Several years ago, while reviewing veteran separations for unfitness for duty, the National Veterans Legal Services Program (NVLSP), a nonprofit advocacy organization, made a disturbing discovery.
NVLP found that the Defense Finance and Accounting Service (DFAS) used an outdated process of withholding taxes prior to making payments to veterans. Tax exemption for disability severance pay has been in effect since 1991 (ruled in St. Clair v. United States).
To ensure disability payments complied with St. Clair v United States, Congress passed The Combat-Injured Veterans Tax Fairness Act of 2016. The law was originally anticipated to impact approximately 13,800 vets, but after a review by DOD and the IRS, it was announced last month that the law could apply to over 130,000 veterans.
The IRS has begun sending out instructions, to the last known address of eligible veterans, on how to request a refund and asking veterans to track and calculate years of severance tax back pay. Those who receive these letters should be aware of a few things:
First, in lieu of tax paperwork such as a copy of the past year’s return or evidence of earned income for that particular year the IRS will allow the veteran to request the “standard refund” for the year they received their disability severance pay.
Second, those not medically retired from the service because of service-unfitting medical conditions who received a lump sum payment while waiting for determination of compensation may not be eligible for a refund. Title 38 Section 5304 of the United States Code states, where federal employees are prohibited from being paid by more than one federal agency for the same thing. Once your entitlement to VA compensation began, the VA withheld an amount equal to your severance pay, dollar for dollar. If you had twenty years in service, you are exempt under an exception to the law, but most people not.
If you do receive recouped refunds, my advice would be to not spend any of it before speaking to a representative at your nearest VA Regional Office. Navigating between multiple federal agencies can be daunting for even the trained professional. If you think you may have been treated unfairly by the military or the VA, or have not received the outcome you are entitled, call a law firm to schedule a consultation with a military attorney at Camp Pendleton who has experience and first-hand knowledge.
More information on the VA severance tax exemptions can be found at www.irs.gov (search “Combat Injured Veterans”), or https://www.dfas.mil/dsp_irs.html.
Thanks to The Federal Practice Group for their insight into tax refunds for veterans.