BIR Compromise Settlement Under Section 204: How to Reduce a Disputed Tax Assessment

A taxpayer disputing a BIR assessment can apply to settle it for less than the full amount through a compromise settlement under Section 204(A) of the National Internal Revenue Code (NIRC) — a discretionary mechanism separate from the fixed compromise penalty schedules that apply to registration, invoicing, and bookkeeping violations.

What is a Section 204(A) compromise settlement, and how is it different from a compromise penalty? #

The two “compromise” concepts sound alike but solve different problems: one is a fixed schedule of small penalties for procedural violations, while the other is a negotiated reduction of an actual deficiency tax assessment itself.

Section 204(A) of the NIRC gives the Commissioner of Internal Revenue the power to:

“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.”

This is distinct from the fixed compromise penalty schedule under Revenue Memorandum Order (RMO) No. 7-2015, which sets standard peso amounts for violations like late registration or missing invoices — this site’s separate compromise-penalty posts cover that schedule. A Section 204(A) compromise instead reduces the basic assessed tax itself in a disputed case, not a fixed procedural penalty.

What are the minimum compromise rates, and who has to approve them? #

The BIR doesn’t negotiate from zero — Revenue Regulations (RR) No. 30-2002 fixes minimum acceptable rates depending on which of the two statutory grounds applies, so an applicant knows the floor before making an offer.

A taxpayer may request a rate below these minimums with written justification, but any offer below the prescribed floor requires prior approval from the National Evaluation Board (NEB) — composed of the Commissioner and the four line Deputy Commissioners. NEB approval is also required whenever the basic tax involved exceeds ₱1,000,000, regardless of the rate offered. Applications are filed using BIR Form 2107, Application for Compromise Settlement.

What can’t be compromised under Section 204(A)? #

Not every disputed liability is eligible — RR No. 30-2002 carves out several categories where a compromise settlement isn’t available at all, generally because allowing one would undercut enforcement rather than resolve a genuine dispute:

• Withholding tax cases, unless a genuine legal doubt exists about the withholding agent’s duty to withhold in the first place
• Criminal tax fraud cases and other criminal tax violations already filed in court
• Delinquent accounts that already have a duly approved installment payment schedule in place
• Cases where the taxpayer has already accepted a final report of reinvestigation or reconsideration
• Cases with a final and executory court judgment, except those still eligible on doubtful-validity grounds

Cases that remain open to compromise include ordinary delinquent accounts, assessments still under protest at the BIR, civil tax cases in litigation, collection cases in court, and criminal violations that haven’t yet been filed in court and don’t involve fraud.

Summary #

Section 204(A) lets a taxpayer settle a genuinely disputed assessment — one with doubtful legal validity or one the taxpayer clearly can’t pay in full — for a reduced amount set at minimum rates of 40% or 10% of the basic tax under RR No. 30-2002, with National Evaluation Board sign-off required for larger cases or below-minimum offers. It’s a materially different remedy from the fixed compromise penalty schedule this site covers elsewhere. For that fixed-penalty schedule, see RMO No. 7-2015 Compromise Penalties Explained: Schedule, Consent, and Separate Payment, and for the assessment process that leads up to a disputed liability in the first place, see BIR PAN vs FAN: The Tax Assessment Due-Process Sequence and Your Response Deadlines.