How to Handle a Local Government Audit—and How It Differs from a BIR Audit

By: Atty. Punch Rivera

15 April 2025

In recent years, it has become increasingly common for businesses to receive Letters of Authority (LOAs) from Local Government Units (LGUs). Given that these LOAs closely resemble those issued by the Bureau of Internal Revenue (BIR), and considering that many businesses are accustomed to dealing only with BIR audits, there is growing uncertainty about the legitimacy and implications of LGU-issued LOAs.

So, are these LOAs from LGUs legitimate? And how do they differ from a BIR-issued LOA?

Legitimacy of LGU-Issued LOAs

LGUs are authorized to issue LOAs under Section 171 of Republic Act No. 7160, also known as the Local Government Code of 1991 (LGC). These LOAs empower LGU officers to:

“Examine the books of accounts and other pertinent records of the business to ascertain, assess, and collect the correct amount of taxes, fees, and charges due during the period from unexamined years.”

Corresponding provisions are typically found in the LGU’s local tax ordinance, further reinforcing their validity.

While BIR and LGU audits may look similar at first glance, their legal basis, scope, and procedures differ significantly. Below are eight key distinctions:

1. Scope of Tax Coverage

For one, and quite obviously, the LGU LOA only pertains to an examination to determine whether the taxpayer paid the proper local business taxes for the specified periods, whereas the BIR LOA pertains to national internal revenue taxes.

2. Scope of Documents Required

The BIR, owing to the scope of taxes to be covered by its examination, will understandably require the presentation of a wider range of records and documents. Since most LGU taxes involve the gross sales as a tax base, the records that should be pertinent to its audited should be limited to all records pertaining to sales and revenue, and should have nothing to do with other accounting records. Yet, as presently worded, the LGC allows the LGU a broad power to examine “the books of accounts and other pertinent records of the business owner.” What is pertinent under the circumstances could therefore be subject to debate.

3. Audit Procedures

While there is a well-defined set of rules and guidelines in the way that the audit is conducted by BIR, as embodied in Revenue Audit Memorandum Order No. 1-2020, related BIR issuances, and jurisprudence, there is a dearth of rules and guidelines in the way that the audit is to be conducted by the LGU. LGUs are not bound by specific timelines or formal procedures—leaving much to discretion. Businesses must therefore exercise vigilance and demand transparency and fairness.

4. Prescriptive Periods

Under the National Internal Revenue Code, as amended (NIRC), the BIR’s right to assess prescribes after three (3) years after the date the return is due or filed, whichever is later, whereas, under the LGC, the LGU’s right to assess prescribes after Five (5) years from the date they became due.

5. Coverage of LOAs

As a general rule, the BIR issues one LOA for a single taxable year. On the other hand, there is no prohibition on the LGU to issue one LOA covering several specified years.

6. Power to Subpoena Documents

The BIR has the power to subpoena documents and even institute criminal actions for disobedience. LGUs do not have subpoena powers. Practically speaking, however, the LGU can can withhold business permits, effectively stopping business operations. To counter act this, and to avoid interruption of business, affected taxpayers can opt to pay the assessed taxes under protest and claim a refund if the protest proves to be successful. It must be noted, however, that under the LGC, payment under protest is not a pre-condition for one to be able to file a protest against a local tax assessment.

7. Interest on Deficiencies

Whereas under the NIRC, the interest imposed on unpaid taxes is 12% per annum, under the LGC, the LGU is authorized to fix by ordinance a rate not exceeding 2% per month from the date it is due until it is paid.  It is important to note on this point that unlike interest imposed with respect to national internal revenue taxes, under the LGC, the total interest on the unpaid amount or portion cannot exceed thirty-six (36) months.

8. Appeals Process

Much different from a BIR Audit that most are already familiar with, here is the step-by-step LGU audit appeals process:

• The LGU issues the LOA and conducts an examination;
• The LGU, thru the Office of the Local Treasurer, issues an assessment;
• After receipt of the assessment, the taxpayer may file a protest within 60 days, otherwise the assessment becomes final and executory (Sec. 195 LGC).
• The Office of the Local Treasurer is given 60 days from the time of its filing to decide the protest;
• Should the Local Treasurer find the assessment to be wholly or partly correct, he shall deny the protest;
• The taxpayer has 30 days from receipt of the denial of the protest, or from the lapse of the 60-day period prescribed within which the Local Treasurer is supposed to decide to appeal with the court of competent jurisdiction, otherwise, the assessment becomes conclusive and unappealable.

• Don’t ignore the LOA — it’s backed by law and non-compliance can lead to business disruption.
• Clarify the scope of the audit early and ensure only pertinent documents are disclosed.
• Monitor the process closely; request a written audit plan and maintain correspondence.
• File a protest timely, even if paying under protest.

LGU audits are valid and increasingly common, they are fundamentally different from BIR audits in scope, procedure, enforcement, and remedies. Understanding these differences helps ensure businesses remain compliant while also protecting their rights.