Combat-Injured Veterans Tax Fairness Act of 2016 Extends Statute for Veterans to Collect Refunds

(Parker Tax Publishing December 2016)

In early December, Congress voted unanimously to approve the Combat-Injured Veterans Tax Fairness Act of 2016, which was signed into law by President Obama on December 16. 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. H.R. 5015 (12/16/2016).

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.

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.

The Combat-Injured Veterans Tax Fairness Act of 2016 directs the Department of Defense (DOD) to identify certain severance payments to veterans with combat-related injuries paid after January 17, 1991, from which DOD withheld amounts for tax purposes. Once such veterans are identified, the DOD must provide the identified veteran with a notice of the amount of improperly withheld severance payments, and instructions for filing amended tax returns to recover such amount.

While the statute of limitations for filing a refund claim is generally three years from the date the return is due or the date the return is filed, the Veterans Tax Fairness Act of 2016 extends the period of time for filing a severance-related claim to the date that is one year after DOD provides the veteran with the relevant information to file an amended return. The Act further requires that, in the future, the DOD ensure that amounts are not withheld for tax purposes from DOD severance payments to individuals when such payments are not considered gross income.

For a discussion of the exclusion from income for amounts received for military-related injuries, see Parker Tax ¶75,920.

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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