Can the IRS Levy VA Disability Benefits? What the Law Protects

Veterans ask me this constantly: "Can the IRS take my VA disability?" The short answer is no, not by levy. The longer answer has a couple of wrinkles you should understand before you rely on it.

The exemption

IRC 6334(a)(10) exempts from levy "any amount payable to an individual as a service-connected (within the meaning of section 101(16) of title 38) disability benefit" under specified parts of title 38: subchapters II, III, IV, V or VI of chapter 11, or chapters 13, 21, 23, 31, 32, 34, 35, 37 or 39.

Chapter 11 is the core VA disability compensation chapter. The other listed chapters cover a range of related benefits. The key words are "service-connected" and "disability benefit." Not every VA payment fits. A non-service-connected pension, for example, is not described in paragraph (10).

The IRM lists "certain military service-connected disability payments" among exempt levy sources at IRM 5.11.1.4.1.

The FPLP cannot reach it

The Federal Payment Levy Program lets the IRS take up to 15% of certain federal payments "notwithstanding section 6334." That sounds like it could override the exemption. It does not, for VA disability. IRC 6331(h)(2) defines the payments FPLP can reach. It includes federal payments other than means-tested ones, plus payments described in paragraphs (4), (7), (9) and (11) of section 6334(a). Paragraph (10), service-connected disability, is not on that list. And section 6334(f) only lifts the exemption for payments described in 6331(h)(2)(B) or (C).

Congress listed the exemptions the FPLP can override. Service-connected disability is not one of them.

Separately, IRM 5.11.7 notes that military retirees receiving disability payments are not subject to the FPLP on their DFAS retired pay. See IRS levies on military retirement pay.

Title 38's own protection

38 U.S.C. 5301(a)(1) says payments of benefits under laws administered by VA "shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary." It also says this does not apply to claims of the United States arising under such laws, meaning VA's own claims under the benefit laws.

The Internal Revenue Code has its own rule in IRC 6334(c): notwithstanding any other law of the United States, no property is exempt from IRS levy other than property specifically exempted by 6334(a). That is why paragraph (10) matters so much. It is the exemption the IRS has to respect.

The gray area: money in the bank

Paragraph (10) protects amounts "payable" as a disability benefit. Once the VA deposits the money in your checking account, a bank levy reaches the account, not the VA. The IRS manual section listing exempt property does not specifically address deposited benefit funds. Title 38's "before or after receipt" language helps veterans, but how it interacts with section 6334(c) on a bank levy is not something I would leave to chance.

Practical steps:

• Deposit VA disability into a separate account that holds only VA money.
• Do not mix it with wages, a spouse's income or business receipts.
• Keep VA award letters and deposit records handy.
• If a bank levy hits, act within the 21-day bank holding period in IRC 6332(c). Ask for release, document the VA source, and claim hardship if it applies. See bank levies for military and federal families.

Exempt from levy does not mean ignored

Here is the wrinkle many veterans miss. The IRS cannot levy VA disability, but it does count it. IRM 5.15.1 says that generally all household income, "including income that is exempt from tax on the Form 1040," is used to determine the taxpayer's ability to pay. VA disability compensation goes on your collection information statement.

So if you have a $1,800 monthly VA check and a part-time job, the IRS will look at both when deciding what you can pay on an installment agreement or whether you qualify for hardship status. The protection is against seizure, not against being counted. See how VA disability is treated on IRS financial statements.

The regulations do cut the other way in one place. In deciding whether a levy creates economic hardship, Treas. Reg. 301.6343-1(b)(4) tells the IRS to consider "the amount of property exempt from levy which is available to pay the taxpayer's expenses." A veteran whose basic expenses are covered mostly by exempt VA income may find that factor cited against a hardship release on other income. Plan for it.

A quick example of how this plays out

Consider a hypothetical veteran with a monthly VA compensation payment, a modest part-time paycheck and an IRS balance. The IRS cannot levy the VA payment. It can levy the paycheck, subject to the wage exemption, and it can levy a bank account that holds wages. When the veteran asks for a payment plan, the IRS adds the VA payment and the wages together, subtracts allowable expenses, and proposes a payment based on the total. The protection is real, but it works at the levy stage, not at the negotiating table.

What about offsets?

A levy and a refund offset are different tools. The levy exemption discussed here addresses IRS levies. If you are dealing with a non-tax federal debt and Treasury offset of benefits, different rules apply and you should get specific advice.

If the IRS levies VA disability anyway

1. Call the number on the levy notice and state that the payment is a service-connected disability benefit exempt under IRC 6334(a)(10).
2. Send the VA award letter showing the benefit type.
3. Ask for release and return of the funds. IRC 6343(b) allows return of wrongfully levied money within two years of the levy.
4. If the IRS does not act quickly and the levy is causing hardship, contact the Taxpayer Advocate Service with Form 911.

Your VA disability exists because of what service cost you. The tax code protects it from seizure. Make sure the IRS respects that, and plan for the fact that it still counts toward what you can pay.