John R. Bullis: Refunds owed to veterans on disability severance overpayments

IRS Information Release 2018-148 of July 11 advised certain (some) veterans who received disability severance payments after Jan. 17, 1991 about possible refunds.

If the veteran paid tax (by mistake) on the payment, then a refund can be obtained by filing an amended return (Form 1040X). Usually refunds for amended returns are only allowed for the recent three years. Public Law 114-292 of Dec. 16, 2016 helps combat-injured veterans by exempting disability severance payments from taxable income. That law extended the time to file for refunds if the veteran reported that disability payment as taxable income.

However, the time for filing the amended return is limited to one year after the Department of Defense provides the veteran with the information required under H.R. 5015, the “Combat-Injured Veterans Tax Fairness Act of 2016.”

If the veteran did not receive a letter from Department of Defense, an amended return can still be filed. Then the Form 1040X must include verification of the exact amount of the disability severance payment (or a Form DD-214) and a copy of the Veterans Administration determination letter confirming the 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 the veteran did not receive the Department of Defense letter and does not have the required documentation that shows the exact amount received and the reason for the disability severance payment, then the necessary proof may be obtained by contacting DFAS.

Most veterans who received a one-time lump sum disability severance payment when their service was completed will receive a letter from Department of Defense. The letter will explain how to claim the tax refund they are entitled to receive. There is a “simplified” method to make the claim, but that has a fixed refund amount. The amount of the refund varies by when the payment was received.

There are special rules for that form 1040X and where to mail it to IRS (in Kansas City, Missouri).

This is just another example of why it is best to save all income tax returns with most of the supporting information usually destroyed maybe three or four years after the return is filed.

If the veteran is no longer living, it seems the person in charge of settling the estate can file the form 1040X but the documentation will still be required to show it qualifies under the Public Law.

Did you hear? “Life is too short not to create, not to love, and not to lend a helping hand to our brothers and sisters,” by Eric Maisel.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.