Can the IRS Take Your VA Disability Check?
Federal law provides specific safeguards for your VA disability income against IRS tax collection. Learn how these protections apply to your benefits and bank account.
For veterans who rely on disability benefits, an IRS tax debt notice can create significant uncertainty. The question of whether these benefits can be seized to cover a federal tax liability is a pressing one. Understanding the rules that govern the collection powers of the IRS is the first step for a veteran. This knowledge helps clarify what assets are protected and what actions the government can legally take.
Federal Protection of VA Disability Benefits
Veterans receiving disability compensation from the Department of Veterans Affairs are protected by federal law from IRS collection actions for tax debts. This protection is explicitly outlined in U.S. Code Section 5301. This statute states that payments of benefits administered by the Secretary of Veterans Affairs are exempt from taxation and the claims of creditors, making them untouchable by levy or seizure.
This protection means the IRS is prohibited from garnishing or levying VA disability benefits directly from the source. Unlike Social Security Disability Insurance, which can be subject to a 15% levy for delinquent federal taxes, VA disability payments are shielded from this collection. The purpose of this law is to ensure financial support for veterans remains available for their basic welfare.
The legal shield covers disability compensation, pension payments, and other assistance administered by the VA. Regardless of the amount of tax debt owed, the IRS cannot issue a notice of levy to the Department of Veterans Affairs demanding a portion of a veteran’s monthly payment. The protection applies directly to the benefit payments themselves.
Exceptions for Other Federal Debts
The protection that shields VA disability benefits from IRS tax levies does not extend to all types of government-owed debt. While the IRS is barred from touching these funds for tax purposes, the Treasury Offset Program has the authority to reduce a veteran’s disability payment to satisfy certain non-tax debts.
The most common exceptions involve family support obligations. Federal law permits the garnishment of VA benefits to enforce payments for overdue child support and alimony. If a court has ordered these payments and they become delinquent, a portion of a veteran’s disability compensation can be diverted to meet these responsibilities.
Another exception involves debts owed directly to the VA itself. For example, if a veteran received an overpayment of benefits, the VA can withhold future payments to recoup the amount owed. This process is an internal collection action and is not subject to the same prohibitions as external creditor claims. The protections are specifically against seizure by outside creditors and the IRS for tax debt.
VA Benefits in Your Bank Account
Once VA disability benefits are directly deposited into a veteran’s bank account, a different set of rules comes into play to protect the funds from an IRS levy. Federal banking regulations provide for the automatic protection of certain federal benefit payments. When a bank receives a garnishment order from the IRS, it must review the account holder’s history for the preceding two months, a timeframe known as the “lookback period.”
During this review, the bank identifies any federal benefits, including VA disability payments, that were directly deposited into the account. The bank is then required to automatically protect the lesser of the sum of those deposits made during the two-month lookback period or the total balance in the account at the time of the review. This protected amount cannot be frozen or turned over to the IRS.
A challenge arises when VA benefits are commingled with funds from other sources in the same account. While the automatic protection still applies to the identifiable federal deposits within the lookback period, any amount exceeding this protected sum is vulnerable to seizure. If a veteran mixes their disability pay with other income, the IRS can levy the portion of the account balance that is not automatically protected.
Actions to Take for a Wrongful Levy
Discovering that a bank account containing protected VA disability funds has been frozen or levied by the IRS requires immediate action. The first step is to contact the IRS directly. The levy notice, typically a Form 668-A, will include the name and phone number of the specific IRS agent or unit that issued it.
When speaking with the IRS, the veteran must be prepared to prove that the levied funds are exempt. This requires providing documentation, such as bank statements from the past two months, that clearly show the direct deposit of VA benefits. The statements will serve as evidence that the money in the account is from protected federal payments.
If contacting the issuing agent does not lead to a swift resolution, the next step is to reach out to the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that helps taxpayers resolve problems they cannot fix through normal channels. A veteran can explain the situation and provide the same documentation to their assigned advocate to get the wrongful levy released.