I. Introduction

This memorandum provides an exhaustive analysis of the rules governing the compromise and abatement of tax liabilities under Philippine law. These are distinct, extraordinary administrative remedies that allow the Bureau of Internal Revenue (BIR) to settle tax claims for less than the full amount due or to cancel certain tax liabilities entirely. They are acts of liberality on the part of the state, not matters of right on the part of the taxpayer. This memo will delineate the legal bases, conditions, procedures, and limitations for each remedy, highlighting their critical differences and practical applications.

II. Legal Bases and Sources of Authority

The power to compromise or abate tax liabilities is statutory. The primary source is the National Internal Revenue Code (NIRC) of 1997, as amended, specifically Section 204 on Abatement and Section 6 of the Tax Code, in relation to Republic Act No. 1125, as amended by Republic Act No. 9282 (the law expanding the jurisdiction of the Court of Tax Appeals), which provides for Compromise. The implementing guidelines are detailed in Revenue Regulations (RR) No. 30-2020, which superseded RR No. 6-2013. These regulations are issued by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue (CIR), and carry the force and effect of law.

III. The Concept and Nature of Compromise

A compromise in tax law is a contract whereby the BIR and the taxpayer, for the purpose of avoiding litigation or ending one already commenced, agree to a mutual concession, resulting in the taxpayer paying an amount less than the total assessed tax liability. It is a contract of compromise governed by the Civil Code, but its validity is contingent upon compliance with strict administrative prerequisites. The authority to approve compromises is vested in specific officials with defined monetary limits. A compromise is generally available for: (a) delinquent accounts; (b) cases under administrative protest; (c) civil tax cases being tried before the regular courts; and (d) criminal tax cases, subject to specific rules.

IV. Grounds and Criteria for Compromise Settlement

Under RR No. 30-2020, a tax liability may be compromised on the following grounds:

The acceptance of a compromise offer is discretionary on the part of the BIR and is not appealable.

V. The Concept and Nature of Abatement

Abatement refers to the cancellation of the entire tax liability, including surcharges, interests, and penalties. It is an act of the BIR that extinguishes the tax obligation. Unlike a compromise, which involves a partial payment, abatement results in no payment by the taxpayer for the specific liability cancelled. It is granted in specific, limited circumstances where the assessment or penalty is deemed unjust or erroneous due to administrative error or other qualifying conditions.

VI. Grounds for Abatement of Tax Liability

Pursuant to Section 204 of the NIRC and RR No. 30-2020, the CIR may abate or cancel a tax liability, or any portion thereof, only on the following grounds:

Furthermore, RR No. 30-2020 explicitly provides for the abatement of penalties in the following instances:
a. The filing of the return/payment of the tax due is delayed for reasons beyond the taxpayer’s control.
b. The taxpayer who failed to file the return/pay the tax voluntarily submits a written disclosure of the violation before its discovery by the BIR and before a tax audit/notice of audit is issued.
c. The taxpayer who voluntarily pays the tax due on the return previously filed late, or pays the tax due per an amended return, before the service of a Final Assessment Notice (FAN) for the deficiency tax.
d. The estate tax on the estate of decedents has remained unpaid for at least five (5) years and the beneficiaries or heirs have no known property or insufficient property to settle the tax.
e. The assessment is brought about or resulted from the taxpayer’s reliance upon a ruling issued by the BIR.
f. Other analogous cases as determined by the CIR.

VII. Comparative Analysis: Compromise vs. Abatement

The following table delineates the fundamental distinctions between the two remedies.

VIII. Procedure and Application

For compromise, the taxpayer must file a formal written offer using BIR Form No. 0717 (Application for Compromise Settlement), accompanied by supporting documents (e.g., Audited Financial Statements, Asset and Liability Statement, legal memoranda). The offer is evaluated by the appropriate office (e.g., Revenue District Office, National Office) and endorsed to the relevant approving authority. For abatement, the taxpayer typically files a request or motion detailing the grounds, often initiated after receiving an assessment or penalty. The request is routed for review and recommendation before approval by the CIR. In both cases, the approval is not final until the taxpayer receives and accepts the official Acceptance Letter or Authority to Cancel Assessment.

IX. Limitations and Irrevocability

Certain tax liabilities cannot be compromised. These include: (1) Withholding tax cases, unless the taxpayer-payee includes the income in their own return and pays the tax due thereon; (2) Criminal tax violations already filed in court, except before the actual filing of the criminal information; (3) Cases where a Final and Executory judgment has been rendered by the courts; and (4) Cases involving fraud. It is crucial to note that an approved compromise or granted abatement is final and irrevocable. The BIR cannot later reassess or collect the compromised or abated amount, and the taxpayer cannot claim a refund of any amount paid under a compromise, except on the ground of fraud or mistake of fact.

X. Conclusion

The remedies of compromise and abatement provide the BIR with necessary flexibility in tax administration, allowing for the efficient resolution of cases where strict enforcement is impractical, inequitable, or economically inefficient. However, they are strictly construed against the taxpayer. Successfully availing of either remedy requires a clear demonstration that the taxpayer’s case falls squarely within the narrow grounds prescribed by law and regulations, supported by incontrovertible evidence. Legal counsel is highly recommended to navigate the procedural complexities and to strengthen the position for a favorable discretionary action by the BIR.