IRS Urges Veterans to File Refund Claims Relating to Disability Severance Payments

(Parker Tax Publishing July 2018)

The IRS is advising certain veterans who received a disability severance payment after January 17, 1991, and had taxes improperly withheld, to file claims for either a credit or refund of the tax overpayment attributable to the payment. Veterans' eligibility for these refunds are the result of the Combat-Injured Veterans Tax Fairness Act passed in 2016; however, the time for claiming the tax refunds is limited. IR-2018-148.

Background

Approximately 10,000 to 11,000 individuals are retired from the Armed Forces for medical reasons each year. Some of these individuals are separated from service as a result of combat-related injuries. In recognition of the tremendous personal sacrifice of veterans with combat-related injuries, severance pay received for combat-related injuries is excludible from income under Code Sec. 104.

In 2016, it came to Congress's attention that, since 1991, the Secretary of Defense had improperly withheld taxes from severance pay for wounded veterans, thus denying them their due compensation and a significant benefit intended by Congress. Congress recognized that many veterans owed redress were beyond the statutory period to file an amended tax return because they were not aware that taxes had been improperly withheld. As a result, Congress passed, and the President signed into law, the Combat-Injured Veterans Tax Fairness Act of 2016 (the Act). The Act extends the time that veterans, who were separated from service for combat-related injuries and that had taxes improperly withheld from their severance pay, have to file amended returns and claims refunds for such taxes.

Statute of Limitations for Applying for Refunds

Most veterans who received a one-time lump-sum disability severance payment when they separated from their military service and had taxes improperly withheld should have received a letter from the Department of Defense (DoD) with information explaining how to claim tax refunds they are entitled to. The letters include an explanation of a simplified method for making the claim. However, the amount of time for claiming these tax refunds is limited. Veterans entitled to make these refund claims have the normal limitations period for claiming a refund or one year from the date of their letter from the DoD, whichever expires later. As taxpayers can usually only claim tax refunds within three years from the due date of the return, this alternative time frame is especially important since some of the claims may be for refunds of taxes paid as far back as 1991.

Amount to Claim

Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X. However, there is a simplified method. Veterans can choose instead to claim a standard refund amount based on the calendar year (an individual's tax year) in which they received the severance payment. The words "Disability Severance Payment" should be written on Line 15 of Form 1040X and, on Lines 15 and 22, the standard refund amount listed below should be entered:

(1) $1,750 for tax years 1991 - 2005

(2) $2,400 for tax years 2006 - 2010

(3) $3,200 for tax years 2011 - 2016

By claiming the standard refund amount, veterans do not need to access the original tax return from the year of their lump-sum disability severance payment.

Compliance Tip: The IRS noted that all veterans claiming refunds for overpayments attributable to their lump-sum disability severance payments should write either "Veteran Disability Severance" or "St. Clair Claim" across the top of the front page of the Form 1040X that they file. Because all amended returns are filed on paper, veterans should mail their completed Form 1040X, with a copy of the DoD letter, to: Internal Revenue Service, 333 W. Pershing Street, Stop 6503, P5, Kansas City, MO 64108

DoD Letter Not Received

Veterans eligible for a refund who did not receive a letter from DoD may still file Form 1040X to claim a refund but must include both of the following to verify the disability severance payment:

(1) A copy of documentation showing the exact amount of and reason for the disability severance payment, such as a letter from the Defense Finance and Accounting Services (DFAS) explaining the severance payment at the time of the payment or a Form DD-214, and

(2) A copy of either the VA determination letter confirming the veteran's disability or a determination that the veteran's injury or sickness was either incurred as a direct result of armed conflict, while in extra-hazardous service, or in simulated war exercises, or was caused by an instrumentality of war.

Veterans who did not receive the DoD letter and who do not have the required documentation showing the exact amount of and reason for their disability severance payment will need to obtain the necessary proof by contacting the Defense Finance and Accounting Services (DFAS).

For a discussion of the exclusion from income for compensation for injuries, see Parker Tax ¶75,901.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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