According to USC, Title 38, §5301 Veteran's disability benefits are exempt from all taxes and/or any other form of withholding. The IRS cannot touch this money and creditors cannot either. You are free to read the entire code if you would like but here is a brief excerpt which would seem fairly straight forward:
Payments of benefits due or to become due under any law administered by the Secretary shall not be assignable except to the extent specifically authorized by law, and such payments made to, or on account of, a beneficiary shall be exempt from taxation, shall be exempt from the claim of creditors, and 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.
I am not an attorney but it sounds to me like these funds cannot be touched by creditors or the tax man. Well… that was the understanding of Kevin Lake as well but he found out that the IRS has found a way to ignore the law. This is from Kevin Lake's column on Freedom Outpost:
…the IRS is still figuring out ways to get to a veteran's disability money. How do I know? Recently, it happened to me.
A couple of months ago, when I logged into my online bank account to make sure that my VA disability check had been deposited (I am a 60% disabled veteran of the Iraq War) I saw red and a negative balance, beside which read the word "hold."
I called my bank and was informed that the IRS had sent a letter demanding that the bank take all of the available funds out of my account on the first day of the month and then wire them to them. The bank gave me a telephone number at which to call the IRS. After being placed on hold for a very long time- long as in a biblical age- I finally spoke with an agent.
Long story short; they claim I made $157,000 in 2010 and that I owe them tons of money, and that until I pay it, a lien will remain on my personal bank account.
At the beginning of 2010, I was still in the hospital recovering from injuries I'd sustained while serving in Iraq. I was released early in the year, but still did not find employment until October, and even then, it was only part time. I can assure you, as I did the IRS, that I did not earn $157,000.00. Actually, I earned less than $10,000.00 in 2010.
I kindly read the federal code mentioned above to the lady I spoke with at the IRS, reminding her that VA disability money is 100% exempt. She placed me on hold for another age (I could see a man coming- bearing water- over the horizon) and then she came back on the line and told me, "We do not take veterans' disability money. We wait until the funds are deposited from the VA and then we take all of the funds from your bank account."
Isn't this called laundering?
I find it ironic, now, that only weeks before the IRS put this hold on my bank account, I'd been asked to be a contributing writer for key Tea Party personality "Joe the Plumber." I'd been writing freelance articles on veterans affairs for some time, publishing and distributing them mostly through Facebook, and I viewed the personal call Joe made to me as one of the greatest compliments I'd been paid in regard to those articles. I jumped at the opportunity to join his team and give my work, such as this piece, a wider audience. I can't help but think that part of my decision to join Joe's team may have played a part in being singled out by the IRS at this specific time and having my VA disability money taken from me in complete breach of federal law.
The good news is that Kevin stood his ground and was able to get the IRS to refund 100% of his lost disability claims. But that is hardly the point.
This money was not taxable. This money was to be untouched by any sort of creditor. This is the letter of the law.
But by letting the money be deposited before it was touched the IRS found a way to break their own laws. I would have to agree with Kevin's assessment that this is a form of money laundering. It may not be what we think of typically with mob bosses and shyster accountants. But what is money laundering? It is basically taking money illegally and making it appear legal. What did the IRS do? They took money in violation of the law and acted like they had done nothing wrong.
Did the IRS target Kevin specifically because of his involvement with The Tea Party?
I was going to ask Lois Lerner that exact question but we all know how that turned out. For what it's worth I had a similar situation with my tax bill this year. I also wonder if my involvement with conservative issues might have caused them to "randomly" pick my name for audit.
The law is the law and government agencies are not allowed to bend or break laws any more than you or I.
We face an ever growing frustration in this country as more and more government agencies and officials are not willing to abide by the laws as they are written.