Taxes are designed to raise revenue by collecting funds or property in order for the government to promote general welfare

and fund its operations. However, taxpayers view taxes as a burden since it is an additional outflow on their part. This is in line with the power to destroy doctrine of taxation since taxpayers have no option but to pay tax. This burden leads taxpayers to falsify, alter or defraud their income tax returns to avoid or, in serious cases, to evade the tax imposed upon them. Given the high risk of undermining correct payments and timely collection, the Tax Code contains punitive provisions such as surcharges and interest in addition to basic taxes to ensure tax collection once a taxpayer neglects to pay his taxes. A period of prescription is also provided to determine if tax agents or examiners have still the rights to pursue further investigations of seemingly falsified tax returns of a taxpayer. Tolentino (2002) described this period of prescription as a time capsule which restricts or limits the time within an action may be brought. In a similar manner, the Supreme Court in Bank of the Philippine Islands, vs. Commissioner of Internal Revenue, 473 SCRA 205 (2005) explained that the prescriptive period of assessment provides the citizenry security against unscrupulous tax agents who always finds excuses to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. As a general rule, the Bureau of Internal Revenue has only three (3) years counted from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without assessment (Sec. 203, NIRC of 1997). The exception to the prescriptive period which greatly prejudices taxpayers deals with false and fraudulent return which is found on Sec. 222 of the Tax Code as quoted: In the case of a false or fraudulent return, with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission. As observed, the three-year rule is extended to ten years. As an additional consequence of a false or fraudulent return, the Tax Code also contains penalizing provisions embodied in Sec. 248B of the NIRC which imposes a penalty of fifty percent (50%) of the tax or the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. It is to be noted that there are twin sanctions of extended period of prescription and fifty percent (50%) surcharge on the tax paid as contained in the Tax Code in case of a false or fraudulent return, and that the sanctions as described are the same if the taxpayer filed a fraudulent return or just

a false return. Manahan (2010) further noted that the need to understand the concept and underlying characteristics of a false return in contrast with a fraudulent one becomes more compelling and acquires paramount importance. A false return has been defined in Commissioner of Internal Revenue vs., Goodrich Phils., Inc., 303 SCRA 546 (1999) as one which contains wrong information due to mistake, carelessness or ignorance. This means that any return containing wrong information of whatever nature, and even if such inaccuracy was without intent to evade taxes, may be argued as being a false return and therefore, will subject a taxpayer to harassment and extortion from tax agents who invoke even the slightest inaccuracy in a return to demand inspection of a book even beyond the 3-year prescriptive period. This is not fair for taxpayers who files returns in good faith when the over or understatement of sales, receipts or income is caused by the negligence of his accountants. In fact, a member of the Congress, Binay (2010) authored a bill, House Bill no. 1430, which seeks to limit the exceptions to the three-year prescriptive periods by removing false returns as one of its exceptions. A fraudulent return, on the other hand, is a return with the intention to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another (Commissioner of Internal Revenue vs. Court of Appeals, 1996). Indeed, a fraudulent return is rightfully and should be subjected to punitive provisions, however said exception is likewise being abused by agents to harass taxpayers even without clear and convincing evidence to support allegation of fraud. To further understand the context of a false return, certain cases involving taxpayers in Baguio and Benguet are reviewed. The decisions of the court must be considered to amplify understanding of false and fraudulent returns. These cases are in limbo whether or not the 10-year rule of prescriptive period shall be applied. In the case of Republic of the Philippines vs. Honorable Feliciano Belmonte, as Judge of the Court of First Instance of Baguio and Benguet, Branch II (1999), the Court rejected the theory of the Republic that the finding by the Commissioner of Internal Revenue as to the existence of fraud has become final and need not be proved because the corresponding assessment itself was already final and executory. The Court stressed that fraud being a serious charge must be alleged and proved by clear and convincing proof. Even if the allegation of fraud is discounted and reliance made on the falsity of the returns, still, falsity is likewise a question of fact which the Bureau of Internal Revenue must prove

before the Court of Tax Appeals and the lower court. BIR's demand letters mentioned understatement of applicable tax rates but it failed to show the applicable tax rates, how the tax rates were applied, how the correct amount of deficiency taxes were arrived at, and where respondents committed the error. With the lack of merit on hand, the ten-year prescriptive period shall not be applicable. In Commissioner of Internal Revenue vs. Consolidated Mines, Inc. CTA Case 565 (1961), the records of the case show that the facts and circumstances surrounding the filing of income tax returns under review do not justify the assessment and collection of the 50% surcharge. The BIR respondent was at least, not sure as to whether or not the petitioner willfully made and filed false or fraudulent income tax re turns. And in case of doubt the same should be resolved in favor of the taxpayer, and the fraud surcharge or penalty should not be assessed and demanded. Having ruled that the petitioner did not willfully make and file false or fraudulent income tax returns, it is clear that the right of the Commissioner of Internal Revenue to assess against the petitioner the questioned deficiency income taxes has already prescribed. In another case, the legal issue being raised in Commissioner of Internal Revenue vs. Arturio Tulio (2005) is whether the complaint in the said civil case may be dismissed on the ground of prescription. In an earlier lower case, the Regional Trial Court (RTC), Branch 60, Baguio City, issued its first challenged order dismissing Civil Case No. 3853-R by reason of prescription, thus: The court is not convinced that the case falls under Section 223 of the NIRC as alleged by the plaintiff for the simple reason that the complaint never alleged fraud. Why should it be when it was the government entity charged with the collection of taxes which filed the return? It would be impossible for them to charge themselves with filing a fraudulent return. The 10-year prescriptive period provided for under the cited section of the tax code therefore, should not apply in this case. However, the Supreme Court stated that the 10-year rule should apply and not the 3-year in the ground that Tulio failed to file his income tax return. It is true that Tulio did not make false or fraudulent returns but he is guilty of not filing his income tax returns, which led to the application of the 10-year rule. The wrong interpretation of Regional Trial Court is then reversed. Section 223 specifies three (3) instances when the running of the three-year prescriptive period does not apply. These are: (1) filing a false return, (2) filing a fraudulent return with intent to evade

tax or (3) failure to file a return. The period within which to assess tax is ten years from discovery of the fraud, falsification or omission.

There is a need, therefore, to qualify if a false return should be applied with the ten-year rule or not. A false return brought about by negligence, mistake, carelessness or ignorance should necessarily fall within those matters which the BIR must be able to ascertain within the three (3) year prescriptive period since the government is not placed in any disadvantage as the supporting documents of these returns are readily available for inspection and review of the BIR. However, needless to say, that a return containing false information due to deliberate and culpable effort on the part of the taxpayer to evade taxes may fall as a fraudulent return, which is still an exception to the three (3) year prescriptive period. It is the authors position that if a false return is done with the intention to evade tax, it cannot be considered as a false return but a fraudulent return, in its sense, because of the presence of the element of intention. However, the Court of Appeals in Commissioner of Internal Revenue vs. Ayala Hotels Inc., (2004) ruled that not all false returns would call for an application of Sec. 222 of the Tax Code, otherwise, any mistake, however slight, would justify the application of the ten (10)-year prescriptive period. Only false returns which are filed by a taxpayer with the intent to evade tax would warrant the application of the 10-year rule. Given this CA ruling, is it not already a fraudulent return if the false returns are filed with the intent to evade tax? Also, in a separate case, the CTA in Estate of Fidel Reyes vs., Commissioner of Internal Revenue (2007) ruled that an understatement of income or overstatement deductions in the tax return which resulted in a substantial impairment in the amount of taxes collected by the government could be considered as a mistake culpable in respect of its value, thus rendering such false return subject to the 10-year period of prescription. Thus, it can be deduced that even if there is no intent to evade tax under Ayala Hotels criteria, a false return qualifies to apply the ten-year rule if the mistake is culpable in respect of its value. In light of the discussions made by Manahan (2010), there are three criteria for qualifying a false return to be subjected to 10-year prescription. First, a false return was filed by the taxpayer with the intent to evade tax. Second, falsity was obvious on the face of the returns and public records were accessible. Lastly, the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities. The Tax Code, itself, does not make any criteria or qualifications as to the falsity of the return which would render a return a false return. It also does not distinguish a false from a fraudulent tax return. The two words are adjoined which is -- false or fraudulent return in our Tax Code. The Court decisions or jurisprudence forms part of the law of the land, however, some decisions are contradicting with each other. As such, the issue on false or fraudulent returns continues to be a vague part of the Tax

Code, until amendment will come into place. The author strongly supports the passing of the bill in order for the issue to be brought into light. A deeper study of this case is recommended until another illuminating case will be decided by our Courts. Indeed, taxpayers must not be deprived of their rights as a taxpayer and must also be respected. Similarly, taxpayers should also respect the government by paying the correct taxes due upon them. In order for us to rise as a nation, we must start from our own selves and get away from the corrupt practices in our daily lives. In one way or another, taxpayers must not view taxation as a power to destroy but a power to build. Valencia and Roxas (2013) stated that the burden to pay tax is only a means to nation building and a consequence of taxation. Taxation is basically a mechanism that creates, builds, and sustains the uplifting of a social condition of the people in general as it continuously supports the other inherent powers of the State that preserve the fundamental rights of the people.

References Bank of the Philippine Islands vs. Commissioner of Internal Revenue, 473 SCRA 205 (2005) Commissioner of Internal Revenue vs. Arturio Tulio, Civil Case 3853-R (2005) Commissioner of Internal Revenue vs. Ayala Hotels, Inc., C.A.-. G.R. SP No. 70025 (2004) Commissioner of Internal Revenue vs. Consolidated Mines, CTA Case 565 (1961) Commissioner of Internal Revenue vs. Court of Appeals, 257 SCRA 200 (1996) Commissioner of Internal Revenue vs. Goodrich Phils., Inc, 303 SCRA 546 (1999) Estate of Fidel F. Reyes and Estate of Teresita R. Reyes, vs. Commissioner of Internal Revenue, C.T.A. EB 189 (2007) Manahan, C.T. (2010). Defining the falsity of false returns. Ateneo Law Journal, 55(354), 359-367. Retrieved from http://www.ateneolawjournal.com/Media/uploads/1eb9cbff50cacefa17f7.pdf

Republic Act No. 8424. Tax Reform Act of 1997, VIII NIRC 203. Republic Act No. 8424. Tax Reform Act of 1997, VIII NIRC 222. Republic Act No. 8424. Tax Reform Act of 1997, X NIRC 248B. Republic of the Philippines vs. Hon. Feliciano Belmonte, et.al, G.R. L-38702 (1999) Tolentino, A. (2002). Commentaries and jurisprudence on the Civil Code of the Philippines. CS 36. Manila, Philippines: Acme Publication Valencia, E.G., & Roxas, G.F. (2013). Income Taxation: Principles and Laws with Accounting Applications (6th ed.). Baguio City, Philippines: Valencia Educational Supply