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CM 304.3 - TP OPTION - PAYMENT BY COMPROMISE SETTLEMENT

The authority to compromise the collection of any internal revenue tax is given to the Commissioner of Internal Revenue, in accordance with the provisions of the NIRC of 1997, as amended and various judicial rulings as follows:[1]

  1. The authority of the Commissioner to compromise includes the civil and criminal aspects of the case.

               1.1.        Compromise in the civil case is allowed:

-              Where there is reasonable doubt as to the validity of the claim against the taxpayer, or;

-              Where the financial capacity of the taxpayer demonstrates a clear inability to pay the tax.

The compromise settlement of any tax liability shall be subject to the following minimum amounts:

-              For cases of financial incapacity:

a.

If taxpayer is an individual whose only source of income is from employment and whose monthly salary, if single, is P10,500.00 or less, if married, whose salary together with his spouse is P21,000,00 per month, or less, and it appears that the taxpayer possesses no other leviable/distrainable assets, other than his family home

10%

b.

If taxpayer is an individual without any source of income

10%

c.

Where the taxpayer is under any of the following conditions:

-        Zero networth

-        Negative networth

-        Dissolve corporations

-        Already non-operating companies for a period of:

a.      three (3) years or more as of the date of application for compromise settlement

b.      less than three (3) years

-        Surplus or earnings deficit resulting to impairment in the original capital by at least 50%

-        Declared insolvent or bankrupt unless taxpayer falls squarely under any situation as enumerated above, thus resulting to the application of the appropriate rate

 

10%

10%

20%

 

10%

 

20%

40%

 

20%

 

-              For cases of doubtful validity of assessment:

a.

Minimum compromise rate, in general

40%

b.

Special rate lower than 40%, on a case to case basis, provided that the request shall be accompanied by sufficient justifications stating the reasons, legal and/or factual, why he should be entitled to a lower rate. However, the same shall be subject to the prior approval by the National Evaluation Board (NEB).

Open rate

 

The above prescribed minimum percentages shall likewise apply in compromise settlement of assessments consisting solely of increments (i.e., surcharge, interest, etc.), based on the total amount assessed.[2]

1.2.        The criminal aspects of a tax case may be compromised only before the institution of the criminal action in court.

  1. Subject to the taxpayer’s compliance to the requisites on the basis for the acceptance of the offer to compromise a delinquent account or disputed assessment, the following cases may be the subject matter of compromise settlement:

               -              Delinquent accounts;

-              Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue district Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office;

-              Civil tax cases being disputed before the courts;

-              Collection cases filed in courts; and

-              Criminal violations, other than those already filed in court or those involving criminal tax fraud.

However, the following cases could not be compromised:

-              Withholding tax cases, tax cases, unless the applicant-taxpayer invokes provisions of law that cast double on the taxpayer’s obligation to withhold;

-              Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative;

-              Criminal violations already filed in court;

-              Delinquent accounts with duly approved schedule of installment payments;

-              Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the NEB on a case to case basis;

-              Cases which become final and executory after final judgement of the court, where compromise is requested on the ground of doubtful validity of the assessment; and

-              Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.

  1. The power of the Commissioner to compromise cases is discretionary and no court can compel him/her to exercise such discretion; and such power shall be exercised based on the merits of the case.
  2. A case that has already been finally decided by the Supreme Court is no longer open for any compromise settlement on account of doubtful validity of the assessment.
  3. Any offer for compromise settlement on the ground of financial incapacity shall not be considered if the taxpayer has outstanding Tax Credit Certificate (TCC) issued under the NIRC of 1997, as amended or Executive Order No. 226, on hand or in transit, or with any pending claim for tax refund or credit with the BIR, Department of Finance One-Stop-Shop Tax Credit and Duty Drawback Center (Tax Revenue Group or Investment Incentive Group) and/or the courts, or with existing finalized agreement or prospect of future agreement with any party that resulted or could result to an increase in the equity of the taxpayer at the time of the offer for compromise or at a definite future time.

               Moreover, no offer for compromise shall be entertained unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute as the authority of the BIR to inquire into the bank deposits of the taxpayer.

               Presence of any circumstance that would place the taxpayer’s liability to pay in serious doubt can be a ground to deny the application for compromise based on financial incapacity to pay the tax.

  1. In case the taxpayer has an unpaid and undisputed tax liability, the full settlement thereof shall first be made by the taxpayer before any action by the BIR on the offer for compromise settlement for other tax liabilities shall commence.
  2. Any unpaid self-assessed tax or dishonored check shall not be allowed to be settled thru compromise agreement. Furthermore, any withholding tax liability of the taxpayer shall not also be a subject matter of compromise settlement, unless the taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold.
  3. If the taxpayer refuses to abide by the terms of the approved compromise settlement, the BIR may demand the collection of accounts receivables based on the original assessment/demand notice, including all the applicable delinquency increments.
  4. The compromise offer may be paid before or after the approval of the offer of compromise by the NEB or REB, at the option of the taxpayer. In case of disapproval of compromise offer previously paid, the said payment shall be considered as partial payment of the total tax liabilities of the taxpayer, including delinquency increments (Refer to CM 304.1 TP Intends to Pay Tax Liability in Full/CM 304.2 TP Option- Payment on Installment/CM 304.4 TP Option-Abatement of Penalties).
  5. The TCC shall not be allowed or accepted as full or partial payment of offer of compromise settlement.
  6. All approved offers for compromise settlement shall be paid in full immediately upon receipt by the taxpayer of the Notice of Approval. In case the taxpayer fails to comply with the immediate payment thereof within the set deadline, the approved offer for compromise settlement shall be automatically revoked, and the amount due from the taxpayer shall be reverted to the original assessment plus delinquency increments. On the other hand and on a case to case basis, the taxpayer with approved offer for comprise on the ground of financial incapacity may be allowed to pay the approved offer on installment basis, subject to the approval of the NEB.
  7. Compromise settlement of a tax liability may be set aside by reasons of fraud, mistake, violence or coercion.
  8. A compromise agreement between the taxpayer and the BIR that was properly entered into is binding and enforceable.
  9. The evaluation of the offer due to doubtful validity of the assessment shall be made on a per tax type basis. On the other hand, evaluation of offer for compromise on the ground of financial incapacity need not be made on a per tax type basis, considering that the evaluation thereof is limited to the determination of the financial capacity of the taxpayer in paying the tax liabilities.
  10. The offers for compromise settlement of assessed taxes involving basic deficiency tax of P500,000.00 or less and for minor criminal violations shall be approved by the Regional/LTS Evaluation Board. All other offers outside the jurisdiction of the Regional/LTS Evaluation Board shall be approved by the majority of all the members of the NEB composed of the Commissioner and the four (4) Deputy Commissioners. All decisions of the NEB granting the request of the taxpayer or favorable to the taxpayer shall have the concurrence of the Commissioner.[3]
  11. All offers for compromise settlement requiring approval by the NEB shall undergo preliminary processing and evaluation by the concerned REBs/LTSEB prior to the endorsement to the NEB Secretariat for final review and evaluation.
  12. The REB shall be comprised of the following Officers of the Regional Office:

               Chairman             -              Regional Director

               Members             -              Assistant Regional Director

                                             -              Chief, Legal Division

                                             -              Chief, Assessment Division

                                             -              Chief, Collection Division

                                             -              Revenue District Officer having jurisdiction over the taxpayer-applicant

               The LTSEB shall be comprised of the following Officers of the Large Taxpayers Service:

               Chairman             -              Assistant Commissioner, LTS

Vice-Chairman   -              Concerned Head Revenue Executive Assistant having jurisdiction over the taxpayer-applicant

Members             -              Concerned Chief, Large Taxpayers District Office having jurisdiction over the taxpayer-applicant

                              -              Chief, LT Collection and Enforcement Division

                              -              Concerned Chief, LT Regular Audit Division having jurisdiction over the taxpayer-applicant

                              -              Concerned LT Excise Audit Division having jurisdiction over the taxpayer-applicant

                              -              Chief, LT Assistance Division

                              -              Chief, LT Excise Regulatory Division

                              -              Chief, LT Field Operations Division

Documentary Requirements in Filing an Application for Compromise Settlement

  1. The taxpayer shall attach the following documentary requirements to the letter-application for compromise settlement, in case of financial incapacity:

               1.1.        For salaried employees:

                              -              Duly filled-up Application for Compromise Settlement (BIR Form No. 2107)

                              -              Latest Income Tax Return filed

                              -              Certificate of current gross compensation from present employer/s

-              Certificate of Property Holdings from the Municipal, Provincial and City Assessor or the Register of Deeds

-              Waiver of the secrecy of bank deposits (Annex 300-1.21) pursuant to the provisions of R.A No. 1405, otherwise known as the Bank Secrecy Act, in case of financial incapacity to pay the tax liabilities and increments[4]

-              Proof of payment, if the taxpayer has already paid the offered amount of compromise

-              Waiver of the Defense of the Statute of Limitation for the collection of the accounts receivable (Annex 300-1.22)

               1.2.        For unemployed individuals and/or individuals without any business income

                              -              Duly filled-up Application for Compromise Settlement (BIR Form No. 2107)

                              -              Sworn statement that he derives no income from any source whatsoever

-              Certificate of Property Holdings from the Municipal, Provincial and City Assessor or the Register of Deeds

-              Waiver of the secrecy of bank deposits pursuant to the provisions of R.A No. 1405, otherwise known as the Bank Secrecy Act, in case of financial incapacity to pay the tax liabilities and increments[5]

-              Proof of payment, if the taxpayer has already paid the offered amount of compromise

-              Waiver of the Defense of the Statute of Limitation for the collection of the accounts receivable

1.3.        For corporations, partnerships or individual taxpayers whose income is derived from business:

               -              Duly filled-up Application for Compromise Settlement (BIR Form No. 2107)

-              Latest Income Tax Return filed together with the latest audited Financial Statements for the last three (3) years

-              Certificate of Property Holdings from the Municipal, Provincial and City Assessor or the Register of Deeds

-              Certification from the barangay and city or municipal licensing office on the status of the taxpayer’s business (closed, ceased operations, retired, active/inactive)

-              Waiver of Secrecy of Bank Deposits pursuant to the provisions of the Bank Secrecy Act under RA No. 1405, in case of financial incapacity to pay the tax liabilities and increments

-              Sworn Statement or Affidavit of no unutilized Tax Credit Certificate on-hand or pending claim or application for tax credit/refund

-              Waiver of the Defense of the Statute of Limitation for the collection of the accounts receivable

  1. In case of “Doubtful validity” of the assessment, the taxpayer shall apply in writing for a compromise settlement of not lower than forty percent (40%) of the basic tax due. However, the taxpayer may also apply in writing for a compromise rate lower or higher than the minimum rate of forty percent (40%) stating therein the reasons, legal and/or factual, why he should be entitled to such rate.

Procedures in Processing Applications for Compromise Settlement

The letter-application for compromise settlement shall be filed with the Commissioner, through the Regional Director/ACIR-LTS or Revenue District Officer/LTDO/LTCED having jurisdiction over the taxpayer. The said letter must state the reason/s for such a request and the amount he is willing to pay. It shall likewise be accompanied by all the necessary documentary requirements in support of the request for compromise settlement. The filing of application for compromise settlement notwithstanding, the Revenue Officer shall continue with the verification of the property holdings of the concerned taxpayer and such other further enforcement actions on the delinquent account(s) in order to ensure that the collection of the accounts receivable from the taxpayer has been safeguarded once the compromise offer has been denied by the Commissioner or his/her duly authorized representative.

The Revenue Officer/Seizure Agent shall:

  1. Stamp the word “Received” on the taxpayer’s application for compromise settlement and attachments, as well as the proof of payment, if the taxpayer opted to pay the tax liability prior to filing application for compromise;
  2. Check the completeness of the documentary requirements and evaluate the merits of the application for compromise settlement;
  3. Prepare and send letter to the taxpayer requesting to submit the required documents, if the documentary requirements are incomplete; and
  4. Prepare recommendation on the application and forward the case docket to the Technical Working Group of the Regional Evaluation Board (TWG-REB)/Large Taxpayers Service Evaluation Board (LTSEB) for evaluation and processing.

The TWG-LTSEB/REB shall:

  1. Receive and process request of taxpayer for compromise settlement of tax liability;
  2. Evaluate the request for compromise settlement and make appropriate recommendation; and
  3. Forward the entire docket of the case to the LTSEB/REB for appropriate action.

The LTSEB/REB shall:

  1. Evaluate the TWG-LTSEB/REB recommendation on the processed application for compromise settlement;
  2. Act appropriately on the request:[6]

2.1.        Approve/disapprove the request of the basic deficiency tax is Five Hundred Thousand Pesos (Php500,000.00) or less,[7] and if the offer is equal or more than the prescribed minimum rate;

2.2.        Forward the evaluated request with basic deficiency tax exceeding Five Hundred Thousand Pesos (Php500,000.00) but not more than One Million Pesos (Php1,000,000.00) to the Commissioner of Internal Revenue (CIR)[8], through the Regional Director and the TWG-NEB; and

2.3.        Forward the evaluated request with basic deficiency tax exceeding One Million Pesos (Php1,000,000) to the NEB;[9] or if the offered amount is less than the prescribed minimum rate, through the Regional Director and the TWG-NEB.

  1. Return the entire docket and all attachments to the district office of original for collection of the compromise offer, if the request is approved as well as for the issuance of the corresponding Authority to Cancel Assessment (ATCA) for the unpaid portion of the tax liability;
  2. Notify the taxpayer in writing that the offer of compromise was denied, stating therein reasons for denial and return the entire docket to the originating district office for the immediate collection enforcement proceedings (Refer to CM 305.1-WDL)
  3. Prepare and submit to the TWG-NEB on or before the 20th day of the following month a Consolidated Monthly Status Report of Application for Compromise Settlement Received and Acted Upon (Annex 300-1.23), for monitoring purposes; and
  4. Submit a monthly report on all approved request for compromise cases with basic tax of Php500,000.00 and below to the TWG-NEB for purposes of preparing a consolidated report to the Congressional Oversight Committee.

The TWG-NEB shall:

  1. Receive the docket bearing on the request for compromise settlement with the appropriate recommendation from the REB, thru the Regional Director, and LTSEB, thru the ACIR-LTS;
  2. Check the completeness of the documentary requirement. If found incomplete, return the docket to the originating Office for appropriate action;
  3. Assign the docket to the evaluator for appropriate action;
  4. Evaluate the request and prepare appropriate recommendation, for routing and signature of the members of the TWG-NEB;
  5. Receive the routed case docket that was approved/disapproved by the Commissioner;
  6. Return the entire docket to the originating district office, for collection of the compromise offer, if the request is approved;
  7. Notify the taxpayer in writing that the offer of compromise was denied stating therein the reasons for denial, if the request is disapproved, and return entire docket to the originating district office for collection enforcement action;
  8. Prepare and submit to the Commissioner on or before the 25th day of the following month a Consolidated Monthly status Report of Application for Compromise Settlement Received and Acted Upon (Annex 300-1.24), for monitoring purposes; and
  9. Submit a report on the exercise of the power of the Commissioner and the NEB/REB to compromise the tax liabilities of taxpayers to the Congressional Oversight Committee, through the Chairmen of the Committee on Ways and Means of both the Senate and House of Representatives, every six (6) months of each calendar year.

The NEB shall:

  1. Evaluate the case docket bearing the recommendation of the TWG-NEB and approve/disapprove the request; and
  2. Return the docket of the case to the TWG-NEB Secretariat, for appropriate action.

 

The CIR shall:

  1. Evaluate the request for compromise settlement and the recommendation thereon by the TWG-NEB and the concerned Deputy Commissioners;
  2. Approve/Deny the application for compromise settlement; and
  3. Return the docket of the case to the TWG-NEB Secretariat, for appropriate action.

The RDO/LTDO/LTCED shall:

  1. Determine if the taxpayer has already paid the required amount prior to the filing of the request for compromise upon receipt of the entire docket and the approved request for payment thereof;
  2. Advise the taxpayer to pay the offered compromise payment, if the taxpayer did not pay before filing of the request (Refer to CM 304.1 TP Option- Taxpayer Intends to Pay Tax Liability in Full);
  3. Prepare the corresponding Authority to Cancel Assessment (ATCA), if applicable;
  4. Prepare the Closing Memorandum on the approved application for compromise settlement;
  5. Record the case as closed and transmit the entire docket to the Regional Administrative Division/NO-Records Division for safekeeping, if the application for compromise settlement was approved by the Commissioner/NEB/Regional Director;
  6. Prepare and submit to the Collection Enforcement Division (CED) copy furnished Regional Collection Division/LTS the Monthly GCL and Updates of Delinquent Accounts on the 10th day of the following month (Refer to CM 306-Monitoring of ARs/DAs);
  7. Prepare and submit to the CED on or before the 20th day of the following month a Monthly Status Report of Application for Compromise Settlement Received and Acted Upon (Annex 300-1.25), for monitoring purposes; and
  8. Enforce the collection of the unpaid tax liability, in case the request is denied (Refer to CM 305.1-WDL).

 

[1] Section 204 (A) of the NIRC of 1997, as amended.

[2] RR No. 30-2002.

[3] RR No. 30-2002.

[4] Republic Act No. 1405 An Act Prohibiting Disclosure or Inquiry into Deposits with any Banking Institution and Providing Penalty therefor.

[5] Ibid.

[6] RR No. 30-2002.

[7] Section 7(c) of the NIRC of 1997, as amended.

[8] RR No. 3-2002.

[9] Section 204 (A) of the NIRC of 1997, as amended.