A promising step toward tax audit reform

The Bureau of Internal Revenue (BIR) ended the two-month suspension of tax audit activities after issuing Revenue Memorandum Circular (RMC) No. 8-2026 and Revenue Memorandum Order (RMO) No. 1-2026. The latter introduces tax audit process reforms, which include, among others, a move to consolidate tax audit cases involving the same taxpayer and taxable year. The consolidation is a welcome relief as it seeks to address a long-standing pain point in tax administration, which is simultaneous to multiple audits covering the same period.

For years, it has been common practice for the Bureau to issue multiple electronic Letters of Authority (eLAs) to a single taxpayer for the same taxable year. The issuance of three separate eLAs is not unusual, covering two semesters of a value-added tax (VAT) audit, and another encompassing all internal revenue taxes except VAT (AIRT). The resolution of each tax audit entails resources diverted from the business such as manpower, time, and documentation to address the requests and findings raised.

While specialized audits enable more targeted and risk-based examinations, experience has shown us that a fragmented audit approach does not necessarily result in better tax enforcement. The consolidation, if properly implemented, may promote efficiency and coherence in tax audits. To help ensure that the RMO’s implementation aligns with existing rules on due process and audit authority, some points may need to be clarified further.

VAT-ONLY LOAS
The Single-Instance Audit Framework allows taxpayers with multiple ongoing tax audits within the same taxable year to file a Request for Non-Consolidation of Cases by Feb. 16 with the BIR office handling their AIRT audits. Without this, all eLAs for the period are automatically consolidated into one eLA covering all applicable internal revenue tax types under audit.

The VAT Audit Sections (VATAS) and the Large Taxpayers VAT Audit Units (LTVAU) will wind up operations by May 15. However, it is not quite clear how this will affect taxpayers who only have ongoing VAT audits. Will this prompt the issuance of a replacement eLA covering all other internal revenue taxes, such as income tax and withholding taxes?  Given the reason behind these audit reforms (i.e., alleged abuses using these eLAs), it seems reasonable to assume that consolidation would not result in an expanded audit coverage in such cases. Nonetheless, it would be helpful to clarify if the replacement eLA would merely reflect a change in examiners and investigating office (from VATAS to the RDO), without expanding the scope of the audit to include all other internal revenue taxes.

CONSOLIDATION OF CASES AT VARIOUS STAGES
Taxpayers with cases that are at varying procedural stages are also curious how the consolidation will be carried out. The RMO does not specify whether consolidation is limited to audits at the same stage, or whether it also applies to cases where assessment notices have already been issued.

For example, a taxpayer may have a VAT audit at the LoA stage, while the AIRT audit for the same year is already at the Final Assessment Notice (FAN) stage. Can these cases still be consolidated under the RMO? If so, what happens to the assessment already issued? Would issuance of a consolidated eLA reset the proposed tax findings, or would the consolidated audit follow the earlier stage, which in this example, is the LoA stage?

From the taxpayer’s viewpoint, moving up the entire audit to the later stage may impair their constitutional right to due process. However, for the BIR, restarting the case at an earlier point may affect the prescriptive periods and the validity of previously issued assessment notices. Clear parameters are needed to prevent disputes arising not from tax findings, but from procedural uncertainty.

Even more curious are reports that some taxpayers have been advised by certain BIR officers that consolidation will not apply to cases where tax findings have already been issued. This interpretation contradicts the objective of the RMO. Thus, further clarification may be needed to ensure consistent application among revenue officers.

AUTHORITY TO ISSUE A REPLACEMENT LOA
The RMO provides that, as a general rule, the replacement eLA must be issued by the RDO/Office Audit Section (OAS)/Large Taxpayers (LT) Audit Office.

However, the authority to issue an eLA is not vested in the RDO. Depending on the nature and scope of the audit, an eLA must be approved by the Regional Director or higher authority. This distinction is critical, as the eLA is the document that legally authorizes revenue officers to examine a taxpayer’s books and records. Jurisprudence consistently holds that audits conducted without a valid eLA are void.

If an eLA must be replaced due to consolidation, can the RDO validly issue that replacement, or should the replacement eLA be issued by the same authority who approved the original LoA? The RMO does not clarify whether replacing an eLA is merely ministerial or a substantive act requiring the same level of approval. Will the BIR issue a Revenue Delegated Authority Order granting RDOs the power to issue the replacement eLAs? More importantly, would such delegation be sufficient to cure potential validity issues? Given the serious consequences of an invalid LoA, this point deserves explicit guidance.

CASES FOR MANDATORY AUDIT
The RMO identified cases subject to mandatory audit or issuance of an eLA. The first item on the list refers to instances where there is at least a 30% under-declaration of sales or a 30% over-declaration of purchases or expenses.

It is not clear how the BIR would determine a 30% discrepancy without first conducting an audit pursuant to a valid LoA. Will this be based solely on documents already submitted to the BIR, such as income tax returns, VAT returns, and audited financial statements?

Without third-party data, information returns, or prior investigations, identifying such discrepancies would ordinarily require examination of a taxpayer’s books. This is permissible only through a duly issued eLA. Without clarification, the provision appears to assume the existence of findings that can only arise after an audit has begun.

Given the questions surrounding consolidation, the authority to issue replacement eLAs, and the criteria for mandatory audits, I hope that the BIR would allow taxpayers more time to properly evaluate their existing cases and decide whether they prefer to conclude their VAT audits at the VATAS/LTVAU, while still granting them the flexibility to consolidate cases earlier should they choose to do so.

The Bureau may consider allowing taxpayers until April 30 instead of Feb. 16 to decide. Since tax audits vary widely in complexity, both taxpayers and revenue officers need sufficient time to interpret and apply new rules consistently. An extension would also allow the BIR to issue clarificatory guidelines, conduct internal briefings, and ensure that consolidation is successfully implemented so that it achieves the Bureau’s objective in a manner consistent with due process.

RMO No. 1-2026 is, without question, a promising step in the right direction. It acknowledges long‑standing taxpayer concerns and seeks to rationalize tax audit procedures. With timely clarifications and a calibrated implementation timeline, the BIR can strengthen this reform and ensure that consolidation becomes not just a policy objective, but a meaningful improvement 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.

Kathrine Joy Capales is a director at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

kathrine.joy.capales@pwc.com