IRS Reminds Combat Veterans to File for Tax Refunds on Disability Payments Reported as Income

(Parker Tax Publishing July 2019)

The IRS advised veterans who received a one-time, lump-sum, disability severance payment after January 17, 1991, and before January 1, 2017, and who reported the payment as income to file a claim 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-2019-125.

The IRS is reminding veterans who received disability severance payments after 1991, and claimed the payment as income, that time may be running out to claim a tax refund relating to the payment. According to the IRS, veterans should take action soon if they received a notice from the Department of Defense (DoD) (letters 6060-A and 6060-D) and have not already filed Form 1040X, Amended U.S. Individual Income Tax Return, to claim a refund or credit of the overpayment attributable to the disability severance payment.

The Combat-Injured Veterans Tax Fairness Act of 2016 provides that most veterans who received a one-time, lump-sum, disability severance payment when they separated from military service are entitled to a refund if that payment was claimed as income. The payment must have been received after January 17, 1991, and before January 1, 2017. Eligible veterans should have received a mailed notice from the DoD in July of 2018 explaining how to claim their tax refunds.

Filing Deadlines

The deadlines for claiming these tax refunds are:

(1) one year from the date of the DoD notice;

(2) three years after the due date for filing the original return for the year the disability severance payment was made; or

(3) two years after tax was paid for the year the disability severance payment was made.

Veterans claiming their refund have the normal limitations period for claiming a refund or one year from the date of their letter from the Department of Defense, whichever expires later. As taxpayers can usually only claim tax refunds within three years from the due date of the return, the IRS said that the alternative time frame is especially important, since some claims may be for refunds of taxes paid as far back as 1991. While many veterans have claimed their refunds in the past year, many others have not, and time is running short.

Two Options for Claiming a Refund

Eligible veterans have two options for claiming a refund. They may either (1) file a claim based on the actual amount of the overpayment attributable to the lump sum disability severance payment, or (2) claim the standard refund amount that corresponds to the year the disability severance payment was made.

Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X and carefully following the instructions. The IRS noted that an original return is not necessary if the information for that tax year is available. Veterans without the required information necessary to complete the Form 1040X can request a transcript online at IRS.gov/transcript.

The IRS said that the second option, claiming a standard refund amount, is the easiest way to request a refund because it does not require finding the original tax return or requesting information about the return from the IRS. It may result in a larger or smaller refund based on the actual amount reported on the return, according to the IRS. The standard refund amounts are: (1) $1,750 for tax years 1991 - 2005, (2) $2,400 for tax years 2006 - 2010, and (3) $3,200 for tax years 2011 - 2016. Veterans are advised to write "Disability Severance Payment" on Form 1040X, line 15, and enter the standard refund amount on line 15, column B, and on line 22, leaving the remaining lines blank.

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 who did not receive a letter from DoD and received a disability severance payment after January 17, 1991, that was reported as taxable income, can still file a claim, according to the IRS, but they must include the necessary documentation to file with their Form 1040X. The IRS advised veterans to contact the National Archives, National Personnel Records Center, of the Department of Veterans Affairs to obtain the required documentation for submission with their Form 1040X.

The IRS noted that it has posted detailed information on IRS.gov. In addition, veterans with questions about claiming a tax refund for a disability severance payment can call the IRS toll-free at (833) 558-5245 ext. 378 between 7 a.m. and 7 p.m. local time (Alaska and Hawaii follow Pacific time).

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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