Compromise and Abatement of Taxes | Taxpayers Remedies | Tax Remedies | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

Under the National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (R.A. No. 10963) and the Ease of Paying Taxes Act (R.A. No. 11976), the Philippine tax code outlines various tax remedies available to taxpayers. Within these, compromise and abatement of taxes provide mechanisms for reducing or alleviating tax liabilities under specific circumstances. These remedies serve to address the needs of taxpayers who may be unable to pay the full amount assessed or are otherwise entitled to relief due to hardship or equitable considerations.

I. Compromise of Taxes

A compromise refers to an agreement between the taxpayer and the Bureau of Internal Revenue (BIR) where the taxpayer settles a tax liability for less than the assessed amount. This tool is a way to facilitate tax collection by allowing taxpayers to pay a portion of their liability when full payment is infeasible. The BIR Commissioner is empowered to compromise taxes, subject to certain conditions.

A. Legal Basis and Authority

1. Section 204(A) of the NIRC provides the basis for the compromise of internal revenue taxes.
2. Under R.A. No. 10963 (TRAIN Law) and R.A. No. 11976, certain amendments have adjusted and clarified rules on the compromise of taxes to streamline tax collection processes and improve taxpayer compliance.

B. Grounds for Compromise

Compromise is only permitted under specific conditions:

1. Doubt as to the Validity of the Assessment:

   • If there is reasonable doubt regarding the correctness of the assessment or the legal basis for the tax, a compromise may be considered.
   • The BIR assesses whether sufficient evidence exists to question the validity or computation of the tax due.

2. Financial Incapacity:

   • When a taxpayer proves an inability to pay the assessed tax in full, a compromise may be granted.
   • Financial incapacity must be supported by documentary evidence, such as financial statements, affidavits, or other proof that demonstrates the taxpayer’s inability to settle the full liability.

C. Conditions and Limitations

1. Minimum Compromise Rate:

   • The TRAIN Law specifies that in cases where a compromise is approved, the taxpayer is generally required to pay at least 40% of the basic tax due in cases of financial incapacity and 10% of the basic tax due in cases of doubt as to the validity of the assessment.

2. Authority to Approve Compromises:

   • The Commissioner of Internal Revenue has the authority to compromise tax liabilities. However, when the basic assessed tax exceeds P1,000,000, the approval of the Secretary of Finance is also required.

3. Cases Not Eligible for Compromise:

   • Criminal tax cases, except those based solely on failure to file returns or pay taxes.
   • Cases involving tax fraud or intent to evade taxes.

D. Procedure for Compromise

1. The taxpayer submits a compromise proposal using the BIR's prescribed forms, accompanied by supporting documentation.
2. The BIR evaluates the proposal, taking into account factors such as the taxpayer’s financial condition and the merits of the assessment.
3. If approved, the taxpayer pays the agreed amount, and the case is closed upon payment.
4. If denied, the taxpayer retains the right to pursue other remedies, such as protest or appeal.

II. Abatement of Taxes

Abatement refers to the cancellation or reduction of penalties, surcharges, and interest on tax liabilities. This relief is typically granted when circumstances suggest that collection would be unjust or inequitable, or if administrative errors contributed to the taxpayer’s non-compliance.

A. Legal Basis and Authority

1. Section 204(B) of the NIRC provides the BIR Commissioner with authority to abate or cancel any portion of the tax liability under qualifying circumstances.
2. Amendments introduced by the TRAIN Law and the Ease of Paying Taxes Act have streamlined and clarified abatement rules, particularly around administrative processes for abatement requests.

B. Grounds for Abatement

1. Mistake in Payment or Assessment Due to Taxpayer or BIR Error:

   • When a taxpayer’s failure to comply arises from a reasonable mistake or the BIR’s administrative errors, the taxpayer may request abatement of the penalties, surcharges, or interest accrued.

2. Excessive Penalties Due to Financial Hardship:

   • If strict application of penalties and interest results in significant financial hardship for the taxpayer, the BIR may consider abatement.

3. Situations Beyond the Taxpayer’s Control:

   • Events like natural disasters, significant economic downturns, or other situations beyond the taxpayer's control that prevent timely payment may be grounds for abatement.

C. Conditions and Limitations

1. No Reduction in Basic Tax:

   • Abatement is strictly limited to surcharges, penalties, and interest. The BIR does not abate the basic tax liability.

2. Finality of Decision:

   • Once the BIR grants an abatement, the matter is settled, and no further collection of the abated amount will occur.

D. Procedure for Abatement

1. Application for Abatement:

   • The taxpayer files an abatement request with the BIR, providing documentation that supports the request, such as proof of financial hardship, evidence of administrative errors, or documentation of extenuating circumstances.

2. BIR Evaluation and Decision:

   • The BIR evaluates the application and decides based on the evidence presented.

3. Notification of Abatement Decision:

   • If granted, the taxpayer is informed, and the liabilities are adjusted accordingly.
   • If denied, the taxpayer may either pay the remaining liabilities or pursue other legal remedies.

III. Key Considerations for Taxpayers

Taxpayers seeking compromise or abatement of taxes should be meticulous in documenting their financial status and any relevant circumstances. Compromise and abatement are discretionary powers of the BIR and require compelling justification to be granted. Taxpayers are advised to seek assistance from tax professionals or legal experts to ensure compliance with procedural requirements and to maximize their chances of favorable outcomes.

IV. Amendments Under the Ease of Paying Taxes Act (R.A. No. 11976)

The Ease of Paying Taxes Act introduced further streamlining measures to make tax processes more accessible:

• Simplified Documentation for requesting compromise and abatement.
• Enhanced Transparency in BIR decision-making to improve trust between taxpayers and the tax authority.
• Reduced Red Tape in processing requests, allowing taxpayers to receive timely responses to their applications.

V. Conclusion

The remedies of compromise and abatement of taxes provide essential relief options for Philippine taxpayers facing challenges in fulfilling their tax obligations. These mechanisms serve as balancing tools to ensure the tax collection process is fair, particularly for those unable to pay due to genuine financial hardship or when the correctness of an assessment is in question. By understanding and properly utilizing these remedies, taxpayers can manage their tax obligations more effectively while ensuring compliance with the law.