This work aims to examine whether or not interfacial failure can occur in a compatible polymer bilayer system under large shear and elongation deformations, as well as to probe the sensitivity of nonlinear transient rheology to the presence of interface/interphase at neighboring layers. For this, stress relaxation after a step strain and fast startup in simple shear and uniaxial extension experiments have been performed on healed and coextruded poly(methyl methacrylate)/poly(vinylidene fluoride) bilayers with the presence of a robust diffuse interphase as evaluated by energy dispersive X ray. For unhealed bilayers, interfacial failure occurred in shear flows at intermediate deformations, while for healed bilayers the interphase greatly delayed the onset of interfacial failure to larger deformation steps and to a higher deformation rate in the startup shear. Extensional rheology demonstrated that the presence of an interphase in the bilayers greatly enhanced the transient extensional viscosity ηE+(t) as well as the tensile relaxation modulus E(t) of the structure, even though the entanglement density was relatively low. Moreover, models are presented to predict the nonlinear relaxation behavior of bilayers and to estimate the relaxation behavior of the interphase. Fitting of the tube model to the shear relaxation indicates a dilated tube diameter in the interphase, confirming its weak entanglement intensity and its readiness to flow-induced disentanglement under large external deformations. Finally, the physics of the interfacial failure was assessed based on some recent molecular dynamic theories.