House Passes Bill to Recover Taxes Paid by Injured Vets

The House passed legislation this week enabling veterans who were injured in combat to recover any income taxes improperly collected by the Department of Defense on their disability severance payments.

The legislation would rectify what must seem an injustice, one of many for injured veterans who have needed to contend with the indignities of long waiting lists at Veterans Administration hospitals combined with frustrating government bureaucracies.

The legislation was introduced in May by Rep. David Rouzer, R-N.C., and was passed by the House on Monday. Action on the bill is pending in the Senate, however, and the congressional term is nearing an end this month.

The Combat-Injured Veterans Tax Fairness Act of 2016 would make sure that veterans who endured service-ending combat-related injuries are not wrongfully taxed on their severance packages from the Department of Defense. Under federal law, veterans who suffer combat-related injuries and are separated from the military are not supposed to be taxed on the one-time lump sum disability severance payment they receive from the DOD. However, thanks to an accounting error, an estimated 14,000 veterans owe millions of dollars. The legislation aims to fix the problem by instructing the DOD to identify those who were wrongfully taxed so they can be reimbursed.

This bill directs the Defense Department to identify severance payments to veterans with combat-related injuries paid after Jan. 17, 1991, from which the DOD withheld amounts for tax purposes, along with the veterans to whom those severance payments were made.

The Defense Department would have to provide each veteran with notice of the amount of improperly withheld severance payments, along with instructions for filing amended tax returns to recover the amount.

The period for filing a related claim with the Internal Revenue Service for a credit or refund would be extended beyond the three-year limitation to the date that is one year after the DOD provides the veteran with the information required by the bill. The Defense Department would ensure that amounts are not withheld for tax purposes from DOD severance payments to individuals when the payments are not considered gross income.

Hopefully the Senate will act before the end of the year to make sure the problem is rectified, perhaps within a larger defense bill, or else it will be inherited by the next Congress and the incoming administration.

For reprint and licensing requests for this article, click here.