'Do taxpayers really need to compromise?'

The Bureau of Internal Revenue (BIR) is on the roll nowadays, imposing compromise penalties left and right to hapless taxpayers who do not even understand what the penalty is all about. This article hopes to shed some light on the nature of the compromise penalty, and the procedure for demanding and collecting it from the taxpayers.

Compromise penalties are amounts collected by the BIR in lieu of criminal prosecution for violations committed by taxpayers, the payment of which is based on a compromise agreement validly entered into between the taxpayer and the Commissioner of Internal Revenue. (Perpetual Succour Hospital, Inc., et al. vs. Commissioner of Internal Revenue, C.T.A. Case No. 7304, Dec. 1, 2010.)

As can be easily inferred from the foregoing definition, the imposition of compromise penalty presupposes the commission of a criminal offense under the Tax Code. It must be noted, however, that not all criminal violations of the Tax Code can be compromised. Under Section 204 of the Tax Code, if the taxpayer’s criminal violation is already filed in court or if the violation involves fraud, the same can no longer be compromised. Revenue Memorandum Order No. 19-07 (RMO No. 19-07) provides for a schedule enumerating the criminal violations of the Tax Code which can be compromised and the corresponding compromise penalty for the violation thereof. The foregoing definition also provides that there must be an agreement validly entered into by and between the taxpayer and the Commissioner of Internal Revenue (CIR) with respect to the settlement of the criminal liability of the taxpayer. It must be pointed out that under the New Civil Code, a compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.

In the absence of the aforementioned requisites, especially the agreement for the settlement of the criminal liability, the BIR cannot hold the taxpayer liable for compromise penalty. As held by the Honorable Court of Tax Appeals, “the imposition of the compromise penalty against a taxpayer presupposes consent on the part of both parties in the absence of which the compromise penalty is not binding nor cannot be mandatorily enforced.” (Camara Steel Industries, Inc. vs. CIR, CTA Case No. 5960, Feb. 19, 2004.) This goes without saying that the settlement of the criminal liability must be consensual to both the taxpayer and the BIR. Unmistakably, if the taxpayer does not consent to settling his criminal liability, the BIR cannot order him to do otherwise.  

It must be pointed out, however, and may serve as a caveat, that in situations wherein the taxpayer opted not to pay the prescribed compromise penalty and settle his criminal liability, the BIR is not left without a remedy. It must be noted that criminal violations of the Tax Code carry with it criminal sanctions (Rightfield Property Ventures Inc. vs. CIR, C.T.A. Case No. 5972, Oct. 16, 2003).The compromise penalty incident to the violation is suggested merely in lieu of criminal prosecution. Thus, if the taxpayer opts not to settle his criminal liability and pay the corresponding compromise penalty thereto, the BIR can refer the taxpayer’s criminal violation of the Tax Code to the appropriate office for criminal action. As clearly worded in RMO No. 19-07, “compromise penalties are only amounts suggested in settlement of criminal liability, and may not therefore be imposed or exacted on the taxpayer, the violation shall be referred to the appropriate office for criminal action in the event that a taxpayer refuses to pay the suggested compromise penalty.”

Clearly then, if no agreement is reached by the BIR and the taxpayer for the settlement of the criminal liability of the taxpayer due to his violation of the Tax Code, the BIR cannot unilaterally mandate the taxpayer to pay the compromise penalty. In same vein, if the taxpayer chose not to pay the compromise penalty, the taxpayer is opening himself to a possible criminal prosecution by reason of his violation of the Tax Code.   

Lastly, with respect to the manner of demanding and collecting the compromise penalty from the taxpayer, RMO No. 19-07 laid down the procedure that must be followed. Under the said RMO, the amount of compromise penalty(ies) incident to the violation(s) should be itemized in the assessment notice and/or demand letter. The compromise penalty assessed, however, should not form part of the assessment notice that reflects deficiency basic tax, surcharge and interest. Evidently, the BIR’s demand for a compromise penalty should appear in a separate assessment notice and/or demand letter as the amount suggested by the BIR that the taxpayer should pay in lieu of criminal prosecution. As to the mode of collecting the compromise penalty, it shall be collected and accounted for under the usual procedures as internal revenue collection, hence, there is no need for a separate process for the purpose of collecting the compromise penalty.   

Atty. Andrew James Gerard Ruiz is a senior manager of Manabat Sanagustin & Co., CPAS, a Philippine Partnership and member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or the Firm. For comments or inquiries, please email [email protected]