Tuesday, April 17, 2012

Troops owe IRS $390 million

About 60,000 active-duty troops and reservists owe the IRS roughly $390 million in back taxes, in part because of confusion caused by frequent overseas deployments and address changes.

"Military tax returns are a little more complicated," said Theresa Buchholz, a tax research analyst with H&R Block Tax Services in Kansas City, Mo.

Among the reasons servicemembers are susceptible to tax troubles:

•Confusion over eligibility rules for a tax break on income earned while serving in combat zones.

•Frequent moves that increase the odds tax documents are mailed to an old address.

•Risk of deployed troops missing deadlines for response to IRS queries.

Straightening out the problem can be a headache, said Navy Lt. Cmdr. Steven Millard, who blames his tax troubles a few years ago on a back-to-back deployment and family move.

"Took me two years to clear up a post deployment and get the money back I had to submit to stop the insanity of fines and interest," Millard said.

The IRS is required to notify military financial service offices when a servicemember is found to be delinquent on taxes. The military investigates the claim and if it discovers that the servicemember is deployed or hospitalized because of a combat injury, it will seek a halt to IRS enforcement measures.

Michael Sullivan, an owner of Fresh Start tax services in Florida, said he routinely receives e-mails or calls via Internet service Skype from troops who have been hit with unexpected tax problems.

"A lot of times that notice does not catch up to where they are actually living, and the IRS is only obligated to send the notice to the most recent address" on file, Sullivan said. "If the IRS can't contact you, you're going to get an enforcement action."

Tax documents mailed to the wrong address can lead servicemembers to mistakenly file incomplete returns — a red flag for IRS auditors.

If the IRS finds a problem with a return, some troops who have recently moved might miss the notification letter warning them about possible delinquency. Taxpayers who fail to respond to IRS delinquency notifications can miss an opportunity to straighten out the problem before a deadline expires.

One common issue is the combat tax exclusion. The military has designated numerous zones throughout the world for the benefit, but restrictions and conditions apply, and the amounts of income excluded can differ according to government formulas.

"It can be confusing because it's hard to know what to include and what not to include" under that exclusion policy, Buchholz said.

As with all taxpayers, the IRS can seize a portion of a servicemember's paychecks until the taxes are paid off.

Despite the tax pitfalls for troops who move about, the delinquency rate among servicemembers regarding federal taxes is less than the rate among civilians working for the federal government. About 2% of servicemembers are found to be delinquent, compared with nearly 3% for federal civilian employees.

The delinquency rate for military retirees is higher: Nearly 4% owe $1.5 billion in back taxes, according to IRS data.



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