1) 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'.

2) 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.

3) 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.

4) 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.

5) Q: Am I required to amend my prior tax returns

A: No.

6) 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).

7) Q: Will excluding these amounts from my gross income have any othereffect 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.