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NSIAD-96-74R 1 (1995-12-22)

handle is hein.gao/gaobaclan0001 and id is 1 raw text is: 


United States
General Accounting Office
Washington, D.C. 20548

National Security and
International Affairs Division




B-260044

December 22, 1995

Congressional Requesters

This letter responds to your request that we examine the tax consequences to
veterans of the legally required offset of certain types of Department of Defense
(DOD) separation pay and Department of Veterans Affairs (VA) disability
compensation.1 Specifically, we requested that the Internal Revenue Service (IRS)
determine whether veterans could (1) reclassify separation pay as disability
compensation, or (2) deduct recouped separation pay from gross income. The IRS
responded to our questions in two separate letters dated June 23, 1995, and
September 28, 1995 (see enclosures). We summarize these documents with this
letter.

BACKGROUND

In 1980, Congress authorized DOD to provide lump-sum separation pay to service
members for involuntary separation. In 1991, to assist DOD in downsizing,
Congress authorized DOD to pay a higher level of lump-sum separation pay (known
as a special separation benefit) or an annual annuity (known as a voluntary
separation incentive) to those who separate voluntarily. Subsequent to separation,
some veterans qualify for service-connected disability compensation (paid monthly)
from VA. Federal income taxes are withheld from separation pay. Disability
compensation is tax exempt.

Federal law requires the recoupment of the gross amount of separation pay (known
as an offset) from those who also receive disability compensation for the same
period of service. The VA withholds disability compensation monthly until the full
amount has been recouped from lump-sum recipients.



1For more information about the offset, see our report Veterans Compensation:
Offset of DOD Separation Pay and VA Disability Compensation (GAO/NSIAD-95-
123, Apr. 3, 1995).

                            GAO/NSIAD-96-74R Tax Consequences of Offsets


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