Taxpayer’s remedy of compromise
By: Atty. Xela Leona D. Laqui on November 6,2025
THE National Internal Revenue Code of 1997, as amended (“Tax Code”), provides taxpayers with certain remedies in addressing their tax liabilities, especially the delinquent ones. One of the most important is the remedy of compromise under Section 204(A) in relation to Section 7 of the Tax Code. This provision allows the Commissioner of Internal Revenue (CIR) to enter into a compromise agreement on internal revenue tax liabilities, offering taxpayers a way to settle their obligations under specific circumstances.
Under Section 204(A) of the Tax Code, the CIR may accept a compromise of any internal revenue tax when either one of the following conditions exists: (1) There is reasonable doubt as to the validity of the claim against the taxpayer; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
The law provides minimum compromise rates for these settlements: 10 percent of the basic assessed tax for cases involving financial incapacity; and 40 percent of the basic assessed tax for other cases.
When the basic tax exceeds P1 million or the offered settlement is below the prescribed minimum rate, the case must be approved by the Evaluation Board, composed of the CIR and the four deputy commissioners.
Several Revenue Regulations (RRs) have been issued to implement these provisions, establish the guidelines and procedures for processing compromise applications, and identify which offices are responsible for evaluation and approval.
Revenue Regulations 30-2002, which implements Sections 7(c), 204(A), and 290 of the Tax Code, prescribes that the following may be subject to a compromise settlement:
1) Delinquent accounts;
2) Administrative protest cases after the issuance of a Final Assessment Notice and pending before various BIR offices;
3) Civil tax cases under dispute in court;
4) Collection cases filed in court;
5) Criminal violations not yet filed in court or not involving criminal tax fraud.
However, the following are not valid subjects of compromise:
1) Withholding tax cases, unless there exists a legal doubt on the duty to withhold;
2) Confirmed criminal tax fraud cases;
3) Criminal violations already filed in court;
4) Accounts with approved installment payment schedules;
5) Cases with final reports of reinvestigation or reconsideration that have already been accepted by the taxpayer;
6) Cases with final and executory court judgments, except those involving doubtful validity;
7) Certain estate tax cases where compromise is requested based solely on financial incapacity.
Section 3 of RR 30-2002 reiterates the two primary grounds for compromise set out in Section 204(A) of the Tax Code, namely, doubtful validity of the assessment and financial incapacity.
Doubtful validity exists when there is reasonable doubt as to the correctness or legality of the assessment. This situation may arise when the assessment results from a jeopardy assessment made without a full audit; when the assessment appears arbitrary or is based on mere presumptions; when the taxpayer fails to receive the notice of assessment and to timely protest, making the validity of the assessment questionable; when the taxpayer did not file an appeal with the Court of Tax Appeals, but there is a strong indication of a lack of legal or factual basis; when the demand notice fails to meet the formal requirements under Section 228 of the Tax Code; when the assessment is based on the Best Evidence Obtainable Rule yet sufficient contrary evidence exists; or when the Waiver of Statute of Limitations is in question as to its validity or authenticity.
Revenue Memorandum Circular (RMC) 34-2014, however, clarified that assessments based on the Best Evidence Obtainable Rule do not automatically qualify as “doubtful assessments,” since they are presumed prima facie correct. The surrounding circumstances must be thoroughly evaluated to determine whether the assessment truly lacks a legal or factual basis.
Financial incapacity, on the other hand, can be demonstrated in the following instances: the corporation has ceased operations or has been dissolved; the latest Balance Sheet reflects a deficit impairing capital by at least 50 percent; the taxpayer suffers from a net worth deficit, with total liabilities exceeding total assets; the taxpayer is an individual compensation earner with limited income and no other leviable assets; or the taxpayer has been declared bankrupt or insolvent by a competent authority.
The Bureau of Internal Revenue (BIR), however, will not consider offers of compromise for taxpayers with tax credit certificates, pending refund claims, or potential agreements that could increase the taxpayer’s equity. Applicants must also waive bank secrecy rights under Republic Act 1405, authorizing the CIR to verify their financial incapacity.
Revenue Memorandum Order (RMO) 20-2007 directs the concerned offices to ensure prompt and efficient handling of applications for compromise settlement and abatement.
This RMO was further amended by RMO 004-16, mandating the faster handling of cases by the regional offices and the Large Taxpayers Service before they are transmitted to the Technical Working Group and eventually to the National Evaluation Board or the CIR for final approval.
Xela Leona D. Laqui is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com
The article was published at the More to Follow Column at The Manila Times on November 6,2025. Please see this link.
https://www.manilatimes.net/2025/11/06/business/top-business/taxpayers-remedy-of-compromise/2216915