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CM 304.4 - TP OPTION - ABATEMENT OF PENALTIES

Pursuant to the existing rules and regulations, the BIR processes applications for the abatement of only the surcharge, interests and compromise penalties. Any application for the abatement of the basic tax assessed or any portion thereof, if any, are not covered by any existing regulations, and therefore, shall not be processed.[1]

Under the NIRC of 1997, as amended, and various judicial rulings, the Commissioner of Internal Revenue is authorized to abate or cancel a tax liability when any of the following conditions is present:

  1. The tax or any portion thereof appears to be unjustly or excessively assessed:

               -              When the filing of the return/payment of the tax is made at wrong venue;[2]

-              When the taxpayer’s mistake in payment of his tax is due to erroneous written official advise of a revenue officer;

-              When taxpayer fails to file the return and pay the tax due on time due to substantial losses from prolonged labor dispute, force majeure, legitimate business reverses such as the following instances, provided that the abatement shall only cover the surcharge and the compromise penalty and not the imposed interest:

  1. Labor strike for more than six (6) months which has caused the temporary shutdown of the business;
  2. Public turmoil;

iii.           Natural calamity such as lightning, earthquake, storm, flood and the like;

  1. Armed conflicts such as war or insurgency;
  2. Substantial losses due to fire, robbery, theft, embezzlement;
  3. Continued losses incurred by the taxpayer for the last two (2) years;

vii.          Liquidity problem of the taxpayer for the last three (3) years; or

viii.         Such other circumstances which the taxpayer may deem analogous to the enumeration above.

-              When the assessment is brought about or the result of taxpayer’s non-compliance with the law due to a difficult interpretation of the said law;

-              When taxpayer fails to file the return and pay the correct tax on time due to circumstances beyond his control, provided that the abatement shall only cover the surcharge and compromise penalty and not interest;

-              Late payment of the tax under the following meritorious circumstances:

  1. One day late filing and remittance due to failure to beat bank cut-off time;
  2. Use of wrong tax form but correct amount of tax was remitted;

iii.           Filing an amended return under meritorious circumstances, provided that the abatement shall only cover the penalties and not the interest;

  1. Surcharge erroneously imposed;
  2. Late filing of return due to unresolved issue on classification/valuation of the property (for capital gains tax, etc.);
  3. Offsetting of taxes of the same kind (i.e. overpayment in one quarter/month is offset against underpayment in another quarter/month)

vii.          Automatic offsetting of overpayment of one kind of withholding tax against the underpayment of another kind;

viii.         Late remittance of withholding tax on compensation of expatraites for services rendered in the Philippines pending the issuance of the Securities and Exchange Commission of the license to the Philippine branch office or subsidiary, provided that the abatement shall only cover surcharge and compromise penalty and not interest;

  1. Wrong use of the Tax Credit Certificate (TCC) where the Tax debit Memo (TDM) was not properly applied for; and
  2. Such other instances which the Commissioner may deem analogous to the above enumeration.
  3. The administration and collection costs involved, including the costs of litigation, are much more than the amount that may be collected from the taxpayer:

-              Abatement of penalties on assessment confirmed by the lower court but appealed by the taxpayer to a higher court, provided “that the taxpayer signified in writing his willingness to pay the basic tax and interest or the basic tax only, whichever is applicable under the prevailing circumstances”;

-              Abatement of penalties on withholding tax assessment under meritorious circumstances;

-              Abatement of penalties on delayed installment payment under meritorious circumstances;

-              Abatement of penalties on assessment reduced after reinvestigation but taxpayer is still contesting the reduced assessment, provided that the taxpayer signified in writing his willingness to pay the basic tax and interest or the basic tax only, whichever is applicable under the prevailing circumstances;

-              Such other instances which the Commissioner may deem analogous to the above enumeration

  1. Taxpayer is already dead, leaving no distrainable/leviable property.
  2. Taxpayer is abroad and there are indications that he/she is not returning to the country, leaving no forwarding address and with no distrainable and leviable property.
  3. In case of a corporation which is already dissolved and all subscribed shares of stock have been fully paid, without prejudice from the filing of any criminal charges against the responsible officials oft the corporation for non-payment of the tax.
  4. The tax case has already prescribed, without prejudice to the filing of administrative case against the responsible Revenue Officer(s).

The abatement of surcharge, interests and penalties on any unpaid tax liability by a taxpayer is an exclusive power of the Commissioner; hence, could not be delegated to any subordinate official.[3] Accordingly, all applications for abatement of penalties shall be subject to final evaluation and approval by the Commissioner.

  1. The Technical Working Committee constituted by the Deputy Commissioner-Operations Group for the review and evaluation of regional cases;
  2. The Technical Working Committee constituted by the ACIR-LTS for large taxpayer cases; and
  3. The Deputy Commissioner-Legal and Inspection Group for the evaluation of the legal issues involved in the case.

Documentary Requirements in applying for Abatement of Penalties

The Application for Abatement or Cancellation of Tax, Penalties and/or Interest (BIR Form No. 2110) must be filed with the concerned BIR office that has jurisdiction over the case. The said written application should clearly state the reasons and causes for such request; and the documentary proofs or evidences for such underlying reasons and causes must be appended to the said application.

In cases of application based on financial incapacity, the request for abatement shall include the following documents:

  1. Duly authenticated tax return and/or amended return with copy of previous tax return filed as basis for comparison;
  2. Proof of payment of the first installment of the tax due, in case of unpaid second installment income tax due for individual taxpayer;
  3. Latest audited financial statements, in case of corporations and individual taxpayers with business income;
  4. Waiver of the Secrecy of Bank Deposit under the Bank Secrecy Act;
  5. Waiver of the Defense of the Statute of Limitation Waiver of the Defense of the Statute of Limitation for the collection of the accounts receivable (Annex 300-1.22); and
  6. Sworn Statement stating that the taxpayer has no Tax Credit Certificate (TCC) on hand or in transit or claim for tax refund or TCC under the NIRC of 1997, as amended, and the Omnibus Investment Code of 1987[4] which is pending in any office.

Additional requirements for the availment of abatement of prnalties that may be prescribed in a separate Revenue Memorandum Order shall likewise be complied with.

Procedures in Processing the Request for Abatement of Penalties

  1. The taxpayer shall file a letter-request for abatement, together with the documentary requirements addressed to the Commissioner, through the RDO that as jurisdiction on the tax case, stating the reasons for the abatement application.
  2. The Revenue Officer handling the case shall:

2.1.        Stamp “Received” the letter-request and application for abatement including the supporting documents appended to the application;

               NOTE: No application for abatement shall be processed without the payment of one hundred percent (100%) of the basic tax.[5]

2.2.        Check the completeness of the requirements;

2.3.        Evaluate the request for abatement of penalties; and

2.4.        Prepare the appropriate report for the signature of the RDO/Chief, LTDO/LTCED containing the recommendation therefore and submit the same to the concerned REB/LTSEB for review and evaluation within five (5) days from receipt of the application for abatement.

  1. The REB/LTSEB shall:

3.1.        Receive the report containing the recommendation on the application for abatement by the concerned RDO/Chief, LTDO/LTCED;

3.2.        Review, evaluate and affix their signature on the recommendation whether for approval or disapproval by a majority of the members; and

3.3.        Forward the recommendation to the Regional Director/ACIR-LTS for final review, evaluation prior to the transmission of the case docket to the TWC, within five (5) days from receipt of the application for abatement.

  1. The TWC shall:

4.1.        Receive the report containing the recommendation on the application for abatement by the REB/LTSEB;

4.2.        Review and evaluate the recommendation of the REB/LTSEB;

4.3.        Submit the TWC recommendation to the CIR on the application for abatement within thirty (30) days from receipt of the docket;

4.4.        Prepare and submit to the Commissioner on or before the 25th day of the following month a Consolidated Monthly Report of Application for Abatement Received and Acted Upon (Annex 300-1.26), for monitoring purposes; and

4.5.        Submit a report on the exercise of the power of the Commissioner and the NEB/REB to abate the tax liabilities of the 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.

  1. The CIR shall evaluate the TWC recommendation and upon approval/disapproval of the request for abatement, return the entire docket and the attachment, to the originating office (RDO/LTDO/LTCED), through the TWC, for implementation of the final decision on the request for abatement of penalties.
  2. The RDO.LTDO/LTCED shall:

6.1.        Advise the taxpayer to pay the offered amount upon receipt of the application for abatement or the docket of the case bearing on the decision of the Commissioner, in case certain portions of the penalties requested to be abated have been denied (Refer to CM 304.1 TP Option – Taxpayer Intends to Pay Tax Liability in Full);

6.2.        Prepare the Authority to Cancel Assessment (ATCA), if applicable;

6.3.        Prepare the Closing Memorandum on the approved application for abatement of penalties;

6.4.        Record the case as closed and submit the entire docket to the Regional Administrative Division/NO-Records Division for safekeeping, in case the application for abatement of penalties has been approved by the Commissioner;

6.5.        Prepare and submit to the Collection Enforcement Division (CED), copy furnished the Regional Collection Division/LTS, the Monthly Summary of General Control Ledger (GCL) and Updates of Delinquent Accounts on the 10th day of the following month (Refer to CM 306- Monitoring of ARs/DAs); and

6.6.        Enforce the collection of the unpaid tax liability, if the request for abatement is denied (Refer to CM 305.1-WDL).

 

[1] RR No. 13-2001 and RMO No. 20-2007.

[2] RR No. 13-2001.

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

[4] Executive Order No. 226.

[5] RMO No. 20-2007.