Compromise Penalty in Philippine Tax
Updated June 13, 2026
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Definition
A compromise penalty is the amount the BIR suggests a taxpayer pay to settle the criminal liability for a violation of the National Internal Revenue Code that does not involve fraud. The amounts follow the Revised Schedule of Compromise Penalties in Annex A of Revenue Memorandum Order No. 7-2015, and paying is voluntary: if the taxpayer refuses, the BIR may refer the violation for criminal action.
Many Tax Code violations, such as late filing, failure to issue invoices or failure to keep books, are crimes as well as grounds for civil penalties. Instead of filing a criminal case, the BIR may offer to settle the criminal liability through a compromise penalty. RMO 7-2015 directs revenue officers to use the amounts in its Annex A schedule for all criminal violations not involving fraud. The compromise penalty is not a discount on the surcharge or interest. Those are civil penalties under Sections 248 and 249 of the Tax Code and are assessed in full: 25% surcharge (50% for willful neglect or fraud) and 12% annual interest, or 10% and 6% for micro and small taxpayers under RA 11976. The compromise penalty appears in a separate assessment notice or demand letter, as the amount suggested in lieu of criminal prosecution. Because it only settles criminal liability, the BIR cannot force a taxpayer to pay it (RMO 7-2015, Part III.5). The Tax Code allows all criminal violations to be compromised except those already filed in court and those involving fraud (NIRC §204(B)). Micro and small taxpayers pay 50% of the scheduled compromise for violations of Sections 113, 237 and 238 (RR 6-2024).
Detailed explanation
What is a Compromise Penalty?
A compromise penalty is the amount the Bureau of Internal Revenue (BIR) suggests a taxpayer pay to settle the criminal liability for a violation of the National Internal Revenue Code (NIRC) that does not involve fraud. Under Revenue Memorandum Order No. 7-2015 (RMO 7-2015), revenue officers must use the amounts in its Annex A, the Revised Schedule of Compromise Penalties.
The compromise penalty is distinct from the civil penalties. The 25% surcharge (50% for fraud) under NIRC §248 and the 12% annual interest under NIRC §249 are assessed in full; micro and small taxpayers pay 10% and 6% instead (RA 11976). The compromise penalty is a separate, suggested amount in lieu of prosecution.
Legal Basis and Authority
NIRC §204(B) provides that all criminal violations may be compromised except those already filed in court and those involving fraud. RMO 7-2015 sets the schedule and the procedure.
Key legal references include:
- NIRC §204: Commissioner's power to compromise, abate and refund taxes, and to compromise criminal violations
- RMO 7-2015: The Revised Consolidated Schedule of Compromise Penalties for Violations of the NIRC
- NIRC §248 and §249: Surcharge (25%, or 50% for fraud) and interest (12% per annum)
Which Violations Can Be Compromised
RMO 7-2015 separates two groups:
Compromisable Violations
Criminal violations not involving fraud, such as late filing, failure to issue invoices or failure to keep books, are settled at the amounts in the Annex A schedule.
Non-Compromisable Violations
Violations involving fraud are referred to the division with jurisdiction for criminal action (RMO 7-2015, Part III.2), and cases already filed in court cannot be compromised (NIRC §204(B)).
How the Amount Is Set
The compromise penalty follows the schedule, not a negotiated percentage:
- Standard rule: The amount must match the Annex A schedule (Part III.3)
- Different amounts: A higher amount may be accepted; a lower one needs approval from the Commissioner, a Deputy or Assistant Commissioner, or the Regional Director (Part III.6)
- Micro and small taxpayers: 50% of the scheduled amount for violations of Sections 113, 237 and 238 (RR 6-2024)
The amount is listed in a separate assessment notice or demand letter (Part III.4).
Paying or Declining
Because it settles only criminal liability, the compromise penalty:
- Is suggested to the taxpayer, not imposed
- Cannot be collected like a tax if the taxpayer declines
- Leads to a referral for criminal action if the taxpayer refuses to pay (Part III.5)
- Does not reduce the basic tax, surcharge or interest
- Is not available for fraud cases
Paid compromise penalties are collected and accounted for as internal revenue collections.
Procedure
The usual sequence is:
- Assessment: The BIR issues the assessment for basic tax, surcharge and interest.
- Separate notice: The compromise penalty appears in a separate assessment notice or demand letter.
- Review: The taxpayer checks that the amount matches the schedule and any reduction that applies.
- Decision: The taxpayer pays the compromise or declines it.
- Payment: The tax, surcharge and interest are paid in full, or protested under NIRC §228 if disputed.
Compromise Penalty vs. Tax Liability Compromise
The two are different remedies:
- Compromise penalty: Settles criminal liability for a non-fraud violation; the tax, surcharge and interest are unchanged.
- Tax liability compromise: Reduces the basic tax under NIRC §204(A), allowed for reasonable doubt as to validity (minimum 40% of the basic tax) or clear inability to pay (minimum 10%).
A tax compromise for basic tax over ₱1,000,000, or below the minimum rates, needs approval of the Evaluation Board.
Impact on Tax Records and Compliance
Paying a compromise penalty settles the criminal side of the violation but does not erase it from the taxpayer's history with the BIR. Filing and paying on time going forward is what avoids new penalties.
Why it matters
Most taxpayers meet the compromise penalty when they file or pay late: the BIR adds it next to the surcharge and interest. Knowing that it settles a possible criminal case, and is separate from the civil penalties, helps a taxpayer read an assessment correctly. Micro and small taxpayers should check that the 50% reduction for invoicing and bookkeeping violations under RR 6-2024, and their lower 10% surcharge and 6% interest, have been applied.
How it works
Identify the Violation
Review the assessment notice or demand letter. The basic tax, surcharge and interest appear in the assessment, while the compromise penalty for the related criminal violation appears separately as an amount suggested in lieu of prosecution (RMO 7-2015, Part III.4).
Check the Schedule
Revenue officers must use the amount in the Annex A schedule of RMO 7-2015 for the specific violation. An amount different from the schedule needs approval from the Commissioner, a Deputy Commissioner or, in proper cases, the Regional Director (RMO 7-2015, Part III.3).
Decide Whether to Pay
Paying the compromise settles the criminal liability for that violation. If the taxpayer refuses, the BIR cannot collect it as a tax, but may refer the violation for criminal action (RMO 7-2015, Part III.5). Fraud cases are not compromised; they are referred for prosecution (Part III.2).
Pay the Civil Liabilities Separately
The basic tax, the surcharge under Section 248 and the interest under Section 249 remain due whether or not the compromise is paid. If the assessment itself is wrong, the remedy is a protest under Section 228, not a compromise penalty.
Examples
Self-Employed Individual with Late Filing
Juan dela Cruz, a medium taxpayer, filed his 2023 annual income tax return 45 days late with ₱60,000 tax due. He owes the ₱60,000, a 25% surcharge of ₱15,000 (NIRC §248), and interest of ₱60,000 × 12% × 45/365 = ₱887.67 (NIRC §249). The BIR may also suggest a compromise penalty from the RMO 7-2015 schedule in place of prosecution for late filing; paying it settles the criminal side but does not reduce the surcharge or interest.
Self-Employed Professional with Deficiency Penalty
Maria Santos, a freelance consultant with gross receipts below ₱3,000,000, is a micro taxpayer. The BIR's audit of her 2022 return found a ₱50,000 deficiency. As a micro taxpayer she pays a 10% surcharge (₱5,000) instead of 25%, and interest at 6% a year instead of 12% (RA 11976). Any compromise penalty for the related violation is a separate, suggested amount in lieu of prosecution (NIRC §248, §249; RMO 7-2015).
Small Business with Repeated Late Payments
Anna Reyes, a small taxpayer running a retail store, is cited for failing to issue invoices, a violation of Section 113. Under RR 6-2024, micro and small taxpayers pay 50% of the scheduled compromise penalty for violations of Sections 113, 237 and 238, so whatever amount Annex A of RMO 7-2015 sets for the violation, she is asked to pay half.
Corporation with Withholding Tax Failure
TechStart Corp, a medium taxpayer, remitted ₱35,000 of tax withheld from its Q2 2024 payroll two months late. It pays the ₱35,000, a 25% surcharge of ₱8,750, and interest at 12% a year from the due date until payment. The BIR may also suggest a compromise penalty for the late remittance, which the company may pay to avoid a criminal referral (NIRC §248, §249; RMO 7-2015).
Denial Due to Fraud Indicators
Roberto Tan underdeclared his business income and the BIR found deliberately falsified records. Fraud cases are outside the compromise schedule and are referred for criminal action (RMO 7-2015, Part III.2), and the Tax Code does not allow compromise of criminal violations involving fraud (NIRC §204(B)). He also faces the 50% fraud surcharge under NIRC §248(B) plus interest.
Common misconceptions
- Myth: A compromise penalty erases the violation from my tax record and improves my compliance rating.
- Fact: Paying a compromise settles the criminal liability for that violation, but the violation is still on record with the BIR. Good compliance going forward is what improves standing.
- Myth: A compromise penalty is a percentage discount on my surcharge and interest.
- Fact: The surcharge (NIRC §248) and interest (NIRC §249) are civil penalties assessed in full. The compromise penalty is a separate amount from the RMO 7-2015 schedule, paid in place of criminal prosecution. A reduction of the basic tax itself is a different remedy under NIRC §204(A).
- Myth: All penalties, including fraud penalties, are compromisable.
- Fact: Criminal violations involving fraud, and those already filed in court, cannot be compromised (NIRC §204(B)). RMO 7-2015 refers fraud cases for criminal action.
- Myth: Filing a compromise request automatically stops interest from accruing on the penalty.
- Fact: Interest continues to accrue on unpaid tax until full payment is made, whatever happens to the compromise penalty (NIRC §249). Prompt payment of the tax minimizes additional interest charges.
- Myth: The BIR can force me to pay the compromise penalty.
- Fact: A compromise penalty is only an amount suggested in settlement of criminal liability and may not be imposed or exacted on the taxpayer; if the taxpayer refuses, the BIR may refer the violation for criminal action (RMO 7-2015, Part III.5).
Questions people ask
What is the difference between a compromise penalty and a compromise of tax liability?
A compromise penalty settles the criminal liability for a non-fraud violation, in an amount set by the RMO 7-2015 schedule; the tax, surcharge and interest stay unchanged. A compromise of tax liability under NIRC §204(A) reduces the basic tax itself and is allowed only where there is reasonable doubt about the validity of the assessment (minimum 40% of the basic tax) or a clear inability to pay (minimum 10%).
What percentage reduction can I expect for my compromise penalty request?
There is no percentage reduction. Revenue officers must apply the amounts in the RMO 7-2015 schedule, and a different amount needs approval from the Commissioner, a Deputy Commissioner or, in proper cases, the Regional Director. The one fixed reduction is for micro and small taxpayers, who pay 50% of the scheduled amount for violations of Sections 113, 237 and 238 (RR 6-2024).
Can I compromise a penalty for fraud or willful tax evasion?
No. The Tax Code allows criminal violations to be compromised except those already filed in court and those involving fraud (NIRC §204(B)). RMO 7-2015 refers fraud cases for criminal action.
Do I have to pay the full tax liability to qualify for a penalty compromise?
The compromise penalty and the tax are separate. The basic tax, surcharge and interest are due under the assessment regardless of the compromise, and interest keeps running on unpaid tax until full payment (NIRC §249). Paying the compromise only settles the criminal side of the violation.
How long does it take for the BIR to decide on my compromise request?
There is usually no separate request. The compromise penalty is listed in the BIR's assessment notice or demand letter, or computed when a late return is filed, and the taxpayer decides whether to pay it.
If my compromise request is denied, can I appeal the decision?
Since a compromise penalty is only a suggested amount, a taxpayer who disagrees can decline to pay it; the BIR may then refer the violation for criminal action (RMO 7-2015, Part III.5). If the dispute is about the assessment itself, the remedy is a written protest within 30 days of receiving the Final Assessment Notice, and then an appeal to the Court of Tax Appeals (NIRC §228).
Will accepting a compromise penalty affect my future audit risk or compliance standing?
Paying the compromise settles the criminal liability for that violation, so the BIR will not prosecute it. It does not cancel the civil liabilities, and the violation remains part of the taxpayer's history with the BIR. Timely filing and payment going forward is what avoids new penalties.
Can I request a compromise penalty before the BIR issues a formal assessment?
A taxpayer who discovers a missed return can file and pay before the BIR acts. The return still carries the surcharge and interest, and the compromise penalty for late filing is usually computed with it. The Commissioner may also abate a tax liability that appears unjustly or excessively assessed (NIRC §204(B)).
In practice
- Compromise penalties commonly appear when returns are filed late, invoices are not issued, or books are not kept, alongside the surcharge and interest on any tax due.
- Revenue officers must follow the RMO 7-2015 schedule; amounts lower than the schedule need approval from the Commissioner, a Deputy Commissioner, an Assistant Commissioner or the Regional Director (Part III.6).
- The compromise penalty is shown on a separate assessment notice or demand letter, not in the notice for basic tax, surcharge and interest (RMO 7-2015, Part III.4).
- Micro and small taxpayers should check that the 50% reduction for Section 113, 237 and 238 violations under RR 6-2024 has been applied.
- Taxpayers who dispute the assessment itself file a protest under NIRC §228; the compromise penalty schedule does not change the tax, surcharge or interest.
Next steps
Learn more
Penalty Calculator
Estimate surcharge and interest on late or deficient tax
Late Filing Penalty Guide
How surcharge, interest and compromise penalties add up on a late return
RMO 7-2015 Full Text
The BIR order that sets the schedule of compromise penalties
Tax Amnesty Programs
How past amnesty laws settled tax liabilities and penalties
Financial Hardship Documentation
Documents used to show financial incapacity in a compromise of tax liability under NIRC §204(A)
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Sources & References (2)
Primary sources and the laws, regulations, and official issuances this page relies on. Links open the recorded source documents or references.
- LawPhil Project (Arellano Law Foundation). “NIRC §204(A) (authority to compromise): full text.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 204(A). Source checked .
- Bureau of Internal Revenue. “BIR RMO 7-2015 (revised schedule of compromise penalties).” bir.gov.ph. Bureau of Internal Revenue, RMO 7-2015. Source checked .