Penalties for Late Filing of Tax Returns

How to compute the penalties for late filing of income tax return in Philippines? Maybe you’re one of those taxpayers who are searching the Internet right now for any clue and answer to that question. The deadline for filing and payment of the annual income tax is April 15. But that day has passed by and you haven’t yet filed your income tax return. Now you want to know how much are the extra charges you need to pay for your failure to file your return on time. Penalties for late filing consist of interest, surcharge and compromise. The following are the steps and guidelines on computing penalties for late filing of tax returns with the BIR.

Computation of penalties on late filing of tax return

Let’s assume that due to economic crisis and insufficiency of available cash for payment, Mr. Pinoy did not make it to the due date in filing and payment of his annual income tax return or BIR form 1701 for the taxable year 2010 last April 15, 2011. His income tax due and payable is Php 10,000. Now he wants to finally file and pay his income tax on April 20, 2011. How much is the total penalty he needs to pay in addition to his income tax payable?

1. Firstly, take note that the total penalties equal the sum of interest, surcharge and compromise (please see image below). We will compute them one by one.

BIR tax penalties

2. In computing interest, the rate of twenty percent (20%) per annum is used, or such higher rate as may be prescribed by rules and regulations, on any unpaid amount of tax, from the date prescribed for the payment until it is fully paid.

In the example above, the interest is computed as follows:

Interest = Tax payable x 20% x no. of days late / 360
Interest = P10,000 x 20% x 5/360
Interest = P 27.78

Note: We use 360 days a year for conservative approach.

3.  A twenty five percent 25% surcharge is imposed on a taxpayer as an additional penalty for failure to file any return and pay the amount of tax on or before the due date.

The computation of Mr Pinoy’s surcharge is:

Surcharge = Tax payable x 25%
Surcharge = P10,000 x 25%
Surcharge = P 2,500

Note: A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, for each of the following violations:

a) Willful neglect to file the return within the period prescribed by the Code or
by rules and regulations; or
b) In case a false or fraudulent return is willfully made.

4. When it comes to the computation of compromise penalty, we need to refer to the Revenue Memorandum Order No. 19-2007 issued on August 10, 2007, which prescribes the Consolidated Revised Schedule of Compromise Penalties for violations of the National Internal Revenue Code (NIRC). For the purpose of computing the compromise penalty in our example, Mr. Pinoy’s compromise penalty is determined as follows:

Compromise penalty for non-payment of tax

Thus, compromise penalty is equal to P 2,000

5. Finally, the total penalties that should be paid by Mr. Pinoy is equal to:

Total penalties = interest + surcharge + compromise penalty
Total penalties = P 27.78 + 2,500 + 2,000
Total penalties = P 4,527.78

Therefore, the total amount of payable to be paid by Mr Pinoy, if he will pay his late income tax return on April 20, 2011 is P 14,527.78 (total income tax payable [P10,000]+ total penalties [4,527.78])

Penalty for non-filing of tax return

What if there is no tax payable to be paid in your income tax return, and you have not filed it with the BIR on the due date? How much is the penalty to be paid?

If there is no tax due in your return or you are exempted but required to file return but you have not filed it on the time required by the law, there is no interest and surcharge to be computed. However, a compromise penalty, based on your gross annual sales, earnings or receipts should be paid as determined below:

Compromise penalty for non-filing of tax return

This means that if your gross annual revenue amounts to P200,000, and you failed to file your income tax return, although you have no income tax payable or even though you are exempt with NIL income tax due (but required to file), your compromise penalty will be P3,000.

You may wonder why the compromise penalty for non-filing of tax returns without tax payable may become higher than the the compromise penalty imposed on non-payment of tax returns. The first is based on gross sales/revenues/receipts, while the latter is based only on tax payable. In my opinion, it is fundamentally easy to prepare and file a tax return without payment than to prepare and file a tax return with tax payable. Hence, failure to accomplish an easier task would be a bigger sin, than failure to accomplish a harder task.

Source: Revenue Memorandum Order No. 19-2007/Revised schedule of Compromise penalty

Disclaimer: This post is for informational use only and doesn’t warrant a formal professional advice. Although, we have based the article on the most reliable resources available, we do not guarantee that the article is free from error, especially from typo-error. If you encounter any error, please inform us immediately for immediate correction. Moreover, new and subsequent laws, rulings and BIR  issuances may render this post obsolete and inaccurate in whole or in part. We encourage our concerned readers to personally visit and inquire with the Bureau of Internal Revenue (BIR) in your area.

Victorino Abrugar is a retired CPA practitioner, a blogger, speaker, and an entrepreneur. He's the CEO of Optixor, Inc., a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.