Taxation & Estate Planning

Should Veterans? disability benefits be included in an IRS installment agreement or compromise?

By howardlevy

I received a great question from a reader about whether Veteran’s disability benefits should be included in the value of an IRS installment agreement or offer in compromise.

Although the question is directed to Veterans’ disability benefits, my answer also applies to those with unemployment and workers’ compensation benefits.  Here is the question:

I owe the IRS over $50,000 and my only source of income is my 100% service-connected disability compensation.  I was set-up on an installment agreement of $428/month.  I listed my service-connected disability as income on my 433A financial statement. Shouldn’t it be listed as $0?  I have no other income but the service disability.

Internal Revenue Code Section 6334 lists the income sources that are protected from an IRS levy.  The protected list includes unemployment benefits, workers’ compensation, and service-connected disability benefits.

But the Section 6334 limitations on IRS levies are slightly unraveled by another part of the Internal Revenue Code, known as Section 6331.

Section 6331(h) gives the IRS discretion to make a continuous levy of up to 15% of benefits including unemployment, workers’ compensation and service-connected disability.  Even though the IRS can take 15% of these benefits, it is cautious in doing so.  And to that end, current IRS guidelines state that the IRS collections is not to levy these benefits.   See Internal Revenue Manual 5.11.7.2(5).

Recommendation for completing an IRS financial statement in cases of veterans, unemployment and workers’ compensation benefits:  The IRS should be put on notice that you receive these benefits – you should make a full disclosure of your income.  Attach a statement to your 433A or 433F disclosing the income and the legal position that it is exempt from IRS collections and, therefore, excluded from an IRS collection analysis.  Do not confuse the issue by listing the benefits as income on the face of the 433A or 433F – rather, direct the IRS to see your attached explanation.

Even if the IRS did have a policy of levying veterans, unemployment and workers’ compensation benefits, only 15% would be available for application to your collection potential.

The payment you propose to the IRS – or the value of your offer in compromise – should be consistent with your collection potential.  Take the position that exempt income sources are not part of your collection potential.

Full post as published by IRS and the Law on May 08, 2010 (boomark / email).