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Tax liability is forgiven for an individual who:

1) Is a military or civilian U.S. employee at death, and

2) Dies from wounds or injury incurred while a U.S. employee in a terrorist or military action.

<Tip> Beginning September 11, 2001, tax liability is forgiven for an individual who dies from wounds or injury incurred while a U.S. employee in a terrorist or military action regardless of where the terrorist or military action occurred.

The forgiveness applies to the tax year death occurred and for any earlier tax year beginning with the year before the year in which the wounds or injury occurred. A terrorist or military action is any terrorist activity primarily directed against the United States or its allies or any military action involving the U.S. Armed Forces resulting from violence or aggression against the United States or its allies.

Any multinational force in which the United States participates is considered an ally of the United States.

Example. Army Private John Kane died in 2002 of wounds incurred in a terrorist attack in 2001. His income tax liability is forgiven for all tax years from 2000 through 2002. Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended.

Above Information Extracted from IRS Publication #3, Armed Forces Tax Guide