In an Information Release, IRS has reminded veterans who received disability severance payments after 1991 and claimed them as income, that the time limit to claim a refund is approaching. The information release provides two options for claiming the refund.
Code Sec. 104(a)(4) generally provides that gross income does not include amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces.
The Combat-Injured Veterans Tax Fairness Act of 2016 (“the Act”, PL 114-292) provides redress to veterans who may have been unaware that taxes had been improperly withheld from their disability severance payments. The Act 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 Jan. 17, 1991, and before Jan. 1, 2017.
Under the Act, the time available for claiming the tax refunds is limited to the later of:
- One year from the date of notice from the Department of Defense (DoD) (letters 6060-A and 6060-D, “the notice”), or
- Three years after the due date for filing the original return for the year the disability severance payment was made, or
- Two years after tax was paid for the year the disability severance payment was made.
Eligible veterans should have received the notice in the mail from the DoD in July 2018 explaining how to claim their tax refunds.
In an Information Release Bulletin, IRS advises veterans to take action soon if they received the notice 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.
There are two options for claiming the tax refund:
- File a claim based on the actual amount of the overpayment attributable to the veteran’s lump sum disability severance payment, or
- Choose to claim the standard refund amount listed below that corresponds to the year the disability severance payment was made. The veteran should write “Disability Severance Payment” on Form 1040X, line 15, and enter the standard refund amount listed below on line 15, column B, and on line 22, leaving the remaining lines blank.
Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X and carefully following the instructions. An original return is not necessary if the information for that tax year is not available. Veterans without the required information to complete Form 1040X can request a transcript online at IRS.gov/transcript.
IRS points out that Option 2, claiming a standard refund amount, might be 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 from the return.
The standard refund amounts are:
- $1,750 for tax years 1991 – 2005
- $2,400 for tax years 2006 – 2010
- $3,200 for tax years 2011 – 2016
Instructions that apply to both options.
Veterans should follow the instructions in the DoD notice and:
- Complete and file IRS Form 1040X, Amended U.S. Individual Income Tax Return, for the tax year the disability severance payment was made.
- Write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of the Form 1040X.
- All amended returns are filed on paper, so 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.
Eligible but never received a DoD notice.
Veterans who did not receive the notice from the DoD and received a disability severance payment after Jan. 17, 1991, that was reported as taxable income, can still file a claim. They must include the necessary documentation to file with their Form 1040X. Veterans should contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs to obtain the required documentation for submission with their Form 1040X.