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Combat-injured Veterans Who May Be Due a Refund

Posted by Admin Posted on Dec 04 2018

Combat-injured veterans (or the estate of such a veteran) who received a lump-sum disability severance payment after 1/17/1991 and before 2017 may be due a refund for income taxes wrongly paid on these payments.  The available refund can range from $1,750-$3,200, possibly more, depending on the year the severance payment was received.

In 2016, Congress found that since 1991, the Department of Defense (DoD) had been improperly withholding income taxes and reporting as taxable income certain disability severance payments.  Unfortunately, by the time this error was discovered, most of the affected years were closed by the statute of limitations, barring refunds of these wrongly paid taxes.  So, in late 2016, Congress passed the Combat-Injured Veterans Tax Fairness Act of 2016 (the Act) to help alleviate this problem.

 

Basically, the Act gave the DoD one year to identify and send notification letters to impacted veterans with instructions for filing amended tax returns to recover wrongly paid taxes.  It also gave impacted veterans one year from the date of the DoD notification letter to file a claim for refund if the tax year was otherwise closed by the statute of limitations.

During July 2018, the Defense Finance and Accounting Service (DFAS) and the IRS sent the required notification letters to approximately 130,000 impacted veterans, thereby starting the special statute of limitations.  (The IRS agreed to forward these letters on behalf of DFAS because DFAS did not have the current addresses of impacted veterans.)  An eligible veteran who did not receive a letter or has questions should email DFAS at dfas.cleveland-oh.jjf.mbx.dfas-irs-combat-injured-veterans-tax-f@mail.mil and include “Combat-Injured Veterans Tax Fairness Act” in the subject line.

 If you received such a letter, you’ll need to file a Form 1040X (Amended U.S. Individual Income Tax Return) to claim a refund following the instructions contained in the DoD notification letter.  Claims for deceased veterans will need to be filed by the veteran’s estate.

 Generally, a copy of the DoD notification letter must be attached to the Form 1040X.  However, an eligible veteran who did not receive a DoD notification letter can still file a refund claim by including both of the following items with the Form 1040X:

          A copy of documentation showing the exact amount of and reason for the disability severance payment, such as a letter from DFAS explaining the severance payment at the time of the payment or a Form DD-214.

           A copy of either the VA’s 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.

 If you did not receive the DoD notification letter and don’t have the required documentation showing the exact amount of and reason for the disability severance payment, you’ll need to obtain the necessary proof by contacting the National Archives, National Personnel Records Center (at www.archives.gov/veterans), or the VA.

 If you would like our help, please give us a call at your earliest convenience.  In all but a handful of cases, the Form 1040X will need to be filed no later than one year after the date of the DoD notification letter.