There are two distinct ways past or disputed tax liabilities may be settled for less than the full amount or with immunity: a tax amnesty and a compromise. A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of a tax law; it partakes of an absolute waiver by the government of its right to collect what is due and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty is granted by a law passed by Congress (for example, past estate tax amnesty and general tax amnesty laws), which sets the coverage, the period to avail, the amnesty tax to be paid (often a small percentage), and the conditions; a taxpayer who validly avails of the amnesty and complies with its requirements is generally immune from the payment of the covered taxes, and from the civil, criminal, and administrative penalties, for the covered years. A compromise, by contrast, is a power the Tax Code grants to the Commissioner of Internal Revenue to settle a tax liability for less than the full amount, on specified grounds. The BIR may compromise a tax liability on two grounds: doubtful validity of the assessment (a reasonable doubt as to the validity of the claim against the taxpayer exists), or financial incapacity of the taxpayer (the taxpayer's financial position demonstrates a clear inability to pay). The Tax Code sets minimum compromise rates (a percentage of the basic tax) for each ground, and compromises above certain amounts or below the minimum rates require the approval of the National Evaluation Board. A compromise is a mutual agreement to settle, and once approved and the compromise amount paid, it settles the liability. So a tax amnesty is a legislative grant of immunity for past liabilities upon payment of an amnesty tax, while a compromise is the BIR's settlement of a particular tax liability for less than the full amount on the grounds of doubtful validity or financial incapacity.
Two Ways to Settle for Less
Past or disputed tax liabilities may be settled through a tax amnesty or a compromise — two distinct mechanisms.
Tax Amnesty
A tax amnesty is a general pardon by the State, granted by a law from Congress, letting taxpayers settle covered past liabilities by paying a small amnesty tax and gaining immunity from the covered taxes and from civil, criminal, and administrative penalties for the covered years.
Compromise by the BIR
A compromise is the Commissioner's power to settle a tax liability for less than the full amount, on two grounds: doubtful validity of the assessment, or the taxpayer's financial incapacity. The Tax Code sets minimum compromise rates, and larger compromises need National Evaluation Board approval.
Practical Takeaways
- Tax amnesty = legislative immunity for past liabilities via an amnesty tax;
- Compromise = BIR settlement for less, on doubtful validity or financial incapacity;
- Both settle liabilities for less than the full amount.
Frequently Asked Questions
What is a tax amnesty? A general pardon or intentional overlooking by the State of its authority to impose penalties on those guilty of tax violations, granted by a law from Congress, giving taxpayers immunity for covered past liabilities upon payment of an amnesty tax and compliance with conditions.
What is a tax compromise? The power of the Commissioner of Internal Revenue to settle a tax liability for less than the full amount, on the grounds of doubtful validity of the assessment or the financial incapacity of the taxpayer.
On what grounds can the BIR compromise a tax liability? On two grounds: a reasonable doubt as to the validity of the assessment (doubtful validity), or a clear inability of the taxpayer to pay (financial incapacity), subject to the minimum compromise rates the Tax Code sets.
How is a tax amnesty different from a compromise? A tax amnesty is a legislative grant of immunity for past liabilities upon payment of an amnesty tax. A compromise is the BIR's administrative settlement of a particular tax liability for less than the full amount on specific grounds.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
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