How the Penalties are Computed for Late Filing of Tax Returns?

The date is May 20, 2019 and you are very busy in the recording and compiling of the transactions of the day to day business activities of your small barber shop. You have just finished the three-year accounting technology course, and you have enthusiastically decided to put up your own business. After some months of research and inquiries, you have finally found a niche in the market. Voila, it's a barber shop!

It was on the fifth day of January this year when you decided to register your small barber shop business with the local business bureau. And on the same day, you had also registered your business with the Bureau of Internal Revenue. You had finished the business orientation and familiarization of the registration, basic tax  filing and tax payment on a Wednesday lecture with the BIR.

The business is running smoothly. Jimmy has been your regular customer . He is almost present in your barber shop every other week for a new style of his haircut.

While compiling your official receipts of the day, you notice a small notepad in your drawer. Suddenly, in a blink of an eye, you remember it was your notes during a lecture with the BIR. So, you started scanning the contents of your notes. While scanning your notes, you found out that as a registrant of the BIR, you are required to file your tax returns and remit the tax due on a specific tax deadline. In your notes, you determine that you are required to file quarterly and annual income tax returns, quarterly percentage tax returns and an annual registration fee. You verified it with your Certificate of Registration (COR) that is posted on your desk wall. And indeed, you are required to file the said returns.

You noticed that the Percentage Tax for the first quarter is due on April 25, and the Income Tax for the first quarter is due on May 15. And it's now May 20! Oh my.....it's already late, what will you do!

You screamed........... No, not really! Just kidding.

Late filing of tax returns is very common especially to new registrants. What happen is, when you failed to file any required returns with the BIR, this will be recorded in the Bureau's database and will remain open until it is settled or resolved. This is called a "stop filer case" or an open case.

Resolving a stop filer case often leads to late filing of returns and subsequently paying the tax due thereon with penalties.

In this article, we are going to discuss about the composition of the penalties for late filing of returns.

Basically, there are three items that are to be imposed upon late filing of returns in addition to the basic tax due.

A. Surcharge

Section 248 of the National Internal Revenue Code (NIRC) states that:

There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:

(1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or

(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or

(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.

For late filing of returns, there shall be imposed a 25% surcharge in addition to the basic tax due.

B. Interest

Section 249 of the NIRC states that:

In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.

 However, due to the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the rate of interest was lowered to the legal interest rate.

Section 2 of the Revenue Regulation No. 21-2018 dated September 14, 2018 states that:

RATE OF INTEREST. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of double the effective legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas (BSP) from the date prescribed for payment until the amount is fully paid.

The rate of interest per BSP Memorandum No. 799 series of 2013 for loans or forbearance of any money in the absence of an express stipulation is six percent (6%). Thus, the rate of legal interest imposable under Section 249 of the Tax Code, as amended, shall be twelve percent (12%). A Circular shall be issued by the Commissioner in case BSP prescribes new rate of interest.

So, for late filing of returns, there shall be a 12% interest in addition to the basic tax due.

C. Compromise

Section 255 of the NIRC states that:

Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. - Any person required under this Code or by rules and regulations promulgated thereunder to pay any tax make a return, keep any record, or supply correct the accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Ten Thousand Pesos (P 10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequently withdraws the same return or statement after securing the official receiving seal or stamp of receipt of internal revenue office wherein the same was actually filed shall, upon conviction therefor, be punished by a fine of not less than Ten Thousand Pesos (P 10,000) but not more than Twenty Thousand Pesos (P 20,000) and suffer imprisonment of not less than one (1) year but not more than three (3) years.

In addition, the Revised Consolidated Schedule of Compromise Penalties for Violations of the National Internal Revenue Code (NIRC) was provided by the Annex A of Revenue Memorandum Order (RMO) No. 7-2015.

For  late filing of returns, the following  is the schedule for the compromise penalty per Annex A of RMO No. 7-2015:

The above items of penalties are added to the basic tax due to come up with the total tax payable.

Let's have an illustration to make things clear.

It is May 20. And you found out that you failed to file your Percentage Tax return for the first quarter on the due date which is April 25. Your taxable sales for the first quarter is P10,000.00

Analysis:
What to file? Percentage Tax return for the first quarter.
What is the due date? April 25
How much is the Percentage Tax rate? 3%
How many days that lapsed already? 25 days from April 25 to May 20

Solution:

1.) Compute the Basic Tax Due:
Percentage Tax due = P10,000.00 x 3% = P300.00

2.) Compute the Surcharge:
Surcharge = P300.00 x 25% = P75.00

3.) Compute the Interest (due date is April 25):
Interest = P300.00 x 12% x (25/365) = P2.47

4.) Compute the Compromise (based on the table above):
Compromise = P1,000.00

5.) Compute the Total Penalties:
Total Penalties = P75.00 + 2.47 + 1,000.00 = P1,077.47

6.) Compute the Total Tax Payable:
Total Tax Payable = Basic Tax Due + Total Penalties = P300.00 + 1,077.47 = P1,377.47

Based on the information above, you are obliged to report a return and to pay the tax due thereon amounting to P1,377.47 today.

So, what to do next?

You are surely now ready to file a percentage tax return. There are three ways to file a return. In this case, we will consider a manual filing of return. So, you try get a copy of a BIR Form 2551Q. Fill it up with your registration details. Fill up the amount due. Sign it (with the taxpayer yourself or with an authorized representative). Go to an Authorized Agent Bank (AAB), then submit it and pay the tax due thereon. In case there are no AAB's in your area, you can file the return and pay the tax due thereon with your Revenue Collection Officer at the BIR office in your municipality.