By Seymour Klierly

An overhaul of our tax code is among the heavy-weight items on the legislative agenda for the 109th Congress. Our massive, complex, confusing and contradictory tax code has become a heavy burden for individual taxpayers and business and a lucrative source of income for tax attorneys.

One of the items in our current tax code that defies common sense and supports the initiative to overhaul the current tax system is the treatment of pay provided to the men and women of the Guard and Reserve by their employers while they are deployed overseas in combat zones. A growing number of employers, both large and small, multi-national and local, are continuing to pay their employees who are members of the Guard and Reserve after they have been called up for active duty. These patriotic employers are continuing to provide benefits and supplement the difference between their civilian salaries and the pay provided by Uncle Sam in order for the guardsmen and reservists to provide for their families while they are deployed into harm's way.

The IRS in its usual taxpayer-friendly manner has forcefully applied an obscure revenue ruling, which was written in 1969, that does not allow the differential pay provided by employers to their deployed employees to be considered as wages. The application of this out of date ruling not only threatens the health and retirement benefits of deployed civilian-soldiers receive from their employers, but also requires the men and women in uniform--who have received support above and beyond the call of duty by their employers--to file quarterly estimated income taxes or face stiff financial penalties.

While Uncle Sam does provide modest pay and benefits to guardsmen and reservists, the lengthy deployments of civilian-soldiers alone has presented an enormous challenge to the Guard and Reserve in motivating individuals to re-enlist. The IRS's handling of these voluntary pay arrangements between employers and their employees not only harms the soldiers but weakens the appeal of continued service in the Guard and Reserve. After all, isn't fighting terrorists and insurgents enough of a challenge without having to fight the IRS too?

Fortunately, what the IRS does, Congress can undo. Last year, Congress weighed in on the matter and requested as part of the Department of Defense authorization bill, that the IRS fix the matter and allow employers to continue to provide differential pay to their deployed employees. Further, this Congress has already seen the introduction of legislation which takes the matter out of the hands of the IRS and resolves the issue legislatively. One way or the other, it is expected that this issue will be resolved. However, the very existence of this matter demonstrates the arcane and impersonal nature of our federal tax code and the agency which enforces it.

Date: 1/26/05

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