Question

Scenario:

Mr. Juan Santos is a self-employed individual engaged in the business of selling imported goods. He has been filing his annual income tax returns (ITRs) and paying the corresponding taxes diligently for the past years.

However, in the current tax year, Mr. Santos received a deficiency tax assessment from the Bureau of Internal Revenue (BIR) claiming that he failed to properly declare and pay the correct amount of income tax. Mr. Santos strongly disagrees with the assessment and believes that he has faithfully complied with all tax obligations.

Amidst this dispute, Mr. Santos received a letter from the BIR stating that they are withholding the refund of his overpaid tax from the previous year to compensate for the alleged deficiency tax owed. Mr. Santos argues that his overpaid tax should not be used to offset the disputed deficiency tax assessment.

Question:

1. Can the BIR legally offset or compensate Mr. Santos' overpaid tax from the previous year against the alleged deficiency tax assessment? Discuss the relevant legal principles and provisions that govern the prohibition on compensation and set-off in taxation.