As they always say, there are only two sure things in life--death and taxes--and stress is unquestionably an integral part of both of them. In the case of taxes, of course, that stress gets much more pronounced during the tax season.
For accountants, in particular, it's the season of long, sleepless nights in the office, crunching numbers to beat deadlines and placating harried employers and clients who demand that their tax payments be made as small as possible.
For taxpayers, on the other hand, it's the season for joining long queues at the offices of the Bureau of Internal Revenue or at the bank to file their income tax returns, even if they are still unsure if they got their numbers right and therefore fearful of a BIR audit later on.
Because of all that stress and fatigue, mistakes are very often committed in the preparation of Annual Income Tax Returns, with the usual unpleasant--and costly--results.
The most common of these errors are the following:
1. Incorrect TIN. The TIN, which stands for Tax Identification Number, has 12 digits. When a taxpayer files an income tax return and uses only nine digits, he normally assumes that the last three digits are zero. This is fine when the business for which the return is being filed is a sole proprietorship or an individual professional practice. When the business has several branches, however, the TIN is expanded to 12 digits. The taxpayer will get into trouble if he or she fails to include the last three digits, which will then be nonzero ones.
2. Incorrect tax computation. In computing for income tax, some items should not be included for tax computation purposes. These are what are normally referred to as the reconciling items between the net income based on the financial statements and the net taxable income payable to the BIR.
Two examples of this are interest income and depreciation. When interest income is credited to the taxpayer by a bank, the BIR has already taxed it at 20 percent. That income should then be presented in the income statement as net of taxes. It should be excluded from the tax base when income tax is computed.
As to depreciation, a very common source of erroneous tax computation is this situation: A business may opt to depreciate a newly purchased car for two years or even shorter, but the BIR may allow it only if that depreciation rate is the existing industry standard and practice. That standard happens to be a five-year life for fully depreciating the car. This means that for BIR purposes, the income statement needs to be restated to reflect the acceptable depreciation computed for the standard five-year life of the car.
3. Failure to attach BIR Form 2307. This form pertains to the Creditable Withholding Tax, which represents the deductions made by a payor--say, an employer--on behalf of the BIR as an advanced income tax payment of the payee--say, an employee. The payor then normally issues a certificate to the payee at the end of the year so that the latter--as a taxpayer--can deduct the corresponding amount from her total income tax payable to the BIR.
Now, when the taxpayer fails to attach the supporting BIR Form 2307, the deduction will be disallowed, and the taxpayer will surely be called by the BIR examiner to show proof and explain the discrepancy.
4. Failure to sign the forms. A corporate annual tax return should be duly signed by two signatories--the president of the company and the treasurer, or in their absence by their authorized representatives. When the signatures are incomplete or there are no signatures at all, the tax return cannot be processed. The taxpayer will definitely get an invitation from the BIR to rectify matters.
5. Wrong mathematics. Due to fatigue, stress, or plain carelessness, taxpayers sometimes make wrong additions or subtractions of expenses or sales in their income tax returns. This is a surefire way of getting invited by the BIR to explain the discrepancies, so it pays to doublecheck one's arithmetic before finalizing and submitting an income tax return.
6. Incorrect RDO numbers. For income tax payment purposes, certain banks are specifically authorized as tax collection agents by a particular Revenue District Office or RDO, which is responsible for tax collection in a particular geographical area. Every RDO is assigned a particular RDO number.
For example, a taxpayer who has an office in Pasig City but operates a business in Robinsons Galleria, a mall located in Quezon City, has to make his or her income tax payments in an authorized bank in Quezon City. In addition, the RDO number to be reflected in the income tax return should be that of the Quezon City RDO that covers the area where the taxpayer's business is operating. By virtue of this RDO number, an authorized bank in Pasig City will refuse payments from Quezon City taxpayers. In the event that it mistakenly accepts the payment, there surely will be delays in the processing of that particular income tax return.
These very common mistakes are committed because many taxpayers don't prepare their income tax returns early enough, often going into a wild rush to beat the deadline. This is a very costly state of affairs because taxpayers are bound to pay their accountants more in overtime charges, make needless last-minute rescheduling of their activities to the detriment of their business operations, and suffer from both physical and emotional stress.
So, how to prepare for the forthcoming tax season without all of those hassles? Here are some important tips:
- Organize your tax records. Your income tax preparation time can be significantly reduced if you develop a good system for organizing your records. On a monthly basis, check your summaries of revenues and expenses and make sure all your Value Added Taxes, Withholding Taxes, and other taxes are properly reported. These items will have a great impact on your tax annualization activities.
- Know what you are doing. Doing your tax returns will be much easier if you understand the basic process, particularly if your tax situation isn't a very complicated one. So don't wait for the last minute to get the necessary forms and know the tax-filing procedures. You can actually get them online by logging on to www.bir.gov.ph, or you can call the BIR call center at (02) 981-8888 if you are in a quandary about certain tax matters.
- Start early; don't procrastinate. Since tax preparation covers all transactions for the year, start from the very first month and not at year-end. To avoid unnecessary mistakes, resist the temptation of delaying tax preparation until the last minute.
- Ask for professional help. Depending on your situation, getting a professional accounting firm or tax-preparation practitioner to help you in your tax planning can be well worth the expense. The advice you get from them can make you realize substantial tax savings legitimately and spare you from all the stress of last-minute, touch-and-go tax preparation. More important, because accounting and taxation rules change from time to time, you need expert advice to cope with them and keep yourself always in full compliance with the tax laws.
Last-minute tips before filing your tax return:
- Verify that all required information is properly filled out.
- Double-check figures and re-compute.
- Attach all required schedules and crosscheck.
- Sign and date the form properly.
Henry Ong, CMA, RFP, is president and COO of Business Sense Inc., a financial advisory and consulting firm that helps small and medium businesses. You may reach him at hong@businesssense.com.ph.
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