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Claiming Refunds for Veterans Where Disability Severance Pay Was Improperly Withheld

Posted on Feb. 26, 2019

Today we welcome guest blogger Sarah Lora. Sarah has been the Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon since April 2016.  Prior to that that, she worked for 13 years as an attorney in Legal Aid’s Farmworker Program where she concentrated her practice on employment litigation and tax controversy. Sarah is also a vice-chair of the pro bono and tax clinics committee of the ABA Tax Section. At the most recent Tax Section meeting she participated in a panel presenting on the issue of obtaining tax refunds for veterans. The blog has previously brought attention to the special extended time frame for filing refund claims by exonerees, here and here. In a similar fashion to exonerees, who needed to file refund claims long after the normal statute of limitations had expired, many veterans face the same issue because of a mistake by the Department of Defense that went unnoticed. Sarah explains the problem and the efforts being made to assist veterans in getting back the money they overpaid to the Treasury. With exonerees the need was for people to assist in filing the claims. For the veterans, perhaps the biggest need is identifying the individuals entitled to the refunds. While the Department of Defense is seeking to notify the veterans, it has lost contact with many of the individuals. Keith

Over 130,000 veterans have the right to a refund of over $717 million. So far only 26,000 have made claims and the time period for making claims for many of those veterans in nearly over. The NTA blogged about this issue last November here. In this post I will summarize the issues discussed by the NTA, as we seek to reach all affected taxpayers, and to provide resources for outreach efforts.

Summary of Issue: Since 1991 the Department of Defense has been improperly withholding federal income taxes and issuing information returns for disability severance payments, also known as “DSP.” A DSP is a one-time lump sum payment made to service members separated due to medical disability. DOD’s withholding of federal income taxes from DSP was improper because the payments are excluded from income under Section 104(a)(4). See St. Clair v. United States. According to the IRS, the DOD improperly withheld approximately $717 million from over 130,000 veterans. These numbers would be higher if they included veterans who served in the military reserves.

To recoup the wrongfully withheld funds, veterans must file an amended tax return with the IRS. However, many taxpayers missed the 3-year deadline for claims for refund under Section 6511(a). To remedy this, Congress passed a law called the Combat-Injured Veterans Tax Fairness Act in 2016, which allows veterans to file an amended return within 1 year after the Department of Defense provides the taxpayer with a letter describing their right to a refund of improperly withheld amounts. As of October 2018, according to TAS, 13,000 letters have been returned as undeliverable. The IRS has advised that the 1-year time period does not begin to run on undeliverable letters. According to TAS, as of October 26, 2018, only 26,000 of the 130,000 veterans had made refund claims for the improperly withheld taxes.

What You Can Do: Reach out to your community partners, veterans groups, and other allies to make sure we help all qualified veterans get the refunds they deserve. Some ideas: post information to your facebook page, send information to your community partners, set up a table at a Stand Down event in your area, or request to give a presentation at your local Purple Heart chapter.

Resources Available: The resources below, created by TAS, are available for dissemination.

For any readers who have already engaged in an effort to obtain refunds for these veterans, we welcome your comments on how the effort is going or your advice on how to make the effort more effective.

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