate omission to report a taxable item, for example.

The term avoidance is the available to cover escaped accomplished by legal procedure which may be contrary to the intent of the tax law's sponsors but nevertheless do not violate the law.

Objectives of Effective Tax Management

Last year, I had attended a seminar somewhere in Mandaluyong City about Effective Tax Management (Tax Avoidance).

The speaker has shared about the Objectives of Effective Tax Management as follows:

1. To maximize Tax Benefits
2. To optimize Tax Deductions
3. To minimize Taxable Income
4. To avail all Tax Incentives
5. To avail Tax Remedies under the code
6. To comply all the requirements of the Bureau of Internal Revenue

Compliance (preventive)

1. Know the tax rules
2. Know how the rules
3. Maintain a high level of tax compliance
4. Secure your Tax
5. Get professional help

Assessments

1. Know your rights and remedies
2. Know the rules and process the assessment
3. Know best practices of handling assessment
4. Study and define your strategy
5. Get professional help

Collection

1. Know your rights and remedies
2. Know the rules and process of collection
3. Know your options

Favorable Settlement

1. Amnesty
2. Abatement
3. Compromise Settlement

Types of Withholding Taxes and Duties and Obligation of a Withholding Agent

Types of Withholding Taxes:

1. Withholding Tax on Gross Compensation
2. Expanded or Creditable Withholding Tax (Service Income / Purchases of Goods)
3. Final Withholding Tax (Passive Investment Income) - Interest, Dividends, Royalties, Prizes, Winnings and Capital Gain
4. Withholding Tax on Government Money Payment - Income Tax; VAT; Percentage Tax
5. Quarterly Withholding Tax - Individual Engage in Business or Profession; Corporation

Duties and obligations of Withholding Agent:

1.To deduct and withhold
2. To remit the tax withheld
3. To file withholding tax returns
4. To register
5. To issue withholding tax certificate

Duties and Privileges of employer and employee with regards to withholding tax on gross compensation:

Employer - Issues the proper withholding statement (BIR Form 2316) and include the employees in the Alphalist under Schedule 7.2 of BIR form no. 1604 CF. Salaries allowed as deductible expenses even without WT.

Employee - File ITR and pay income tax. If any, on or before April 15. Shall not qualify for Substituted Filing even if no tax payable at year end.

Deductibility of Charitable and Other Contribution from Gross Income

Charitable and other contribution were Corporation or association to whom contributions or gifts may be made or paid and claimed as deduction, the amount of which is subject to limitations.

The limitation is 5% for corporations and 10% for individuals, of the taxable income derived from trade, business or profession.

Besides, the valuation of deductible contributions is the amount of property other than money shall be based on the acquisition cost of the said property.

Contribution is deductible in full of the following:

1. Donation to the Government
2. Donation to Certain Foreign Institutions or Internal Organizations
3. Donation to Accredited Nongovernment organization

The term Nongovernment organization means a nonprofit domestic corporation

a. Organization operation exclusively for scientific research, educational, character-building and youth and sports development. Health, social welfare, cultural or charitable purposes.

Under Section 30 of the National Internal Revenue Code (NIRC), the following items are not deductible:

1. Personal, living or family expenses.
2. Any  amount paid out of new building or for permanent improvements, or betterment made to increase the value of any property or estate;
3. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

References: National Internal Revenue Code, Chapter VII Allowable Deductions, Section 34 (H); RR 13-1998

Requisites for Valid Deduction of Bad Debts from Gross Income

Bad debts are deductible from gross income if the following requisites are met:

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business or practice of profession;
3. The same must not be sustained in transaction entered into between related parties;
4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;
5. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;

* Debt s charged-off within the taxable year. Partial writing-off is not allowed, it must be charged-off in full or not at all. (Fernandez Hermanos, Inc. vs. Comm.2DCRA552)

Loss which are Not Allowed by Law to be Deducted from Gross Income

For taxation purposes, we have to consider loss which are not allowed by law to be deducted from Gross Income as follows:

1. Loss on voluntary removal of building on land with the view to erecting another building;

2. Wagering losses not covered by wagering gains;

3. Capital losses not covered by capital gains

4. Losses from exchanged of property in corporate readjustment;

5. Losses from illegal transactions;

Requirement for the Substantiation of a Loss

The taxpayer bears the burden of proving and substantiating his claim for deduction for loss and should comply with the following substantiation requirements:

1. A sworn declaration of loss must be filed within the period prescribed; and

2. Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss.

Requisites for the Deductibility of a Loss

Losses are deductible for Income Tax purposes if the following requisites are met:

1. The loss must be incurred in trade, profession, or business of the taxpayer, or any transaction entered into for profit;

2. It must be actually sustained within the taxable year;

3. It must be evidenced by a closed and completed transaction;

4. It must not be compensated for by insurance or other form of indemnity; and

5. The taxpayer has filed a sworn declaration of loss within 45 days after the date of the occurrence of casualty or robbery, theft, or embezzlement.

NOTE: No loss shall be allowed as a deduction if a the time of the filing of the return, if such loss has been claimed as a deduction for estate tax in the return.