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For the past 5 years, I claimed CZTE or Combat Zone Tax Exclusion income on my tax returns. Every year after I file my taxes, I receive a CP04 Notice from the IRS, asking to verify that I am eligible for tax exemption.
The first time I received the letter I was nervous to receive an inquiry from the IRS. However, after asking around the squadron it seemed like everyone received one of these letters if they claimed CZTE pay on their taxes.
You can see your CZTE pay listed on your W-2 form in Box 12 under the “Q” code. The amount listed after the Q code is tax exempt military pay from any month you were in a designated combat zone.
This is not an audit or the IRS calling you a liar! They are simply looking for additional information in regards to your claim of serving in a combat zone. See more information on the IRS website here.
How to Respond to an IRS CZTE Inquiry
First, gather your information. I find it useful to save a PDF copy of my LES in my Google Drive every month because MyPay only keeps the last 12 LES.
This way I have a permanent record of what I have been paid and what has been deducted. It also keeps a record of when I hit tax free areas.
I write down the months I hit a tax free area which is usually the month before the CZTE is paid. You can see if CZTE was reimbursed to you with the line in entitlements “FITW REFUND (CZ).” “FITW” is Federal Income Tax Withholding and “CZ” is Combat Zone.
You can also check the notes of the LES at the bottom. It should display the dates you are eligible for combat zone entitlements: “COMBAT ZONE 170201-170228(702)”.
The CP04 only provides three lines for date of entry and date of exit. If you entered and exited more frequently than that, just include a copy of your orders showing the relevant information.
I have included CED orders and DTS TDY orders with CZTE locations highlighted.
Once I have gathered my dates and paper copies of my orders, I will redact any information I do not feel is relevant to the IRS inquiry.
If there are classified or sensitive locations listed on any of the orders, I remove them with the redaction tool in Adobe Acrobat PDF viewer.
Then just mail the orders and CP04 form back to the IRS in the included postage paid envelope. I have never had a second inquiry by following the method above.
Have you ever had a CZTE or CP04 inquiry from the IRS? How did you respond to it? Have you ever had any follow up inquiries or audit because of CZTE income? Let us know in the comments.
7 thoughts on “How I Respond to the IRS Combat Zone Tax Letter (CP04)”
This last year was the first time I received the letter from the IRS. I was worried at first because I had nothing deployed during that tac year. I simply called the IRS, waited a surprisingly short period of time and the lady asked what were the dates of my deployment with year prior. She adjusted that in my file and said she had no questions.
I still didn’t fully understand how I got CTZE so I asked my finance office. I didn’t know the leave accrued while deployed can qualify for CTZE once you take it back home.
Good morning, my son states that some of his orders, when entering or exiting a combat zone, were not returned to him. Is there a way to get a copy of his orders for the combat zones in order to send to the IRS?
He should be able to pull up a copy from the Defense Travel System (DTS), ask his Unit Deployment Manager (UDM), or ask his supervisor/commander for a copy.
Honestly, I wouldn’t stress it too much. Just report the dates he was deployed and provide as much documentation as he has. If the IRS wants to know more, they will ask. This isn’t an audit, just a request for information.
Also it’s nice that you’re doing this for him, but if he’s capable he should really be taking charge of his own taxes and finances. It’s the best way to learn how to do them.
It seems unnecessary when you serve for the federal government for another branch of government to confirm the dates. Why not just an interface between DoD and IRS? It’s not like military people don’t have enough to worry about.
I couldn’t agree more, Terry. Call your Congressman or Senator and tell them to change the law: https://www.countable.us/
Until the law changes, we have to play within the system they gave us.
Good morning, I am Jean ****, mother of *****. He has never received this type of letter before. He is currently overseas and is not due to return until the end of April beginning of May. We are wondering if there is any kind of an extension he can get for this letter until he returns and can fill this out. Any help is greatly appreciated.
Hi Jean, I redacted your names for privacy and OPSEC :)
Military servicemembers get an automatic 180 extension on their tax filing if they are serving in a Combat Zone. IRS Link
Some other great tips here.
Don’t sweat it! The IRS is very accommodating to military servicemembers. Since he is returning in May, just ask for the extension process at email@example.com. More details on this IRS program here. Or call the 800, 866 or 888 number listed on the top right corner of your CP04 notice.