What Are the New BIR Audit Selection Criteria and How Can Taxpayers Reduce Audit Risk?

A Practical Guide for Philippine Taxpayers

Many taxpayers ask a straightforward but important question:

“How does the BIR decide who to audit—and how can we avoid being flagged?”

Under updated regulations for 2026, the Bureau of Internal Revenue (BIR) has clarified the audit selection criteria and risk indicators it uses in identifying taxpayers for audit.

These are set out under Revenue Memorandum Order (RMO) No. 1-2026, particularly Annex A, which now serves as the principal guide for audit selection.

This article explains:

• The new BIR audit selection criteria; and

• Lawful and practical ways taxpayers may reduce audit risk through proper compliance and documentation

This guide is for general information only and is not a substitute for professional advice.

I. Understanding the BIR’s New Audit Selection Framework

The BIR’s current approach is risk-based and data-driven, relying on:

• Quantitative thresholds

• Third-party information

• Pattern analysis across tax returns and financial statements

Audits are generally initiated through either:

• An Electronic Letter of Authority (eLA), or

• A Tax Verification Notice (TVN), depending on the case type

II. Mandatory Audit Cases Under the New Rules

These cases are considered high-risk and commonly lead to full audit coverage.

1. Significant Underdeclaration of Sales or Overstatement of Deductions

A taxpayer may be selected if there is:

• Sales underdeclared by 30% or more, or

• Deductions overstated by 30% or more

How taxpayers may reduce risk:

• Regular reconciliation of sales with VAT and income tax returns

• Ensuring all deductions are supported by valid and properly substantiated documents

• Aligning accounting records with tax filings

2. Third-Party and Intelligence-Based Mismatches

The BIR compares tax filings with:

• Third-party submissions

• Banking and transactional data

• Public disclosures and reports

Risk-reduction practices:

• Consistency across all tax returns and financial reports

• Periodic internal review of third-party-reported transactions

• Timely correction of discrepancies through lawful amendments, when applicable

3. Mission Orders With Preliminary Findings

If an initial review already indicates a 30% or greater understatement, escalation to a full audit may follow.

Practical guidance:

• Address discrepancies early

• Maintain clear documentation explaining unusual transactions or fluctuations

4. One-Time and High-Value Transactions

Transactions commonly reviewed include:

• Real property transfers processed through the eCAR system

• Cases with prior deficiency tax findings

Risk management approach:

• Pre-transaction tax review

• Complete documentation of valuation, consideration, and tax treatment

5. Tax Incentives and Exemptions

Taxpayers enjoying incentives or exemptions are subject to audit to confirm compliance with conditions.

Best practices:

• Separate tracking of incentive-related income and expenses

• Regular validation of compliance requirements

• Retention of approval documents and reports

6. Spontaneous Exchange of Information (SEOI)

International information sharing may trigger audits involving foreign income or transactions.

Risk-reduction focus:

• Proper disclosure of foreign-sourced income

• Alignment with international reporting and withholding rules

7. Tax Clearance Applications

Applications may trigger audit where:

• Gross sales exceed ₱1,000,000, or

• Gross assets exceed ₱3,000,000

This applies to estate settlements, business closures, and corporate reorganizations.

Practical tip:

• Conduct a compliance review before filing any clearance application

III. Audit Coverage Through Tax Verification Notices (TVN)

Refunds and credit claims are typically verified through a TVN, including:

• Income tax refunds or credits

• VAT refunds or VAT credit claims

• Excise tax refunds

• Claims from erroneous or double payments

Risk-aware approach:

• Ensure computations are accurate and traceable

• Maintain complete supporting schedules and source documents

• Anticipate verification as a standard process, not an exception

IV. Priority Audit Cases Under the Risk-Based System

The BIR prioritizes taxpayers showing patterns such as:

• Sharp drops in sales or VAT payments

• Large increases in exempt or zero-rated sales

• Excess input VAT exceeding 75% of output VAT

• Income tax due below 2% of gross sales

• Filing percentage tax returns despite exceeding the VAT threshold

• Repeated net losses

• No audit for more than five (5) years

• Asset growth exceeding 50% year-on-year while reporting losses

• Significant related-party transactions or shared expenses

V. Lawful Ways to Reduce BIR Audit Risk

Reducing audit risk does not mean avoiding taxes. It means complying correctly and consistently.

Sound compliance practices include:

• Regular tax health checks

• Reconciliation of VAT, income tax, and financial statements

• Clear documentation for variances or unusual transactions

• Proper treatment of related-party transactions

• Timely filing and payment of taxes

Prepared taxpayers are generally better positioned to address audit inquiries efficiently.

VI. The Role of Professional Guidance

CPA Law Firm Advisory

A CPA law firm provides integrated accounting, tax, and legal advisory services in accordance with professional and ethical standards.

Services may include:

• Compliance and risk assessment

• Assistance during BIR audits and verifications

• Review of audit findings and preparation of responses

• Advisory on tax documentation and procedures

Engagements depend on the specific facts of each case and applicable laws.

Consultation by Appointment

Readers who require clarification or professional assistance regarding the matters discussed may contact Aureada CPA Law Firm for a consultation, subject to standard engagement terms and ethical guidelines.

Nothing in this article should be construed as legal or tax advice, nor as a guarantee of any specific result.

Conclusion

The new BIR audit selection criteria for 2026 reflect a more systematic and data-driven enforcement environment. Understanding these criteria—and adopting sound compliance practices—allows taxpayers to reduce audit risk, respond effectively when reviewed, and protect their rights under the law.

Preparedness, accuracy, and transparency remain the most reliable safeguards.

RMO No. 1-2026 Annex A.pdf

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