Tax Penalties, Interest and Surcharges

A civil penalty is a form of financial penalty imposed by a government agency as restitution for doing something wrong. The wrongdoing is typically defined by a codification of legislation and regulations. The civil fine is not considered to be a criminal punishment, since its primary purpose is to compensate the state for harm done to it, rather than to punish the wrongful act.

The BIR issued Revenue Regulations 12-1999 implementing the provisions of NIRC of 1997 governing the rules on assessment of national internal revenue taxes; tax penalties and interest; and the extrajudicial settlement of a taxpayer’s criminal violation of the Code through payment of a suggested compromise penalty. The government can impose tax penalties and interest in addition to basic taxes to ensure tax collection once a taxpayer neglects to pay his taxes.

A surcharge is a civil penalty imposed by law as addition to the main tax required to be paid due to delinquency or misrepresentation of taxes. The term “delinquency” means failure on the part of the taxpayer to pay the tax due on the date fixed by law indicated in the assessment notice or letter of demand. On the other hand, “misrepresentation” may result from fraudulent returns reported to the BIR by the taxpayer.

Tax Penalties / Surcharges

One of the amendments introduced by the Tax Reform Act of 1997 relates to the imposition of the 25 percent (25%) surcharge under Section 248. Tax surcharges are classified as simple neglect and willful neglect.

Simple Neglect- twenty five percent (25%) surcharge

A simple neglect surcharge of 25% in addition to the assessed tax payable shall be imposed if the taxpayer:

  1. Fails to file any return and pay the tax due;
  2. Files income tax returns with an internal revenue officer other than with whom the return is required to be filed;
  3. Fails to pay the deficiency tax within the time prescribed for its payment in the notice assessment; or
  4. Fails to pay the full or part of the amount of tax shown on any return required to be filed, or the full amount of tax due for which no return is required to be filed on or before the prescribed date for its payment.

Willful Neglect- 50% of the tax or of the deficiency tax.

A willful neglect surcharge of fifty percent in addition to tax assessed to be paid shall be imposed when the taxpayer:

  1. Intentionally neglects to file the return with the period prescribed by the Tax Code or by rules and regulations; or
  2. Presents false or fraudulent return to the BIR.

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Interest on Unpaid Taxes

In general, interest amounting to twenty percent (20%) per annum on any unpaid amount of tax shall be assessed and collected. Computation of the interest shall start after the deadline of the filing of the said tax until the amount is fully paid.    

Deficiency Interest. – Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

Delinquency Interest. – In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax.

Interest on Extended Payment.If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate herein above prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid.

Compromise Penalties

The Bureau of Internal Revenue (BIR) has been continuously introducing new measures to reduce and hopefully eradicate tax evasion. One of the more recent measures issued to realize this objective and ensure uniform application of the penalties is Revenue Memorandum Order (RMO) No. 19-2007 which implements changes on compromise penalties that a taxpayer may pay in cases of criminal violations under the National Internal Revenue Code (NIRC).

A Compromise Penalty is a certain amount of money which the taxpayer pays to compromise a tax violation.  This is paid to avoid criminal prosecution. However, it must be emphasized that the essence of compromise penalty is mutuality and its unilateral imposition is without legal basis. As such, compromise penalties cannot be imposed or collected without the agreement and conformity of the taxpayer.  In the event that a taxpayer refuses to pay the suggested compromise penalty, a criminal action may be filed against him for tax violation.  A compromise penalty generally leads to expediting the settlement of tax violations and for peace of mind. In most cases, taxpayers agree to pay the suggested compromise penalties especially in assessment cases.

Some of the violations which can now be subject of compromise penalty under RMO 19-2007 are:

  1. Failure to register with the BIR;
  2. Failure to pay and display the annual registration fee;
  3. no certificate of registration displayed, failure to display the poster “ Ask for BIR Receipt” or “Notice to the Public to demand receipts/invoice”;
  4. Failure to attach or paste authorized sticker/DECAL authorizing the use of CRM/POS/CAS;
  5. Failure to present application form (BIR Form 1900 and 1905) to use registered sales books/permit to use loose leaf sales books; and
  6. Failure to refund excess taxes withheld on compensation.

On other violations which were already subject of compromise penalty, the change is only on the amount of compromise which has increased significantly from the original rates. Among the revised rates is the compromise penalty in case of failure to file and/or pay any internal revenue tax at the required time if the unpaid tax exceeds P5 Million, it increased from P25,000 to P50,000.  In certain instances, specific amounts are now provided where previously, the same may be compromised only at the discretion of the Commissioner and on a case to case basis.

Although the tax authorities has prescribed a schedule of compromise penalties for different violations of NIRC, these are merely suggested amounts in lieu of criminal prosecution that may not be imposed upon the taxpayer without his consent. Accordingly, a taxpayer may offer a compromise penalty lower than the prescribed amount but which may only be accepted under the said RMO upon approval by the Commissioner of Internal Revenue or his duly authorized representative. On the other hand,the suggested schedule of compromise penalties shall not prevent BIR officers from accepting a compromise amount higher than what is prescribed.

The expansion on the coverage of compromise penalty gives the taxpayer more room to settle right away the criminal liability for tax violations. Though payment of the compromise penalty involves a cash outlay, availment of this facility should be encouraged among taxpayers. Any program which provides relief on the taxpayer’s burden should be seriously considered.

Criminal Penalties

In addition to being liable for the payment of the tax, a person convicted of tax evasion (because of non-payment of compromise penalty) shall be subject to the following penalties:

  1. If the offender is not a Filipino Citizen, he shall be deported immediately after serving the sentence without further proceedings of deportation;
  2. If the offender is a public or employee, the maximum penalty prescribed for the offense shall be imposed. Furthermore, he shall be dismissed from the public service and perpetually disqualified from holding any public officer.
  3. If the offender is a Certified Public Accountant (CPA), his CPA license shall be revoked immediately or cancelled upon conviction; and
  4. In the case of associations, partnerships or corporations, the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officer in-charge, and employees responsible for the violation.

Amount of Penalty

The fines to be imposed for any violation of the provision of this Code shall not be lower than the fines imposed herein or twice the amount of taxes, interests and surcharges due from the taxpayer whichever is higher. In addition to other penalties provided by law, a convicted tax evader shall be punished by a fine of not less than P30,000 but not more than P100,000 and an imprisonment of not less than 2 years but not more than 4 years.

Any person who willfully fails to comply with the required records, accurate information remit or refund excess taxes withheld, upon conviction, shall be punished by a fine of not less than P10,000 and be imprisoned for not less than one year but not more than 10 years.