- Obtain and review copies of lease contracts.
- Conduct ocular inspection of the premises under lease. Identify tenants and monthly or annual rentals.
- Relate real properties under lease agreement to assets declared in the balance sheet.
- Where the rental income is based on a percentage of sales of the lessee, the sales of the lessee should be tested for a representative period, say one month, to get a proper approximation of the lessee’s sales during the taxable year under audit and the rental income received by the lessor. In such cases, proper authorization from the lessee should be obtained before conducting the test verification.
- Obtain information on rental of neighboring properties and compare with rent income reported.
- Examine official receipts issued. Compare total collections per official receipts with entries in the cash receipts book and general ledger.
- Ascertain acceptability and consistency of accounting methods used. For cash-basis taxpayers, prepaid rent and rental deposits constitute income during the year of receipt.
- Secure copies of lease contracts or agreements. Take note of lease contracts which are actually conditional sales.
- Where necessary, obtain copies of Transfer Certificates of Title, tax declarations, mayor’s or municipal permits, and real property tax receipts to determine properties which may be undisclosed/ unrecorded by the taxpayer.
Reference: RAMO 1-2000