IRS owes tax refunds to 133,000 injured veterans

The Internal Revenue Service is preparing to send millions of dollars in tax refunds to veterans who received disability severance payments starting in 1991.

The tax refunds are the result of a 2016 law known as the Combat-Injured Veterans Tax Fairness Act (see Combat-injured veterans receiving special tax refund). More than 133,000 injured vets may qualify for the tax refunds, according to the National Veterans Legal Services Program, originally estimated to amount to $78 million but now thought to be much more than that sum. The tax refunds are expected to average $1,750 or more, according to CBS News.

The tax refunds are owed to veterans who received disability severance payments after Jan. 17, 1991, and included that payment as income on their tax returns. Most veterans who received a one-time lump-sum disability severance payment when they separated from their military service will receive a letter from the Department of Defense with information explaining how to claim tax refunds they are entitled to, the IRS said Wednesday. The letters will provide an explanation of a simplified method for claim the refund. The IRS has been working closely with the Defense Department to produce the letters, spelling out how veterans should claim the related tax refunds.

They will need to file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a credit or refund of the overpayment attributable to the disability severance payment.

The amount of time for claiming the tax refunds is limited, though the law gives veterans an alternative timeframe, one year from the date of the letter from DoD. Veterans who make the claims have the normal limitations period for claiming a tax refund, or they can claim it one year from the date of their letter from the DoD, whichever expires later. Taxpayers can generally only claim tax refunds within three years from the due date of the tax return, so the alternative time frame is especially important as some of the claims could be for refunds of taxes paid as far back as 1991.

Veterans can send in a claim based on the actual amount of their disability severance payment by filling out Form 1040X, while carefully following the instructions. But there’s also a simplified method, where veterans can choose instead to claim a standard refund amount based on the calendar year (an individual’s tax year) in which they received the severance payment. They should write “Disability Severance Payment” on line 15 of Form 1040X and enter on lines 15 and 22 the standard refund amount listed below that applies:

• $1,750 for tax years 1991 – 2005

• $2,400 for tax years 2006 – 2010

• $3,200 for tax years 2011 – 2016

Claiming the standard tax refund amount is the easiest way for veterans to claim a refund, the IRS noted, because they don’t need to access the original tax return from the year of their lump-sum disability severance payment.

All veterans who claim tax refunds for overpayments that can be attributed 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

Veterans who are eligible for a refund who didn’t receive a letter from the Defense Department can still file Form 1040X to claim a refund but need to include both of the following to verify the disability severance payment:

• A copy of documentation displaying the exact amount of and reason for the disability severance payment, such as a letter from the Defense Finance and Accounting Services explaining the severance payment at the time of the payment or a Form DD-214, and

• A copy of either the VA 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.

Veterans who didn’t receive the DoD letter and who don’t have the necessary documentation indicating the exact amount of their disability severance payment and the reason for it will have to get the necessary proof by contacting the Defense Finance and Accounting Services.

IRS headquarters in Washington, D.C.

IRS headquarters in Washington, D.C.

Andrew Harrer/Bloomberg


Michael Cohn