Tax debt relief for service members and veterans

If you serve in a combat zone or a qualified hazardous duty area, deadlines to file returns, pay tax and respond to IRS notices are extended for the period of service plus 180 days, plus any days that were left on the deadline when you entered the zone. The IRS also generally suspends collection and doesn't charge interest or penalties for that period. Spouses generally get the same extension for joint returns. IRS Publication 3 explains the rules.

Under the Servicemembers Civil Relief Act, interest on federal income tax incurred before entering active duty — including joint liability with a spouse — is capped at 6% a year during active service, if military service materially affects your ability to pay. You generally need to request it in writing with a copy of your orders. The current IRS rate is 7%, so the cap matters most when rates are high.

Service members can request a deferral of income tax payments — both before and during service — if military service materially affects their ability to pay. Deferral can last up to 180 days after release from active duty, without penalties or interest during that period. Requests generally go to the IRS in writing, describing how service affects your finances.

Debts sometimes arise from combat pay exclusion errors, state residency confusion, rental income from a home you couldn't sell after PCS orders, or spouses' self-employment income without estimated payments. Reservists and Guard members moving between civilian and military pay may also end up under-withheld. Review your W-2 and LES carefully, and check your IRS transcripts.

If special protections don't cover your situation, the regular programs do: an installment agreement (online for individuals owing $50,000 or less), Currently Not Collectible status, penalty abatement, or an Offer in Compromise. Military pay can be levied like other wages after proper notice, so it's worth resolving balances before that point.

Unresolved tax debt and unfiled returns are common issues in security clearance reviews. Being on a payment plan and current on filings generally looks far better than an ignored balance. Address the debt early and keep documentation of any agreement.

Many installations offer free tax preparation through the Volunteer Income Tax Assistance (VITA) program. Military OneSource also offers free tax preparation software and consultations. Low Income Taxpayer Clinics can represent eligible taxpayers in disputes with the IRS. The Taxpayer Advocate Service helps when an IRS problem causes hardship.

Service members generally keep their state of legal residence when stationed elsewhere under military orders, and the Military Spouses Residency Relief Act lets spouses keep the same state residency in many cases. Mistakes here create unexpected state tax bills — for example, a spouse's wages taxed by both the duty-station state and the home state. Check each state's guidance and file nonresident returns to claim refunds where tax was withheld incorrectly. State tax agencies have their own collection rules; see our state tax debt page.

Suppose you owed $8,000 in federal income tax from a year before you were called to active duty, and the IRS rate is 7%. If service materially affects your ability to pay and you send the IRS a written request with your orders, interest above 6% should be forgiven for the period of active service. On larger or older balances, that difference adds up.

1. Tell the IRS you're in a combat zone or deployed, if applicable.
2. Request the SCRA interest cap in writing with orders if your debt predates active duty.
3. Request a payment deferral if service affects your ability to pay.
4. Use a payment plan for remaining balances.
5. Keep copies of orders, LES and IRS correspondence.