What happens to VA disability benefits when a veteran is incarcerated, and can that debt be sent to collections or the IRS?

Under 38 U.S.C. § 5313 and its implementing regulation, 38 CFR 3.665, VA compensation is reduced—not necessarily terminated—when a veteran is incarcerated in a federal, state, or local penal institution for more than 60 days following conviction of a felony. A veteran rated 20% or higher is typically reduced to the 10% rate, and a veteran already rated at 10% is reduced to half of that rate. The reduction applies to the award itself, not retroactively to the date of incarceration in a punitive sense, but VA does apply it from the 61st day of confinement, which can create an overpayment if VA does not learn about the incarceration right away and keeps paying the full rate in the meantime.

That overpayment is what usually leads to the collection action being described. When VA determines a veteran was paid more than they were entitled to during incarceration, it establishes a debt and sends a notice through the Debt Management Center (DMC). If the debt is not repaid or disputed, VA can refer it to the Department of the Treasury for collection, including through the Treasury Offset Program, which can intercept federal tax refunds or other federal payments. This is likely what is being perceived as “the IRS sending a bill”—it is actually a Treasury-level offset tied to a VA debt, not a new tax liability created by VA.

What would this rating pay you? (2026 rates)

Official 2026 VA monthly compensation, including the 2.8% COLA increase.

Rating Married Children

per month · per year, tax-free

Dependent add-ons start at a 30% rating. Child-only and dependent-parent rates: see the full 2026 pay chart.

2026 base rates, all ratings (veteran alone)

Rating	Monthly (2026, incl. 2.8% COLA)
10%	$180.42
20%	$356.66
30%	$552.47
40%	$795.84
50%	$1,132.90
60%	$1,435.02
70%	$1,808.45
80%	$2,102.15
90%	$2,362.30
100%	$3,938.58

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There are ways to address this. The veteran (or someone with proper authorization, such as a power of attorney) can request a waiver of the debt using VA Form 5655, Financial Status Report, arguing financial hardship or that collection would be against equity and good conscience. A veteran can also dispute the debt amount if they believe VA miscalculated the reduction period or failed to properly apportion benefits to dependents, which is separately allowed under 38 CFR 3.665 even while the veteran's own rate is reduced.

The concrete next step is for the veteran or an authorized representative to contact the VA Debt Management Center directly to get a written explanation of the debt and then submit VA Form 5655 to request a waiver or compromise, since this must come from the veteran or someone legally authorized to act on their behalf, not just a family member inquiring informally.