Prosecution of criminal actions for violating tax laws

In the fairly recent decision in the consolidated cases of People v. Mendez and Mendez v. People (G.R. Nos. 208310-11 and 208662, 28 March 2023), the Supreme Court (SC) En Banc ruled that an assessment for deficiency taxes is not a prerequisite for collection of the taxpayer-accused’s civil liability for unpaid taxes in the criminal prosecution for tax law violations.

These guidelines were issued in a 42-page unanimous Decision by the SC, penned by Associate Justice Mario Lopez, which denied the petition for review on certiorari filed by celebrity-doctor JM and partly granting the petition for review on certiorari filed by the Office of the Solicitor General (OSG) for the Bureau of Internal Revenue.

JM is a single proprietor doing business under several trade names and businesses. He is a doctor by profession and runs several clinics.

In 2006, he was criminally charged with violation of Section 255 of the National Internal Revenue Code (NIRC) for (1) not filing his 2002 Income Tax Return (ITR) and (2) willfully failing to supply correct and accurate information in his 2003 ITR, to the government’s prejudice.

In 2011, the Court of Tax Appeals (CTA) Division found JM guilty of both criminal charges. However, as to his civil liability for deficiency taxes for the taxable years 2002 and 2003 is concerned, the CTA Division held that a final assessment issued by the Commissioner of Internal Revenue (CIR) is required before the taxpayer can be held civilly liable for deficiency taxes.

The CTA En Banc affirmed JM’s conviction and the non-imposition of deficiency taxes, which prompted both JM and the OSG to file separate petitions before the SC.

With respect to the OSG’s petition assailing the CTA’s non-imposition of civil liability on JM, the SC partly granted its petition, and more importantly, laid down, for the Bench and the Bar, the following guidelines for the prosecution of criminal actions for violating tax laws:

1. When a criminal action for violation of the tax laws is filed, a prior assessment is not required. Neither is a final assessment a precondition to collection of delinquent taxes in the criminal tax case. The criminal action is deemed a collection case.

The government must thus prove two things: (a) the guilt of the accused by proof beyond reasonable doubt; and (b) the accused’s civil liability for taxes by competent evidence (other than an assessment).

2. If before the institution of the criminal action, the government filed (a) a civil suit for collection, or (b) an answer to the taxpayer’s petition for review before the CTA, the civil action or the resolution of the taxpayer’s petition for review shall be suspended before judgment on the merits until final judgment is rendered on the criminal action.

However, before judgment on the merits is rendered on the civil action, it may be consolidated with the criminal action. In such a case, the judgment in the criminal action shall include a finding of the accused’s liability for unpaid taxes relative to the criminal case.

Applying the guidelines to the case of JM, the SC said since the prosecution filed a criminal case for tax violation against him, the civil action for collection of deficiency taxes is deemed instituted. Thus, a formal assessment issued by the CIR is not required for the imposition of civil liability for unpaid taxes.

The SC, in partly granting the OSG’s Petition, said that finding of deficiency taxes should have been done at the level of the CTA Division. Hence, the proper remedy is to remand the case to the CTA Division to determine the civil liability of JM and resolve it with “reasonable dispatch.”

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