The Internal Revenue Service is expected to refund disabled veterans an estimated $78 million that was wrongly withheld from their disability severance pay.

More than 133,000 may qualify for the tax refunds, according to the National Veterans Legal Services Program. In 2016, President Obama signed into law the Combat-Injured Veterans Tax Fairness Act, which directed the Department of Defense to identify any severance payments to veterans with combat-related injuries paid after Jan. 17, 1991, from which the DOD withheld amounts for tax purposes, and the individuals to whom the severance payments were made.

The DOD is supposed to provide each veteran with a notice of the amount of improperly withheld severance payments, along with instructions for filing amended tax returns to recover the amounts. The law extended the amount of time for filing a claim with the IRS for a credit or refund beyond the standard three-year limitation. Instead, veterans will have up to one year after the DOD provides them with the information about the tax refunds to which they’re entitled. The DOD is also supposed to ensure under the 2016 law that the amounts aren’t withheld for tax purposes from DOD severance payments when the payments aren’t considered gross income.

The refunds will apply to veterans who received disability severance pay dating back to Jan. 17, 1991, with taxes withheld, and who also qualified for disability from the Veterans Affairs Department. The law aims to ensure that veterans who suffer service-ending combat-related injuries aren’t taxed on the severance payment they receive from the DOD.

A DOD spokesperson told the Jacksonville Daily News that it will be sending out letters to veterans with all the information needed and they will have one year to file a claim.

The word "Taxes" on the facade of the IRS headquarters in Washington, D.C.
The word "Taxes" on the facade of the IRS headquarters in Washington, D.C. Andrew Harrer/Bloomberg

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.