Tax Articles

The BIR Must Compromise

By Atty. Irwin C. Nidea Jr.

Do you want to finally settle your tax liability and do away with the stress of dealing with the revenue officers of the Bureau of Internal Revenue (BIR)? The easiest way is for you to pay your alleged deficiency tax in full as computed by the BIR. But there is a cheaper way. You can file for a compromise and just pay at most 40% or 10% of the basic tax that is being assessed.

But since it is a compromise, there must be an agreement by both parties where mutual concessions are reached to settle conflicting demands. In a compromise, it is important that both parties agree and sign the compromise agreement. But can the Commissioner of Internal Revenue (CIR) choose not to sign an offer of compromise based on whim or caprice? In other words, is the CIR’s discretion to accept or reject a taxpayer’s offer of compromise absolute and is not subject of judicial review?

Apparently, it is not. There are instances when the CIR has no choice but to accept an offer of compromise. The CIR's authority to compromise taxes emanates from the Tax Code. It provides that the CIR may - (A) Compromise the payment of any internal revenue tax, when: (1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and for other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax.

According to the Supreme Court and in a recent CTA case, the discretionary authority to compromise given to the CIR is “not absolute, uncontrolled and unrestrained”. The CIR’s authority to compromise, can only be exercised within the parameters set by the law, and in case he abuses his discretion, the CTA may correct such abuse if the matter is appealed to them.

Clearly, the CTA has jurisdiction to review by appeal the decisions of the CIR over compromise applications as it is a matter arising under the Tax Code. What actions of the CIR can the CTA review?

As mentioned above, a taxpayer may invoke doubtful validity and just opt to pay at most 40% of the basic tax assessed. If the CIR rejects this offer, the CTA will determine whether the rejection is proper. It will examine the records of the case to see whether reasonable doubt exists as to the validity of the tax assessment that would warrant the compromise payment of tax liabilities. If it finds that there is doubtful validity, the CTA will overturn the CIR’s denial of the offer of compromise and rule that the CIR has abused its discretion.

What are the examples of doubtful validity? The courts in some cases have demonstrated that a tax assessment is doubtful if the CIR has violated the taxpayer’s right to due process. The absence of a Letter of Authority of the revenue officers who conducted the assessment is one example. Others are when a Preliminary Assessment Notice (PAN) was not issued or received by the taxpayer. Final Assessment Notice was prematurely issued, or it does not state a valid demand to pay. Also, a tax assessment becomes doubtful when a tax assessment has prescribed, i.e., it was issued beyond the 3-year period set by law. In all these cases, the CIR has no choice but to accept the offer of compromise. Please note that these are just examples. There are many other instances when you can consider the validity of a tax assessment doubtful.

In these pronouncements by the SC and the CTA, is the very essence of the word compromise being compromised? In an ordinary compromise agreement, either party can choose not to proceed for any reason, however flimsy it may be. But in a tax compromise, the courts find it prudent to clip the power of the CIR in negotiating a compromise agreement, maybe for good reason. Any government officer must not be given an absolute power. He must perform his functions within the bounds of the law. In this case, the CIR must accept or deny an offer of compromise if an assessment is doubtful and the definition of doubtful validity of an assessment has been defined in many cases by the courts.

What if the taxpayer can show that he is financially incapable to pay the tax that is being assessed? The Tax Code provides that it can apply for compromise and just pay 10% of the basic tax. It means that the government will lose the remaining 90% of the basic tax plus interest and the CIR cannot do anything about it.

So, if you think that the tax assessment of the BIR against you is doubtful or that you can prove financial incapacity, buy your peace of mind, and apply for a compromise. The BIR has no choice but to accept it.