Compromise Penalty in Philippine Tax Law: A Comprehensive Guide (2025 update)

1. What Is a “Compromise Penalty”?

A compromise penalty is a sum of money the Bureau of Internal Revenue (BIR) proposes to collect from a taxpayer in settlement of the taxpayer’s criminal liability for violations of the National Internal Revenue Code (NIRC).

It is not a surcharge (Sec. 248) or interest (Sec. 249).
It is not automatically due and demandable; payment is voluntary and contractual, requiring the taxpayer’s offer and the BIR’s acceptance.
Once paid, it constitutes a compromise agreement under Civil Code Arts. 2028‑2037 and bars further criminal prosecution for the same act.

2. Statutory Foundations

Provision	Key Content
Sec. 204(A), NIRC	Grants the Commissioner authority to “compromise any civil or criminal tax liability” when: (1) the factual/legal basis is doubtful, or (2) the taxpayer’s financial position shows clear inability to pay.
Sec. 248–249, NIRC	Create surcharge and interest—distinct, automatically imposed civil additions to tax; they do not require consent.
Sec. 255 et seq., NIRC	List specific criminal offenses (e.g., willful failure to file, pay, or supply information) that may be compromised before charges are filed in court.
Rule 110, Rules of Criminal Procedure	Once an Information is filed with the Department of Justice/ courts, compromise of the criminal aspect is no longer within BIR’s sole power.

3. Administrative Issuances and the Schedule of Compromise Penalties

Issuance	Salient Points
RMO 1‑90 (1990)	First consolidated schedule.
RMO 19‑2007	Updated amounts; clarified that compromise penalties are proposed—not mandatory.
RMO 7‑2015 (still controlling as of 17 April 2025)	Current matrix, pegging penalties largely on gross sales/receipts or the tax due.

Below is a condensed sample (full matrix runs 13 pages):

Offense	Basic Amount (₱) where gross sales < ₱50 k	Graduated ceiling (₱)	Notes
Late filing of VAT return	5,000	up to 50,000	Scales with sales volume.
Failure to register with BIR	5,000	25,000	Per head office/branch.
Failure to issue receipts	1× value of unissued receipt or minimum 20,000	50,000	Each act/series.
Bookkeeping violations	10,000	50,000	Separate for head office & each branch.

Practice tip: A Revenue Officer may write the proposed amount on the face of the Letter of Authority (LOA) or Notice of Violation. The taxpayer is free to negotiate, reject, or ask that the case be referred to the DOJ instead.

4. Nature and Limits of BIR Authority

Voluntariness
- Commissioner of Internal Revenue (CIR) v. Court of Appeals, G.R. No. 108576, 20 Jan 1999: The BIR cannot force payment; absent consent, its sole recourse is to prosecute.
No compromise once docketed in court
- CIR v. Lianga Bay Logging Co., G.R. No. 130748, 20 Jan 2004*: After an Information is filed, only the prosecutor/judge may dismiss.
Prohibition against “double imposition”
- A taxpayer who has already paid surcharges and interest may still be offered a compromise penalty (because one is civil, the other criminal).
- However, the BIR should abate surcharges under Sec. 204(B) if the same factual basis shows “reasonable cause” or “no willful neglect.”
Hazard‑of‑litigation rule
- Memorandum Circular No. 27‑2002 lists quantitative thresholds (e.g., at least 40 % probable recovery risk) before compromise of civil liability is approved; the same standards guide compromise of the criminal aspect.

5. How Compromise Penalties Are Assessed and Collected

Detection of Violation – via audit, tax mapping, or third‑party information.
Issuance of Notice of Violation – states facts, section infringed, proposed compromise penalty with reference to the schedule.
Negotiation – taxpayer may:
- accept and pay using BIR Form 0605;
- submit a sworn request for abatement; or
- refuse—in which case the BIR endorses the case to the DOJ for prosecution.
Approval – Revenue District Officer signs if penalty ≤ ₱500 k; higher amounts require higher approval (Regional Director, Commissioner).
Release of Certification – payment is acknowledged; copies kept in docket to forestall double jeopardy.

6. Interaction with Other Remedies

Remedy	May coexist with compromise penalty?	Remarks
Civil compromise of deficiency taxes	Yes	Often packaged together; taxpayer signs two separate compromise agreements.
Abatement of surcharge/interest	Yes	BIR may abate civil additions if same facts negate willfulness.
Tax Amnesty (RA 11213, 2019)	No	Amnesty is statutory and wipes criminal/civil liability upon compliance—no further payment due.
Judicial settlement under Rule 22, CTA Rules	Yes	Once the case reaches the Court of Tax Appeals, parties may move for judicial compromise; the court’s approval is required.

7. Key Jurisprudence

Case	G.R. No. / Date	Doctrine
CIR v. CA & CTA	108576 / 20 Jan 1999	Compromise penalty is contractual; absent agreement, the BIR must sue.
Lianga Bay Logging	130748 / 20 Jan 2004	After an Information is filed, BIR cannot unilaterally compromise.
First Express Pawnshop	172045 / 16 Jun 2009	Payment of compromise penalty without protest = waiver of right to contest criminal aspect.
People v. Que (CA)	CA‑G.R. SP 117996 / 25 Jul 2011	Non‑payment of compromise penalty may constitute probable cause for estafa‑type offenses, but not automatic guilt.
CIR v. Philippine Daily Inquirer	213943 / 15 Jun 2021	Distinction between surcharge (civil) and compromise (criminal) emphasized; court cannot convert one into the other.

8. Controversies and Policy Debates

“Quota” mentality – Critics claim schedules are used to meet collection targets rather than approximate damage to the Government.
Lack of statutory ceilings – Congress has never legislated the exact amounts, leaving them to BIR discretion; some scholars argue this violates the non‑delegation doctrine (Const., Art. VI § 28).
Perception of inequality – Large corporations often negotiate lower percentages, while MSMEs simply pay the posted rate.
Calls for codification – Proposals in the 19th Congress (HB 4109, SB 2465) seek to fix ranges and require annual congressional review of the schedule.

9. Practical Compliance Guide (2025)

Document everything. Keep stamped‑received copies of returns; missing originals lead to hefty “failure to file” penalties.
Respond within 15 days of a Notice; silence is construed as refusal and triggers endorsement for prosecution.
Invoke Sec. 204(B) when:
- fire, flood, or theft destroyed records;
- BIR delay caused the late filing/payment;
- sickness/acts of God prevented compliance.
Negotiate intelligently. Show financial statements proving negative working capital to argue for reduction.
Never pay cash directly to an examiner. Use the Authorized Agent Bank (AAB) or eFPS/GCash facility; ask for an eOR.

10. Frequently‑Asked Questions

Question	Short Answer
Can I be jailed if I refuse to pay the compromise penalty?	Not automatically. The BIR must first file a criminal Information; conviction can lead to fines and imprisonment under Secs. 255‑269.
Can I deduct the compromise penalty as an expense?	No. Sec. 34(A)(1)(c) disallows deductions for “fines and penalties paid to any government agency.”
Is the 25 % surcharge still imposed when I pay the compromise penalty?	Yes, unless separately abated under Sec. 204(B).
What if I already paid but new evidence shows I was not liable?	File an administrative claim for refund within 2 years from payment (Sec. 204(C)); success is rare because compromise is deemed a voluntary waiver.
Is RMO 7‑2015 still valid in 2025?	Yes; no superseding issuance as of 17 April 2025.

11. Comparative Note: Civil vs Criminal Compromise

Feature	Civil Compromise (Deficiency Tax)	Criminal Compromise (Penalty)
Governing rule	Sec. 204(A) + RR 30‑2002	Sec. 204(A) + RMO 7‑2015
Basis	Doubtful validity or financial incapacity	Same, plus hazard of litigation
Form	BIR Form 2118‑C	BIR Form 0605 (with “compromise penalty” ticked)
Effect	Settles tax plus civil additions	Extinguishes criminal liability for the offense
Court approval needed?	Only if case already docketed at CTA	Needed if Information already filed at RTC/CTA

12. Conclusion

The compromise penalty is a uniquely flexible enforcement tool: it allows the BIR to conserve prosecutorial resources while giving taxpayers a predictable exit from criminal exposure. Understanding its statutory roots (Sec. 204), voluntary nature, procedural safeguards, and jurisprudential limits is essential for informed tax compliance and effective defense strategy. With proposals in Congress to legislate fixed ceilings and expanded judicial oversight, practitioners should keep watch—any reform will directly affect negotiation dynamics in the years ahead.

Updated by the author on 17 April 2025. This article is for general information only and not a substitute for legal advice.