The BIR Investigation Process Explained: A Guide for Business Owners

No business owner wants to receive a notice from the Bureau of Internal Revenue (BIR), but understanding how the investigation process works can take much of the fear and guesswork out of the experience.

Whether you've been flagged for tax delinquency, inconsistencies in your returns, or simply chosen for a random audit, knowing the BIR investigation process empowers you to respond confidently, avoid costly mistakes, and protect your business.

This guide walks you through each phase of a typical BIR investigation—from initial notification to resolution.

1. Identification and Targeting

The BIR doesn’t investigate businesses at random. You may be selected due to:

Underreported income or VAT

Frequent amendments to tax returns

Third-party complaints

Non-compliance discovered during tax mapping

Data mismatches through cross-agency verification (e.g., with the SEC, banks, LGUs)

The agency uses automated systems and risk profiling to identify irregularities before initiating an audit.

2. Issuance of a Letter of Authority (LOA)

The formal investigation begins when the BIR serves a Letter of Authority (LOA). This document:

Authorizes specific BIR officers to examine your books and records

Lists the taxable periods under review

Legally requires you to submit requested documents within 10 working days

Important: Only a valid LOA grants the BIR power to audit. Verify its authenticity and scope.

3. Initial Records Request and Submission

Upon receiving the LOA, you’ll be asked to provide:

Books of accounts (manual or computerized)

Official receipts and sales invoices

Tax returns and attachments (ITR, VAT, withholding taxes)

Payroll, inventory, and bank records

The completeness and accuracy of these documents heavily influence the direction of the investigation.

4. Review and Audit Procedures

The assigned BIR examiners will:

Reconcile income, expenses, and VAT records

Compare sales with third-party data (banks, suppliers, customers)

Analyze large deductions or unusual transactions

Identify signs of tax avoidance, evasion, or errors

At this stage, the BIR may request clarification or additional documents, and may also visit your premises for verification purposes.

5. Issuance of a Notice of Discrepancy (NOD)

If the BIR finds issues, you’ll receive a Notice of Discrepancy, summarizing their initial findings. This gives you the opportunity to:

Respond to each issue raised

Provide missing documentation

Correct any misunderstandings

This phase is critical—your response can reduce or eliminate the proposed tax deficiency.

6. Preliminary and Final Assessment Notices

If discrepancies remain unresolved, the BIR issues:

Preliminary Assessment Notice (PAN): A formal document proposing a tax deficiency, penalties, and interest. You usually have 15 days to respond.

Final Assessment Notice (FAN): Issued if your response is denied or insufficient. It includes the final amount the BIR demands you pay.

At this stage, you may request a reconsideration or file a formal protest within 30 days of receiving the FAN.

7. Payment, Protest, or Legal Action

You now have options depending on your situation:

Pay the assessment – especially if liabilities are minor or clearly valid

File a protest or motion for reconsideration – if you believe the findings are incorrect

Elevate to the Court of Tax Appeals – for unresolved or high-value disputes

Note: Ignoring the FAN or missing deadlines can lead to enforced collection, including garnishment or business closure.

8. Resolution and Future Monitoring

If resolved, the BIR may issue:

A Letter of Compliance, if no issues are found or successfully rectified

A Payment Confirmation, once liabilities are settled

A Compromise Agreement, if negotiated

The BIR may monitor your future filings more closely, so it's essential to strengthen your internal processes going forward.

Final Thoughts

The BIR investigation process can be long and technical—but it’s not insurmountable. With proper documentation, legal guidance, and professional accounting, your business can survive (and even learn from) a BIR audit.

Don’t wait for an audit to take compliance seriously. Staying organized and filing correctly are your best defenses.

Need help responding to a BIR audit or cleaning up your tax records? Talk to our team of tax and legal professionals for a confidential consultation today.