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Computer ‘glitch’ costs veterans big bucks

By August 13, 2018August 23rd, 2018VA Disability

The old saying about computers is “Garbage in, garbage out,” which is basically how the Department of Defense is explaining the fact that for approximately 25 years, veterans who received severance payments for disabilities incurred in combat were incorrectly taxed on those monies (the error did not include any monthly disability income payments).  Now, the government is trying to help the estimated 300,000 veterans affected get refunds, which could be anywhere from $1,750 to more than $10,000.

It’s not going to be easy

The Defense Department just recently determined which veterans were involved and how much each overpaid.  The error only affected those who received a disability discharge severance between January 1, 1991 and December 31, 2016.  Since even the IRS does not keep tax returns for more than seven years, it is unlikely many of the records filed prior to 1999 still exist.  Some veterans, fortunately, found the error and had it corrected; however, about 130,000 have not yet claimed their refund.

The law bars taxpayers from filing for refunds more than three years past the date of the original return; however, the National Veterans Legal Services Program (NVLSP) succeeded in getting legislation passed allowing all veterans affected by this error to make a claim.  The Defense Department has sent letters to vets who overpaid and haven’t yet filed a claim, telling them how much income they received that was unfairly taxed. Any veteran who receives one of these letters has a year to file an amended tax return — but not all of the vets involved will get the letter.

Here’s how to claim with — or without — the letter:

  • If you got a letter, fill out form 1040X (amended return), stating the amount of over-taxed income to receive the exact amount you overpaid or write “Disability Severance Payment” on line 15 of the form and receive a standard refund based on the year you received your severance payment.  ($1,750 for 1991 – 2005; $2,400 for 2006-2010; and $3,200 for 2011-2016)
  • You will also need to send a copy of the appropriate year’s tax return.  If you no longer have this document, you can request a copy from the IRS. If the IRS doesn’t have it, you might have to reconstruct it as best you can.
  • If you did not receive a letter, you need to ask for the form DD-214 from the Defense Finance and Accounting Services.  This form will show your severance payment. You’ll also need a copy of your VA disability determination letter. When you have these two documents you can file a refund claim.
  • Surviving spouses who filed joint returns with a veteran can use the 1040X procedure to make the claim.  Court-appointed representatives or trustees will need the additional Form 1310 (Statement of Person Claiming a Refund Due to a Deceased Taxpayer).

In all cases, send the claim to:

Internal Revenue Service
333 W. Pershing St., Stop 6503, P5
Kansas City, MO 64108


Contact Defense Finance and Account Services; Veterans Administration legal services; the IRS Taxpayer Advocates Office; or the NVLSP at