Recipients of CWT payments will no longer receive a Form 1099 from the Department of Veterans Affairs. Disabled veterans who paid tax on these benefits in tax-years 2004, 2005 or 2006 can claim a refund by filing an amended return using IRS Form 1040X. According to the VA, more than 19,000 veterans received CWT in Fiscal Year 2007.

The IRS agreed with a U.S. Tax Court decision issued earlier this year, which held that CWT payments are tax-free veterans’ benefits. In so doing, the agency reversed a 1965 ruling which held that these payments were taxable and required the VA to issue 1099 forms to payment recipients.

According to the VA, the CWT program provides assistance to veterans unable to work and support themselves. Under the program, the VA contracts with private industry and the public sector for work by veterans, who learn new job skills, re-learn successful work habits and regain a sense of self-esteem and self-worth.

Veterans Q&As


Q: I receive payments for my participation in compensated therapeutic and rehabilitative work therapy (CWT) programs operated by the Department of Veterans Affairs (VA). Are these payments subject to federal income tax?

A: No. Payments by the VA for participation in CWT programs are exempt from federal income tax as ‘veterans’ benefits’.


Q: In past years I received a Form 1099 from the VA reporting my receipts as taxable compensation and I included these payments in my gross income. What’s changed?

A: For many years, the IRS treated payments made by the VA from the Special Therapeutic and Rehabilitation Activities Fund for work performed under CWT programs as includible in the recipient’s gross income as compensation for services, even though intended for therapeutic or rehabilitative purposes.

In 2007, the Tax Court ruled that CWT program payments made by the VA are exempt from federal income tax as ‘veterans’ benefits.’ The IRS now agrees with the decision of the Tax Court, and has acquiesced in that decision. Accordingly, payments made by the VA from the Special Therapeutic and Rehabilitation Activities Fund for work performed under CWT programs are not includible in a recipient’s gross income for federal tax purposes.


Q: Will I be sent a Form 1099 from the VA for payments I receive from the Special Therapeutic and Rehabilitation Activities Fund for work performed under CWT programs?

A: No. Because these payments are exempt from federal income tax, they will no longer be reported to you or the IRS by the VA on Forms 1099.


Q: Can I get a refund of federal income taxes that I’ve paid as a result of including these amounts in my gross income in prior years?

A: Yes. If you reported CWT program payments in your federal gross income in prior years, you can file amended income tax returns from which you exclude these receipts. Use Form 1040X, Amended U.S. Individual Income Tax Return, for this purpose. See the Instructions for Form 1040X, and Pub. 556, Examination of Returns, Appeal Rights, and Claims for Refund, for more details.


Q: Am I required to amend my prior tax returns?

A: No.


Q: How far back can I amend my returns?

A: In general, you may amend any income tax return within 3 years after the date you filed the original return, or within 2 years after the date you paid the tax, whichever is later. This time is extended for certain people who are physically or mentally unable to manage their financial affairs (See Pub. 556, above).


Q: Will excluding these amounts from my gross income have any other effect on my overall federal tax liability?

A: Possibly. Before amending any federal income tax return, you should consider the effect of excluding these amounts on your overall tax liability. Excluding CWT program payments from gross income may adversely affect other tax items that depend on taxable compensation.