Law Allows Combat-Injured Veterans to Recover Improperly Withheld Taxes

Veterans with combat-related injuries will get relief from improperly withheld taxes under legislation signed into law by President Barack Obama. The Combat-Injured Veterans Tax Fairness Act of 2016, H.R. 5015, orders the restoration of tax amounts improperly withheld by the Defense Department from certain veterans’ severance payments going back to January 1991.

According to Congress, some 10,000 or 11,000 individuals retire from the U.S. armed forces every year for medical reasons. Congress has also found that the Defense Department has been improperly withholding taxes from severance payments to wounded veterans since 1991, and because most of those years are closed by the statute of limitation, those veterans cannot get redress through amended returns.

The act therefore extends the period for filing an amended return to recover the improperly withheld amounts. Veterans will have one year to file amended returns after they are notified by the Defense Department of the improper withholdings.

The act requires the Defense Department, by Dec. 20, 2017, to identify:

1. Severance payments paid after Jan. 17, 1991, that are not considered gross income under Sec. 104(a)(4) but from which taxes were withheld; and
2. Individuals to whom such payments were made.

The Defense Department must then notify those individuals, telling them the amount of their payment that was improperly withheld and telling them how to file an amended return to recover that amount. That notice will start the one-year period during which affected veterans can file amended returns.

Sec. 104(a)(4) excludes from gross income “amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country . . .”

—Alistair Nevius (anevius@aicpa.org) is The Tax Adviser’s editor-in-chief, tax.