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Chapter 1

THE PROBLEM AND ITS BACKGROUND

Introduction

Some things are certain in this world: like death and taxes, as the old saying

goes. Just like how much most of the people are scared of dying and wanting to

avoid them, they do the same with their taxes. People want to minimize their taxes

to the littlest amount possible to make the most out of their income, or so they call

it.

There are two ways to lower the tax liability. First is tax avoidance, which is

a wise and legal way of decreasing the tax bill by structuring the various

transactions that occurred in the taxable year to come up with an amount with the

largest tax benefit; then, there is tax evasion, or excessive tax avoidance, which is

an attempt to intentionally deceive the authority, and conceal their true tax liability.

According to Investopedia.com, tax fraud occurs when an individual or

business entity willfully and intentionally falsifies information on a tax return in order

to limit the amount of tax liability.

Under tax fraud was tax evasion which is done by deliberately

underreporting income, falsifying records, claiming of false deductions, overstating

expenses, creating fictitious transactions and hiding or transferring assets. This is

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not only a misconduct that holds the offender personally accountable, but is a

crime against the society and the democracy as it limits the governments ability to

meet the demand of its nation. As a result, it creates a shadow economy.

In a research conducted by Tax Justice Network, an equivalent of 5.1

percent of global gross domestic product never reaches the government in the

form of taxes on a global scale. This is equal to a $3.1 trillion loss in annual

revenue; where in Asia alone costs about $665 billion.

In the Philippines, meanwhile, based on the 2014 presentation submitted

by the Former Bureau Internal Revenue (BIR) Commissioner Kim Henares to the

International Monetary Fund, there are 327 cases filed where 283 is still pending

at the Department of Justice, 39 at courts and only 5 was dismissed with finality

which totaled to an estimated tax liability of P64.98 billion through the Run After

Tax Evaders (RATE) program of the BIR and Department of Finance. In the

present year, a total of 492 RATE cases have been filed since 2010 but there we

no recorded convictions.

Governments of different countries have their ways of fighting this issue.

Some imposes higher penalties on tax evaders, while some enforces longer

sentence for imprisonment to discourage them. The Philippines, on the other hand,

aside from using the RATE program, also uses different strategies to ensure

proper tax compliance. But despite these, there are no prominent reports about

significant improvement on tax evasion. In order to improve their investigation

process, the researchers aim to determine what steps in forensic accounting are

deemed useful by the Bureau of Internal Revenue.

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Forensic accounting was first introduced to investigate matters and provide

evidence that could be used in legal proceedings which in effect changed the way

frauds are assessed. This method may give rise to combatting the ever-growing

cases of tax evasion through thorough investigations combined with the knowledge

in accounting. It may either help discover fraud that audits might not have sufficed

on, or assist in the prosecution stage prior to filing them to the court.

The former Prime Minister of the United Kingdom, Gordon Brown, once

stated that "what the use of fingerprints was to the 19th century, and DNA analysis

was to the 20th century, so financial information and forensic accounting has come

to be one of today's most powerful investigative and intelligence tools available.

Forensic accountants have been used as expert witnesses as far back as 1817

but had just been gradually being known in the industry.

In fact, one of the most notable utilization of this accounting investigative in

nature was the case of Al Capones tax evasion. Lawyers back then simply cannot

provide evidence, while the group of forensic accountants assigned to this specific

case was able to convict Al Capone. This imparts the strong foundation of this

department that could end the most notorious of activities.

Locally, there is a 90% tax evasion rate among professionals, particularly

doctors, engineers, lawyers, architects, and accountants, among others. This

implies concerns as there are inevitably countless suspicious activities that

question the credibility of the concerned people, most especially the auditor. This

primary employee that must ensure the reliability, verifiability and accuracy of

financial statements provided to intended users can also be subject to these

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maliciousness because fraud that are being detected are under the supervision of

an auditor. Also, the scope of their work is only within the pages of generally

accepted accounting principles, so they could not simply draw conclusions and

opinions on seemingly compliant reports.

There is a conflict between the Tax Code and GAAP where the former

prevails for taxation purposes. Here is where forensic accountants take charge

upon the influx of this issue to investigate granular information that might not have

been easily detectable without thorough analysis undergoing a normal course of

action. The need was also contributed by the fact that there were no convictions

despite the multiple filed cases which shows the incompetence of current

personnel and programs that combat tax evasion.

Everyone is susceptible to this deceit. Even the big-time corporations, who

are large taxpayers, which virtually would already have an appropriate system to

detect-and-prevent them, are not safe. This only indicates an unethical

management, incompetent personnel, and failure as whole. Due to these

explanations, businesses seek for a more capable method to assist them in terms

of legal matters.

Although the diversity of laws and implementations of accounting principles

around the world tried to fix this issue, it simply cannot be solved without one

specifically pronounced on these kinds of events. Thankfully, the demand for

practitioners has been predicted to increase by 6.7% from 2013 to 2018. This infers

a rise for future availability of specialty accountants to perform investigative

procedures.
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Background of the Study

Forensic Accounting

According to the Forensic Accounting Demystified by Zysman (2016),

Forensic accounting is the use of accounting knowledge and skills in collecting,

analyzing, evaluating and interpreting evidence that could be used for legal

proceedings. It is a rapidly growing field of accounting that describes the

engagement that results from an actual or anticipated dispute or litigations.

Forensic means suitable for use in a court of law, implying that it attains

information based on the accounting standard and will be used as evidence in legal

cases.

Forensic Accounting is an investigative style of accounting used to

determine whether an individual or an organization has engaged in any illegal

financial activities. Professional Forensic Accountant may work for the government

or a public accounting firm. Although, forensic accounting has been in existence

for several decades, it has evolved over time to include several types of financial

information scrutiny.

In the case study provided by Tilly (2015) entitled Forensic accounting

techniques unveiled $7.5 million in underreported taxes, an accounting and

advisory firm, it stated that there is an international food service industry, which is

headquartered in two major cities on two continents that was under criminal

investigation for tax evasion. He monitored the international business through

forensic accounting and investigative procedures concentrated on the entities

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financial reporting and tax compliance. In which they also lengthily interviewed the

clients tax preparer, legal counsel and other key personnel to ensure correct tax

treatment of various items. And they also reviewed the financial statements

provided by the client to ensure transparency in financial reporting. This

investigation led to the discovery of underreporting of taxable income and

underpayments of taxes and resulted in $7.5 million repayment of taxes owed. It

was successfully investigated and the case had been filed up to the extent that

penalty and sending to jail occurred.

Based on the case study made by Baker Tilly, forensic accounting as a

means of investigating method is useful in detecting tax evaders. It only supports

that forensic accounting will be having a significant role in the society, particularly

in the Philippines in terms of detecting different types of financial fraud.

Based on the research of Davis et.al, (2009) entitled Characteristics and

Skills of the Forensic Accountant, the primary professions of forensic accounting

practitioners are Certified Public Accountants (CPAs), Attorneys and

Academicians.

In relation to the study, the aforementioned study specifies who are the

people involved in the application of forensic accounting or who benefits from their

service. This helps in determining who are qualified to provide a relevant

perception regarding on the use of forensic accounting as an investigation method.

An article made by Smith (2015) The CPA Journal, he discussed the past,

present and future of forensic accounting in terms of its usefulness to the society.
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According to him, the practice of forensic accounting was not recognized as a

separate practice area distinct from auditing. But over the decades, the auditing

function separated itself from fraud detection. As occurred, forensic practice began

to develop, and fraud investigation and litigation services began to be offered. As

forensic practices followed their own separate path, the services provided changed

into those of an investigative nature. This article reviews the history of forensic

accounting, and makes predictions about what the future holds for this practice

area.

Today's forensic accounting is very different from the search for fraud at the

turn of the twentieth century. The field is still changing today, and it is worthwhile

to speculate how much it will change in the future. This article reviews the

contractions and expansions that have occurred in the field of forensic accounting.

According to the Finance Magazine, Malaysian Business Article (2011)

LJM among Whos Who in forensic accounting, Leonardo J. Matignas discussed

the details of forensic accounting, including the risks involved in investigating

allegations of fraud. He compared this specialized branch of accounting to Crime

Scene Investigation where information is unveiled one by one as represented in

the companys records and studiously reviewed for quality in the event of any

resulting legal implications.

It had helped the researchers to easily distinguish the role and the

usefulness of forensic accounting practice and how influential it is in giving

information in solving such fraudulent cases. It also gave them a clear vision about
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the emphasis of their study. This information had given them a strong belief that

this method of detecting fraud will be a great help to the world, nation, country and

the society.

Forensic Accounting Seven-Step Method

One of the procedures of criminal investigation applied by forensic

accountant used to resolve fraud is the Seven-Step Method popularized by

Richard Nossen. This procedure is considered because it matches the approach

used by the Bureau of Internal Revenue in conducting tax fraud investigation.

Interview and Interrogation

The first step is the interview and interrogation that show the personal

aspect of data-gathering which is obtained through personal interviews and

interrogation under law enforcement authority and labeled as source of primary

data.

According to Golden and Dyer (2006) Forensic accounting evaluations

often use interview techniques designed to obtain an admission of guilt by the

person(s) involved with the fraud scheme. Forensic accountants should carefully

construct the interview process because its results will be a vital influence in court

and legal proceeding. And the evaluation of the interview must undergo a legal

process with the coordination of an attorney.

Based from the website entitled Tax Law Lawyer by Hartsock (2009) a tax

lawyer, he stated that the interviews performed by the Special Division

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Investigation of Internal Revenue Service (IRS) under a criminal investigation are

thoroughly planned in advance after the special agent had researched all publicly

available evidence, existing case evidence, tax returns, and other information

available in IRS databases.

A third-party interview can also be conducted by the special agent where it

gathered evidence and information from other witnesses other than the taxpayer,

such as tax return preparers, employees of financial institutions or the taxpayers

business associates. Under this type of interview the special agent must not

disclose a particular detail relating to the investigation against the taxpayer, unless

it is necessary.

Criminal Investigation interviews are rarely conducted by the special agent

alone, it is usually led by another IRS agent or employee. Interviews are recorded

in written form by the special agent, and may be in the form of an affidavit, unsworn

statement, a transcript of the questions and answers, or a memorandum. The

taxpayer who is subject to the investigation must not be present during third-party

witness interviews.

Background Research

The second step is background research involving the primary and

secondary data. Primary data were gathered personally by the forensic

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accountants while the secondary data were collected from public databases,

internet and corporate official records.

According to the website called Investigative Knights (2016), Background

Research is the collecting of evidence about the legal status of a person or

company. It involves inspection if there are any criminal records that exist for the

person or any complaints against the company.

Background Research also involves conducting thorough and complete

investigations. It is also the procedure of gathering, verifying, and analyzing

personal, professional, financial and educational documents. Under this step, the

forensic accountant may also contact other agencies, governments, and

professional organizations for verification of information. This is also where the

data are collected and reviewed from various databases and the access of an

information system for verifying information related to the person subject of

investigation.

Electronic and Physical Surveillance

The third step based on seven-step method that was being practiced by

forensic accountants is the electronic and physical surveillance. Electronic refers

to internet surveillance and e-mail while the physical is through a surveillance

camera.

Based on the research study of Knoesen (2012) entitled The Use of

Physical Surveillance in Forensic Investigation, Physical surveillance is

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information that is obtained without being noticed. In order for forensic accountants

to be successful in implementing physical surveillance, they must use the aids of

binoculars and satellite cameras during the investigation and have a good

observation and listening skills. Under this step, a suspect can physically be

followed and use it to trace his movements and activities. This can also mean that

the footage is captured by a security surveillance system obtained by a person.

Physical surveillance is conducted to gather intelligence that can be used as

admissible. And another important aspect of physical surveillance is the fact that it

can determine the suspects behavioral patterns.

According to a study by Elder Jr. (2007) entitled Electronic Surveillance:

Unlawful Invasion of Privacy or Justifiable Law Enforcement. Electronic

surveillance is the method of using electronic devices to overhear or of an

individual. The evidence or information gathered is used to determine if probable

cause exists to warrant further action. This procedure has been used by state and

congressional investigative committees, the National Security Agency, the U.S.

Postal Service, the Treasury Department, Internal Revenue Service, the military

establishment, the Central Intelligence Agency, manufacturing and corporate

concerns, private detective services, and private individuals. Electronic

surveillance is a tool in order for the government to hunt suspect and to detect and

to prevent crime. The techniques and methods of electronic eavesdropping, offer

the possibility of gathering evidence which would otherwise be unobtainable. Such

techniques are wiretapping, bugging, pen register, photographic surveillance and

wired agents and informers.

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Confidential Informants

Fourth step is having confidential informants such as current employees,

former employees, e-mails, letters and customers that could give relevant

information on the investigation.

Based on Internal Revenue (IR) manual, it stated that confidential

informants provide useful and credible information to a special agent regarding

criminal activities, and from whom a special agent expects or intends to obtain

additional useful and credible information regarding such activities in the future

acts at the direction of the IRS.

Confidential Informants must be expecting their identity to remain

confidential, facing the potential of any type of retaliation and receiving payment or

other compensation for future information or services. And the identity of the

confidential informants is legally protected by the law.

According to Revenue Regulations No. 16 released by the Bureau of

Internal Revenue (BIR), informers are any qualified person who voluntarily

provides definite and sworn information not yet in the possession of the BIR nor of

the public knowledge that leads to discovery of frauds upon the internal revenue

laws or violation of the NIRC of 1997. It also stated, that the confidential information

provided by the informer must definitely state the facts of a fraud committed by the

person.
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Undercover

The fifth step is going undercover to obtain first-hand subject data which

should only be used under special circumstances.

According to the Internal Revenue Service (IRS), the use of undercover

operations is a lawful technique used in the detection and investigation of tax fraud,

political corruption, organized crime, money laundering, narcotics trafficking,

questionable return preparers, and other priority areas related to tax crimes.

Undercover operations may be controversial and potentially dangerous

undertakings requiring significant financial and personnel resources. Therefore,

judicious decision making must be practiced with regard to the use of undercover

techniques.

The successful use of undercover techniques rests on the prudent and the

judicious application of the technique. To ensure the success of undercover

operations the management must demonstrate unwavering support and concern

for the welfare of the undercover agents. It is also stated that the cooperation of

the team is vital for the continued success of the undercover program.

Laboratory Analysis

The sixth step of the Seven-Step Method is the conducting of laboratory

analysis in accordance with the jurisdictional rules. It includes physical examination

of fictitious documents, fingerprint analysis, identifying forgeries, ink sampling,

document dating and with the help of computer forensics.

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Cole (2009) states that forensic accountant should have special skills in

inspecting documents for authenticity, alteration, forgery or counterfeiting. And

enables the forensic auditor in carrying out his duties and can easily detect errors

and omissions thereby preventing and reducing fraudulent activities.

Analysis of Financial Transactions

And lastly the analysis of financial transactions where it compares

transactional and pattern-sensitive data measures to provide a record for forensic

analysis. Such analysis that can be used are horizontal/vertical analysis,

comparison of employee and vendor addresses, analysis of sales returns and

allowance account, management override of controls and knowing the different

reviews based on known industry fraud schemes.

Forensic accountants can also use computer assisted audit techniques

such as data mining, entity charts, timeline analysis, link analysis, item listing, net

worth method, source, and the use of cash method, proof-of-cash method and

digital analysis such as duplicate numbers test, rounded numbers test,

stratification percentage comparison and Benfords Law.

Internal Revenue System (IRS)

In order for America to protect its people from the individuals who

intentionally break the tax code, the Internal Revenue Service created the IRS

Criminal Investigation (CI). This special division hires highly trained, dedicated

special agents to ensure the integrity and fairness of their taxation system.
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IRS Criminal Investigation special agents applied forensic accounting with

more traditional law enforcement investigation methods to build legal cases

against those who commit financial crimes. They also analyze financial records

that have a potential criminal violation of the Internal Revenue Code in order to

find indications of money laundering, fraud and other financial wrongdoing by

following the money trail to track down both criminals and their locations.

It stated that governments from America are using forensic accounting in

order for them to have protection from fraudulent tax activities. In connection to

this, the setting of the study is a government agency specifically the Bureau of

Internal Revenue, which is the one responsible here in the Philippines in resolving

tax fraud cases. The researchers would be able to measure the usefulness of

forensic accounting procedures as an investigation method against tax fraud as

perceived by their employees who had experience using the same forensic

investigation method and serving as a reference as they have same objective of

convicting tax violators.

Bureau of Internal Revenue: Their Actions and Punishments Against Tax Evaders

The Bureau of Internal Revenue has several programs that are intended to

improve the system enforcing tax laws, rules and regulations. Some of these are

geared towards stricter tax compliance, discovering tax lapses and tracking down

fraudsters, such as (1) Oplan Kandado Program, which temporarily shuts down

business operations due to failure to comply with certain grounds, (2) Tax

Compliance Verification Drive or more commonly known as tax mapping where

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officers of the BIR visits taxpayers business establishments to confirm and verify

the compliance of taxpayer on requirements under existing regulations, (3)

Benchmarking, implemented through Revenue Memorandum Order No. 4-2006,

is the development of industry benchmarks to be used as a reference in

determining the extent of compliance, (4) Taxpayers Reconciliation System (TRS)

which utilizes the tax returns, reports and attachments and third-party information

to catch a tax evader, and finally, (5) Run After Tax Evaders (RATE) which is a

joint program of the Bureau of Internal Revenue and Department of Justice to

prosecute and convict tax evaders for their criminal violations of the Tax Code.

The actions that the Bureau of Internal Revenue is undertaking and

implementing are focused on stricter tax compliance, hence, prevention of possible

tax fraud. On the other hand, programs intended precisely on the catching of tax

evaders can still be limited by certain conditions and situations. The Tax

Reconciliation System which makes use of documents in the Revenue District

Office are narrowed to those that are filed which can still be subject to willful

misrepresentation because they do not submit source documents like official

receipts and sales invoices. This part of the program may need extensive

investigations involving accounting works that forensic accountants could offer.

Additionally, on the RATE Program, the difference of investigation being conducted

by prosecutors from a forensic accounting practitioner could provide for a

substantial piece of material evidencing the need for such a specialized

professionals.
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Under Section 222 of National Internal Revenue Code, In the case of a

false or fraudulent return with intent to evade tax or of a 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

Actions without assessment equate to a prejudice of tax fraud, which

forensic accounting is in congruence with since it always assume the occurrence

of fraud, and is professionally skeptical. However, since fraud cases do not apply

presumptions, mere suspicions and doubts do not present attestation. Because

the burden of proof lies on the BIR, supporting evidence must be provided through

a reliable investigation method combined with auditing and accounting functions.

Penalties on criminal offenses cover deportation for aliens, dismissal from

public office or disqualification of holding them, and revocation or cancellation of

the Certified Public Accountant certificate.

Even with these punishments and penalties imposed by the government,

cases of tax fraud are still prevalent, evidenced by the continuous growth of filed

tax evasion cases. This means there is a need for a more effective type of

investigation method.

Additionally, Section 204 of the Tax Code states that any willful attempt to

evade or defeat any tax imposed by the NIRC or the payment thereof has a fine

ranging from P30,000-P100,000 and imprisonment of not less than two years but
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not more than four years. More importantly, this cannot be compromised because

it involves fraud.

Penalties, specifically violations involving fraud, stated in the Revised

Schedule of Compromise Penalty (RM0 19-2007) are in agreement with Section

204 of the National Internal Revenue Code. Violations that cannot be compromised

are those that are already filed in the court and those that involve fraud. In relation

to the study, since forensic means being suitable in the court of law and the

nature of tax evasion being fraud, they are can be apt as an investigation method

because as described by Investopedia.com, Forensic accounting provides an

accounting analysis suitable for court They are frequently used in fraud cases.

Assessment Division of BIR

The Assessment Division of Bureau of Internal Revenue (BIR) conducts

original investigation of office audit returns under the region's jurisdiction, as well

as reviews and evaluates all audits/verification reports except those involving

erroneous or illegal collection of taxes and tax fraud criminal prosecution.

Based on Accountant Search (2016), forensic accounting applied their

knowledge of all the accounting procedures in financial reporting systems,

accounting as well as auditing standards along with various other procedures in

order to help the government agencies as well as various private organizations in

getting information about the various inconsistencies as well as irregularities in the

financial operations of the company.

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Financial Parlance (2016) also stated in forensic accounting audit includes

the use of the latest technology in order to locate various anomalies in an

organization, the investigation, collection as well as analysis of the evidences

regarding the frauds and other irregularities in the company to the people who

matter.

In relation to the study, the researchers believe this would help prove the

importance of the perception of the assessment division in determining the steps

of forensic accounting in assessing tax returns.

Special Investigation Division of BIR

The Special Investigation Division of the Bureau of Internal Revenue

formulates policies, work programs, standards, guidelines and procedures relative

to the investigation of tax fraud cases and the conduct of intelligence work.

It also conducts preliminary investigation of confidential information filed by

an informant with the BIR. And conduct arrests and seizures in relation to the

violation of any penal law, rule or regulation administered by the BIR.

Derived from A Guide to Forensic Accounting Investigation by Clayton et.al

(2006), in forensic accounting investigations, several types of evidence are

normally relevant, and most of them are documentary in nature. Documents

generally can be divided into broad categories: those that exist in electronic form

or media and those that are physical in nature, such as paper documents. One

should always begin an investigation as if the matter may end up in a criminal court

and for this reason take all appropriate steps to gather and preserve the evidence.
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With this, the study was provided with the steps used by the investigators

or field workers that are useful in gathering the evidence they deem appropriate in

evaluating cases with regards to tax violation.

Legal Division of BIR

The Legal Division of Bureau of Internal Revenue (BIR) is responsible for

preparation and issuance of legal opinions based on established precedents;

institute civil and criminal cases/actions to effect collection of taxes and

punishment of tax violators within the region's area of jurisdiction and processes

claims for tax credit/refund involving erroneous or illegal collection of taxes and

protests involving questions of law.

As stated in the book entitled Fraud Auditing and Forensic Accounting

written by Bologna et.al (2006), forensic accountants provide testimony in litigation

support matters and criminal prosecutions in which their services are utilized to

support investigations of crimes relating to financial frauds, embezzlement,

misapplication of funds, bankruptcy fraud and tax evasion. It is also stated that

their expertise can be used for defending witnesses involved in financial issues.

In connection to the study, the researchers aimed to prove the relevance of

the opinion from the legal division to determine the steps of forensic accounting

used in the courts.

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Tax Fraud

The incidence of tax fraud continues to increase through private and public

sector organizations across the nation. And tax fraud still occurs as believed by

some scholars because there is no strong enforcement of rules against it. And one

possible treatment to avoid such unethical act is through the practice of using the

skills and knowledge in forensic accounting.

According to the website entitled The Ferraro Law Firm represented by

Knott et.al (2007), tax evasion is a subset of tax fraud. "Tax evasion" is typically

used in the criminal context, as in someone who is charged with the crime of tax

evasion. Tax evasion is using illegal means to avoid paying taxes. Typically, tax

evasion schemes involve an individual or corporation misrepresenting their income

to the Internal Revenue Service. Misrepresentation may take the form either of

underreporting income, inflating deductions, or hiding money and its interest

altogether in offshore accounts. Individuals involved in illegal enterprises, often

engage in tax evasion because reporting their true personal incomes would serve

as an admission of guilt and could result in criminal charges. Individuals who try

to report these earnings as coming from a legitimate source can face money

laundering charges.

In the United States, tax evasion constitutes a crime that may give rise to

substantial monetary penalties, imprisonment, or both. Section 7201 of the

Internal Revenue Code reads, Any person who willfully attempts in any manner

to evade or defeat any tax imposed by this title or the payment thereof shall, in
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addition to other penalties provided by law, be guilty of a felony and, upon

conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of

a corporation), or imprisoned not more than 5 years, or both, together with the

costs of prosecution.

According to Manasan (1980) the author of Tax Evasion in the Philippines

Tax evasion may be defined as the act of reducing taxes by illegal or fraudulent

means. Common practices of tax evasion include: underreporting of income,

overstatement of expenses, use of fictitious receipts, the keeping of double sets of

books, false or fictitious entries in books, fictitious transactions in the name of

dummies, non-recording of sales, and others. Moreover, it has always been a

major problem in any taxing jurisdiction. With the rising expenses to maintain the

order of things in the society, the taxman cannot allow revenue to slip because of

tax evasion. Hence, like its counterparts abroad, the Department of Finance issues

from time to time measures intended to ensure effective tax enforcement and

prevent and curtail tax evasion.

Tax evasion as it was defined by the local author is prevalent. Most of the

country has the same treatment in facing this kind of case, though they are in

different cultures but since it has the same cause and effect, it leads them to adapt

the ways and means of other countries in minimizing if not eliminate ones tax

liability. Many accused tax evaders have had been disclosed to the society but the

regime has no sufficient evidence to support the accusation. It simply tells that

theres a great need of other tool or method to make the evidence strong in the

court. Just to remind everybody tax evasion leads into a great loss in a certain
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country. It also brings gigantic damages to the society for being unable to support

the project of the government for the people.

In the case of Republic v. Ker, G.R. L-21609 (1966) the Supreme Court held

that fraud is a serious charge and to be sustained, it must be supported by clear

and convincing evidence. This evidence is just a little lower than proof beyond

reasonable doubt, but higher than a mere preponderance of evidence. In case,

however, of criminal prosecution for tax evasion the quantum of evidence remains

the same, that is proof beyond reasonable doubt. But one may wonder, how

does tax evasion arise? To illustrate, in the case of Republic v. Gonzales, G.R. L-

17962 (1962) the Court found that failure of the taxpayer to declare for taxation

purposes his true and actual income derived from his furniture business for two

consecutive years is equivalent to tax fraud.

Based on the archived case of Republic v. Gonzales the evidence was a

little lower than proof beyond reasonable doubt which results to the defendant

being acquitted. For a more formal and legal way of detecting tax evaders there

should be specific means or methods to win the case against tax evaders.

Opinions of the supreme courts are important, but the evidence should be strong

enough.

According to an article by Calayag (2016) Henares files 11 cases vs tax

evaders. There are a total of 492 RATE cases that have been filed since 2010 but

there were no convictions. Accordingly, 50 of these cases are pending before the

Court of Tax Appeals, one on the Court of Appeals and 17 others before the regular
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courts, based on the data shown by the Department of Finance. Three were junked

by CTA and other regular courts, and another three were dismissed with finality,

where the two are by the DOJ and the remaining one, by the Supreme Court.

The report shows how the number of tax evasion cases continuously grows

through the years, yet a significant percentage of them are still unresolved in the

different courts in the Philippines. In the span of six years, only 1.21% has been

dismissed, half of which were junked.

In conjunction, in a report on the Business World Online by Patag (2016),

four out of five criminal complaints filed under the leadership of Commissioner

Henares remained at a prosecutorial level with the DOJ. In the 219 cases

submitted for resolution where prosecutors yet to issue their findings, probability

of bringing them to the court remains hanging.

According to Process Map on the Criminal Prosecution of the Tax Evasion

in the Philippines by Asian Development Bank (2009), for a case to be considered,

probable cause must be found as determined by the prosecutor. In reference to

the figures, 80% are being held at the prosecution office. This implies that cases

are still trapped in the hands of prosecutors because they cannot provide evidence

which might be limited by their lack of accounting practice. Forensic accountants

may be able to contribute great help here as they have accounting and auditing

skills.
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Run After Tax Evaders (RATE)

Run After Tax Evaders (RATE) is a combined effort of the Bureau of Internal

Revenue (BIR) and Department of Justice (DOJ) to investigate, prosecute and

convict individual or entities that committed tax evasion and other criminal

violations of the National Internal Revenue Code (NIRC) of 1997. Such violations

include failing to file returns, failing to pay taxes, deliberating of under-declaration

of income and over-declaration of expense by more than 30%, having one book of

accounts, non-remittance of withholding tax and others.

The objectives of the RATE Program is to discourage the taxpayers from

committing tax evasion and emphasize the fact it is illegal and any violators will be

caught and punished. And to improve the voluntary compliance of the taxpayers

and to show that the tax systems of the Philippines are fair to anyone.

The Criminal Investigation operates the tax fraud investigation which

divided into National Investigation Divisions found within the BIR National Office

and the Special Investigation Divisions which are set up at every BIR Regional

Office.

Under the RATE Program, the BIR has a Memorandum Agreement

executed with the National Bureau of Investigation and Criminal Investigation and

Detective Group (CIDG). It stated that the BIR will be responsible in investigating

and prosecuting tax evaders, the NBI is involved in providing effective and efficient

investigative and support services and while the CIDG is charged with the
 26

monitoring, investigation and prosecution of all crimes involving economic

sabotage.

And with this cooperative effort between the BIR, NBI and CIDG shall it

bring maximum results in the RATE of investigating, enforcing and prosecuting tax

evaders.

In order to prove the commission of fraud in tax cases, the BIR executes a

direct or indirect approach method. Direct Approach Method is the direct evidence

while the Indirect Approach Method composed of different types of methods such

as the net worth method, expenditure method, percentage method and unit and

value method.

Similar Study

In a study by Burnaby et al (2012) The Use of Forensic Accounting Experts

in Tax Cases as Identified in Court Opinions. With their final list of 30 federal at

10 state tax cases, 75% have been determined that tax issue is the primary reason

of involvement of forensic accountants. Stated herein, as tax cases are about

government revenue, one would expect that forensic accountants be presented by

the government in order to secure its revenue and by the taxpayer to prove that

the methods used to determine their tax payments were within the law. The

assignments of forensic accountants were concluded into governmental

compliance, fraud investigation and determination of commercial damages.

Furthermore, the study found out that 23 out of 42, which equals to 54.76%,

testimonies of forensic accountants were effective. However, it was noted here that
 27

even if the party lost, their testimonies were still effective which resulted to lesser

penalties and tax owed. It was also noteworthy that 62.5% (25 out of 40) of the

cases are in favor of the government, 22.5% favored the taxpayers and the

remaining 15% was with partial outcome.

As mentioned in the same study, there is 100% success rate of the forensic

accountants used by the government. On the other hand, the side of taxpayers

can also be helped by the effectivity of testimonies deemed by it giving life to

theoretical justice.

Likewise, on an article by Schainbaum (2012) entitled The Assistance of

Forensic Accountant in a Criminal Tax Investigation, forensic accountants help in

the prosecution by developing technical defenses, creating accounting analyses

for use in trials, examining witnesses, organizing evidences and testifying as a

summary or expert witness.

This shows how essential forensic accountants can be in the prosecution

stage of tax evaders. As stated in Section 220 of NIRC, no action shall be filed

without the approval of the BIR Commissioner. This means that prior to raising the

case to the appropriate courts; forensic accountants can have the privilege to

perform investigative measures to the cases. That way, prosecution period can be

lessened thus increasing the number of cases being filed.

Based on the research study conducted by Enyioko et al (2015) entitled

The Relevance of Forensic Audit and Investigation Resolving tax Related Fraud

and Malfeasance concluded that accountants should specialize in forensic

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accounting in order for them have the power to detect tax evasion that is crucial to

tax compliance. It also said the need for forensic auditing should not be

underestimated because there is an increase in global perpetration of fraud in

organizations.

It helped the researchers to understand further the usefulness of forensic

accounting in resolving tax evasion. And it acted a reference for the researchers

because it has same nature as their study.

Theoretical Framework

The study was anchored on the Seven-Steps Method of Forensic

Accounting in conducting fraud investigation by Richard Nossen.

The first step is the interview and interrogation (I&I) that show the personal

aspect of data-gathering which is obtained through personal interviews and

interrogation under law enforcement authority and considered as source of primary

data.

The second step is background research (BR) where it is made of primary

and secondary data. Primary data were gathered personally by the forensic

accountants while the secondary data were collected from public databases,

secretary state of website, internet and corporate official records.

Third step based of seven-step method is the electronic and physical

surveillance (EP). Electronic refers to internet surveillance and e-mail while

physical is through surveillance camera.

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Fourth step is having confidential informants (CI) such as current

employees, former employees, e-mails, letters and customers that could give

relevant information in the investigation.

The fifth step is going undercover to obtain first-hand subject data; usually

a recommendation to use in special circumstances and can be done if carefully

planned.

The sixth step is to conduct investigation laboratory analysis (LA) where it

should be done conscious of jurisdictional rules plus what the chain of custody best

practices. It includes physical examination of fictitious documents, fingerprint

analysis, identifying forgeries, ink sampling, document dating and with the help of

computer forensics.

And lastly, the analysis of financial transactions (AT) where it compares

transactional and pattern-sensitive data measures to provide a record for forensic

analysis. Such analysis that can be used are horizontal/vertical analysis,

comparison of employee and vendor addresses, analysis of sales returns and

allowance account, management override of controls and knowing the different

reviews based on known industry fraud schemes.

The researchers believed that this theory is greatly suitable to the study

since this aims to determine and evaluate forensic accounting in tax fraud based

on the given factors. Since the issue regarding tax fraud is undying, the use of

forensic accounting will be defined by the perception of the people in the BIR

handling and concerned with the cases. In that way possible actions can be
 30

implemented which will benefit the government, industry, community and

individuals.
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Conceptual Framework

INPUT PROCESS OUTPUT

I. Profile of the
respondents:
Age
Sex Administering
Division questionnaires
Profession Interview
Years of Checklist
Employment Analysis
Interpretation of Forensic Accounting as
II. Perception on forensic
gathered data an Investigation
accounting in terms of:
Interview and Thorough Method on Tax Fraud
Interrogation appropriate as Perceived by the
Background statistical Bureau of Internal
Research treatment Revenue Delta,
Electronic and Determining the Quezon City Calendar
Physical appropriate
Year 2016 determined
Surveillance statistical
Confidential treatment to be
Informants used
Undercover
Laboratory
Analysis
Analysis
of Financial
Transaction

III. Questionnaire

FEEDBACK

Figure 1

Conceptual Framework on the Forensic Accounting as an Investigation

Method on Tax Fraud as Perceived by the Bureau of Internal Revenue
Delta, Quezon City Calendar Year 2016
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A conceptual framework is the structure of the research idea or concept and

how it is put together. It was designed to help and guide the researchers in making

the project study. The study used the Input-Process-Output or Coombs System

Approach. It illustrates the input, process, output and feedback as the interrelated

parts in developing the system. Figure 1 shows the illustrated model of the study.

The input comprises the studys raw data which are to identify; the profile of

the respondents, and the perception of the Bureau of Internal Revenue employees

on forensic accounting in terms of: Interview and Investigation, Background

Research, Electronic and Physical Surveillance, Confidential Informants,

Undercover, Laboratory Analysis, Analysis of Financial Transaction.

The process refers to procedures in converting the data gathered into

meaningful information. It includes administering questionnaires, interview,

checklist analysis, interpretation of gathered data, thorough appropriate statistical

treatment, lastly determining the appropriate statistical treatment to be used.

The output represents the end-product of the study which is the Forensic

Accounting as an Investigation Method on Tax Fraud as Perceived by the Bureau

of Internal Revenue Delta, Quezon City Calendar Year 2016 determined.

The feedback shows the interaction of the variables with one another.

The lines or arrows connecting the different parts of the model represent

relationship and sequence.

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Statement of the Problem

In this study, the researchers tried to find out the Forensic Accounting as an

Investigation Method on Tax Fraud as Perceived by the Bureau of Internal

Revenue Employees.

1. What is the profile of the respondents in terms of:

1.1. Age;

1.2. Sex;

1.3. Division;

1.4. Profession; and

1.5. Years of Employment?

2. How does the respondents perceive forensic accounting in terms of the following

parameters:

2.1 Interview and Interrogation;

2.2 Background Research;

2.3 Electronic and Physical Surveillance;

2.4 Confidential Informants;

2.5 Undercover Operations;

2.6 Laboratory Analysis of Physical and Electronic Evidence; and

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2.7 Analysis of Financial Transaction?

3. How do the respondents perceive forensic accounting as an investigation

method in relation to their division?

4. Is there a significant difference on the respondents profile and their perceived

usefulness of investigation method of forensic accounting?

Hypothesis

There is no significant difference on the respondents profile and their

perceived usefulness of investigation method of forensic accounting.

Scope and Limitation

This descriptive study extended to the information that was gathered from

the Federal Bureau of Investigation Vault, Supreme Court Reports Annotated

(SCRA), interviews, the information available from the library and studies found on

the internet about tax fraud. The researchers tried to determine the use of forensic

accounting in relation to tax fraud.

The information was limited to perception of the employees on different

departments of BIR, namely Investigation, Legal and Assessment, on the

contentions of covering necessary opinions that are aligned to the goals of this

study. The researchers tried find out whether the steps of forensic accounting as

an investigation method were useful to prevent and detect tax fraud better, and

assist in the prosecution.

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For the purpose of this study, the researchers included the views of the BIR

employees according to their division with the intention of finding out whether there

was an implication as to their nature of work purposely selecting ten (10) from each

of the division.

Significance of the Study

The researchers believe that the study will be a great help to the following

group of people:

To the Government. To raise government revenue that will be beneficial in

implementing programs needed for governance.

To the Bureau of Internal Revenue (BIR). To enhance the forensic

accounting method against tax fraud and for the improvement of the system of

investigating and prosecuting tax violators.

To the Certified Public Accountants. To increase awareness of the

usefulness of the forensic accounting profession especially in the field of resolving

tax fraud and to improve the demand rate of their occupation.

To the Businesses. To let the businesses be aware on the importance of

following the taxation system implemented by the government.

To the Society. To let the society experience a better system in their health

care, education and public transportation as a result of better taxation.

To the Future Researchers. This research study will serve as a basis and

reference for future researchers undergoing the same nature of study.

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Definition of Terms

The following terms were defined operationally and conceptually for further

understanding of the study:

Background Research. It is the process of looking up and compiling criminal

records, commercial records, and financial records of an individual or an

organization.

Bureau of Internal Revenue (BIR). Is an agency of Department of Finance

and it collects more than half of the total revenues of the government in the

Philippines.

Confidential Informants. A person who conceal his identity while providing

reliable information about criminal activity to law enforcement officers.

Conviction. It is a formal declaration that someone is guilty of a criminal

offense, made by the verdict of a jury in a court of law.

Electronic Surveillance. A surveillance or the gathering of information with

the use of electronic devices.

Financial Transaction Analysis. Accounting process of examining a

transaction such as net worth method, expenditures method or proof-of-cash

method.

Forensic Accounting. The use of accounting skills to investigate fraud and

to analyze financial information for use in legal proceedings.

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Fraud. A wrongful or criminal deception intended to result in financial or

personal gain.

Interrogation. It refers to the verbal questioning of a suspect by law

enforcement authorities for the purpose of producing a statement or useful

information.

Interview. It is the process of obtaining information from people who

possess knowledge about a particular offense.

Investigation. It is a careful examination or search in order to discover facts

or gain information.

Laboratory Analysis. It is the protection and validations of documents either

through physical examination or with the aids of computer forensic techniques.

Method. It is a means or manner of procedure usually in a regular and

systematic way of resolving issues.

National Bureau of Investigation. It is an agency of the Philippine

government under the Department of Justice, responsible for handling and solving

major high-profile cases that are in the interest of the nation.

Physical Surveillance. It is a form of monitoring where the subject is kept

under physical observation.

Prosecution. The act or process of holding a trial that determine if the

person who is accused of a crime is guilty.

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Supreme Court Reports Annotated (SCRA). It is compilations of Supreme

Court decisions and a source for searching cases.

Tax. A compulsory contribution to state revenue, levied by the government

on workers' income and business profits or added to the cost of some goods,

services, and transactions.

Tax Fraud. It occurs when an individual or business entity wilfully and

intentionally falsifies information on a tax return in order to limit the amount of tax

liability.

Undercover. It involves covert means of discovering information based on

the actions of a human agent.