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IRS Owes Veterans Refunds for Overpayments from Disability Severance Pay

Michael Lostritto

July 13, 2018

Updated: June 20, 2024


Veterans who received disability severance pay from an injury sustained in combat since 1991 may have been taxed improperly and could be eligible for a refund. Legislation passed in 2016 to address the Department of Defense’s (DoD) errors in withholding taxes from pay that is supposed to be tax-free. On July 11, 2018, the Internal Revenue Service (IRS) released information about these refunds and how veterans can go about claiming them.


Why Does the IRS Owe Veterans?

In 2016, President Obama signed the Combat-Injured Veterans Tax Fairness Act, enacted to keep DoD from improperly taxing veteran’s disability severance payments. Disability severance pay is a lump-sum payment that veterans receive if they are wounded in war zones. The payment is based on rank and years of service, and is supposed to be tax-free.

As mentioned, veterans who receive disability severance pay are not supposed to be taxed on that pay. However, DoD improperly withheld taxes from these lump-sum payments from many veterans. To repay veterans who were improperly taxed on their disability severance pay, the Act requires that DoD identify veterans who were improperly taxed and notify them of how to claim a refund from the IRS. The Act also requires that DoD determine how much these veterans are owed.

The Act covers veterans who received disability severance pay as far back as January 1991. DoD estimates that this could include over 133,000 veterans.


How Will the IRS Refund Veterans?

The Internal Revenue Service (IRS) worked with DoD to identify veterans who received a one-time lump sum disability severance payment since January 1991, and these veterans will be sent a letter from DoD instructing them on how they can file a Form 1040X, Amended U.S. Individual Income Tax Return, to claim their refund.

However, veterans will only be able to claim their refund within one year from the date on the letter they receive from DoD.

According to the IRS, veterans have two options for claiming their refunds: they can submit a claim based on the amount of their disability severance pay, or they can claim a standard refund where the amount is based on the year they received the payment. The standard refund amounts are:

  • For tax years 1991-2005: $1,750
  • For tax years 2006-2010: $2,400
  • For tax years 2011-2016: $3,200

For veterans that do not receive a letter from DoD but believe they are eligible for a refund, the IRS requires additional information (as listed on their website):

  • Documentation showing the exact amount of disability severance payment (this can be in the form of a DD-214 or a letter from the Defense Finance and Accounting Service (DFAS)); and
  • A letter from VA that confirms the veteran’s disability or states that the veteran’s injury or illness was incurred in or the result of “armed conflict, while in extra-hazardous service, or in simulated war exercises, or was caused by an instrumentality of war.”

About the Author

Michael joined CCK in September of 2016 as an Attorney, was named Supervising Attorney in 2021, and now serves as a Managing Attorney. His practice focuses on the representation of disabled veterans before the Department of Veterans Affairs and the United States Court of Appeals for Veterans Claims.

See more about Michael