Refund Available for Improperly Taxed Veteran Disability Payment

Do you qualify for a Refund?

Fairness Act:  The Combat-Injured Veterans Tax Fairness Act of 2016 (“Fairness Act”) was enacted in December 2016.  The Fairness Act allows certain Veterans who received lump sum disability severance payments additional time to file a claim for credit or refund of any tax overpayment attributable to such payment. The Fairness Act directed the Secretary of Defense to identify disability severance payments paid after January 17, 1991, that were included as taxable income on Form W-2, but later determined to be nontaxable, and to provide the Veterans notice of the amount of that payment. The Department of Defense mailed letters to affected Veterans in July 2018 and July 2019.

man sitting in wheelchair with american flag

Combat-Related Disability Payment Not Taxable:  Veterans discharged from military service due to medical disability may receive a one-time lump sum severance payment. Disability severance pay is taxable income unless the pay results from a combat-related injury or the service member receives official notification from the Department of Veterans Affairs (VA) approving entitlement to disability compensation.

Refund Claim Can be Filed:  Any Veteran who received a disability severance payment that was taxed and determines later that the payment is not taxable can file a claim for credit or refund for the tax year in which the disability severance payment was made and was included as income on a tax return.

Additional Time to File Refund Claim:  For Veterans who received a lump sum disability severance payment after January 17, 1991, the Fairness Act provides additional time to claim a credit or refund for the overpayment attributable to the disability severance payment.  The Veteran must generally mail the refund claim by the later of:

                • 1 year from the date of the Department of Defense notice, or
                • 3 years after the due date for filing the original return for the year the disability severance payment was made, or
                • 2 years after tax was paid for the year the disability severance payment was made.

How to File a Refund Claim:  A Veteran must complete and file an IRS Form 1040X, Amended U.S. Individual Income Tax Return, for the tax year the disability severance payment was made.  It is important to carefully following the instructions in the notice that was mailed by the Department of Defense in July 2018 or July 2019.

If DOD Notice Note Received:  If a Veteran received a disability severance payment after January 17, 1991 that was reported as taxable income, and did not receive a notice from Department of Defense, the Veteran can still file a claim as long as the Veteran attaches the necessary documentation to his or her your Form 1040X.  Any Veteran may contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs to obtain the required documentation for the refund submission with the required Form 1040X.

In some cases, through no fault of their own, eligible Veterans did not receive the Department of Defense notice at all or did not receive the notice timely.  For example, the Department of Defense may have mailed the notice to a wrong address or to an old address.  Such failure could result in the Veterans not having the necessary time to submit their refund claim within the allowable time periods described above. While the Fairness Act does not specifically describe how to rectify a situation where the Veteran does not receive the Department of Defense notice, the legislative recognition of the importance of doing right by our Veterans, fundamental fairness, and equitable tax administration support IRS acceptance of late refund claims where such late filing is the result of a Veteran not receiving the DOD Notice.

If you have comments or questions about the Fairness Act, or assistance with a refund claim, please contact one of our tax attorneys at 937-223-1130 or JSenney@pselaw.com.

AUTHOR: Jeff Senney
jsenney@pselaw.com