The intricate balancing act between the state’s power to tax and the constitutional rights of taxpayers, particularly the right to due process, forms the backbone of fair taxation. Every tax audit tries to keep these competing interests in check: the State’s right to collect what is legally due, and the taxpayer’s right to be treated fairly and lawfully. This delicate equilibrium is evident in what has emerged as the Achilles’ Heel of tax audits: missing Letters of Authority (LoAs).
In a Court of Tax Appeals (CTA) decision (CTA Case No. 10951) promulgated this year, we see how the power to tax was once more tempered by the Constitutional right to due process. The CTA invalidated a tax assessment for the failure to issue a replacement LoA — a seemingly simple omission that rendered an entire assessment void from the start.
The case centered on a taxpayer who received an LoA in 2018, authorizing the assigned Revenue Officer (RO) and his Group Supervisor (GS) to audit the taxpayer’s 2017 books of account and other accounting records.
The audit continued to proceed through the Notice of Informal Conference (NIC), Preliminary Assessment Notice (PAN) until the Final Assessment Notice (FAN) stage. The taxpayer protested the FAN in a timely manner and thereafter submitted additional documents during the 60-day reglementary period of the request for reinvestigation. Seven months after the submission, the taxpayer received a new LoA authorizing a new RO and new GS to continue the investigation. A year later, the taxpayer received the Final Decision on Disputed Assessment (FDDA).
The taxpayer initially argued that the right to due process was violated on the grounds that the new RO conducted his audit without a valid LoA, and the belated issuance of the second LoA did not cure this defect. However, the CTA held that the new RO’s involvement in the reinvestigation process (after the FAN) no longer required a new LoA.
Interestingly, the assessment was eventually invalidated by the CTA — in reviewing the records of the tax audit, it found that the newly assigned GS had participated in the tax audit as early as the PAN stage — much earlier than the issuance of the new LoA reassigning him to the tax audit. The CTA held that at the PAN stage, the change in the GS required a new LoA. Prior to the issuance of the second LoA, the new GS’s participation in the investigation was unauthorized. Therefore, the resulting assessment is void.
The mandatory nature of the LoA is firmly established under the Tax Code, which authorizes certain BIR officers to examine a taxpayer’s books. Specifically, before any RO may conduct an audit or recommend an assessment, the Commissioner or his duly authorized representative must first issue an LoA naming the specific officers authorized to examine the taxpayer. A GS is also considered an RO.
The CTA reiterated the ruling of the Supreme Court (SC), which held that the LoA is not a mere formality or technicality. It is a due process requirement that serves as a critical safeguard to ensure that a taxpayer is informed of the authority of the ROs conducting the audit.
In case of reassignment, the SC underscored the importance of issuing an amended LoA to allow a new RO to continue an audit or investigation. This ruling firmly establishes that auxiliary documents such as Memorandum of Assignments, Referral Memorandums, or equivalent documents directing the continuation of the audit, do not function as an LoA, but merely notify the taxpayer of the fact of reassignment. These do not grant the authority to conduct an audit. Clearly, no tax audit may lawfully begin without a valid LoA, and any audit conducted by officers not named in the LoA is void.
Another point raised in the CTA case is the distinction between an assessment and a decision. An assessment is the BIR’s formal determination of a taxpayer’s tax liabilities, while a decision (i.e., the FDDA) is the BIR’s ruling on a taxpayer’s protest against that assessment. These are not interchangeable, and the invalidity of the FDDA does not automatically void the assessment. The SC has previously explained that a defective FDDA affects only the decision on the disputed assessment, not the underlying assessment itself, which may still stand and be reviewed by the courts.
As mentioned, the CTA held that a new LoA is not required to authorize the new RO/GS during the reinvestigation stage after the FAN. Even assuming that an LoA is required, the court pointed out that such defect pertained only to the decision and did not retroactively invalidate the assessments (PAN, FAN) that had already been issued based on the audit conducted by the old RO under a valid LoA. It merely affected the validity of any subsequent decision arising from the reinvestigation.
While the taxpayer believed that the new RO was the weak link in the audit, the true issue lay in the lack of authority of the new GS, which ultimately invalidated the entire assessment.
Because the new GS was not included in the LoA at the time he supervised the audit, his participation violated the taxpayer’s right to due process, rendering the assessment legally ineffective. As can be gleaned from the CTA decision, the presence or absence of an LoA has significant implications in the tax audit process. Taxpayers may consider adopting the following in handling an LoA:
1. Always request and verify the LoA at the start of the tax audit.
Taxpayers must check whether the officers conducting the audit are named in the LoA, whether the correct taxable year is covered (e.g., calendar year or fiscal year) and whether the LoA was signed and issued by the authorized BIR official (i.e., Regional Director). If any errors are found, they should be noted as they can be used as grounds to invalidate the assessment.
2. Watch out for reassignments in BIR personnel.
The BIR may at times shuffle its personnel, which may potentially affect ongoing tax audits. For tax cases that have yet to reach the FAN stage, a replacement LoA is required to proceed further. A Memorandum of Assignment or Letter Notice is not sufficient.
3. Keep strict documentation.
Keeping original and electronic copies of every letter or notice received from the BIR would be prudent as a missing document may be the difference between a valid and a void assessment.
Ultimately, the LoAs serve both sides — a tool for governance and a shield for protecting taxpayers’ rights. It is not merely a piece of paper or bureaucratic requirement. It is essential in safeguarding constitutional rights to due process and ensuring transparency, fairness, and lawful exercise of power by the state’s taxing authority.
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.
Jannelle Roxas is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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