Today we welcome guest blogger Sarah Lora. Sarah has been the Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon since April 2016. Prior to that that, she worked for 13 years as an attorney in Legal Aid’s Farmworker Program where she concentrated her practice on employment litigation and tax controversy. Sarah is also a vice-chair of the pro bono and tax clinics committee of the ABA Tax Section. At the most recent Tax Section meeting she participated in a panel presenting on the issue of obtaining tax refunds for veterans. The blog has previously brought attention to the special extended time frame for filing refund claims by exonerees, here and here. In a similar fashion to exonerees, who needed to file refund claims long after the normal statute of limitations had expired, many veterans face the same issue because of a mistake by the Department of Defense that went unnoticed. Sarah explains the problem and the efforts being made to assist veterans in getting back the money they overpaid to the Treasury. With exonerees the need was for people to assist in filing the claims. For the veterans, perhaps the biggest need is identifying the individuals entitled to the refunds. While the Department of Defense is seeking to notify the veterans, it has lost contact with many of the individuals. Keith
Over 130,000 veterans have the right to a refund of over $717 million. So far only 26,000 have made claims and the time period for making claims for many of those veterans in nearly over. The NTA blogged about this issue last November here. In this post I will summarize the issues discussed by the NTA, as we seek to reach all affected taxpayers, and to provide resources for outreach efforts.
read more...Summary of Issue: Since 1991 the Department of Defense has been improperly withholding federal income taxes and issuing information returns for disability severance payments, also known as “DSP.” A DSP is a one-time lump sum payment made to service members separated due to medical disability. DOD’s withholding of federal income taxes from DSP was improper because the payments are excluded from income under Section 104(a)(4). See St. Clair v. United States. According to the IRS, the DOD improperly withheld approximately $717 million from over 130,000 veterans. These numbers would be higher if they included veterans who served in the military reserves.
To recoup the wrongfully withheld funds, veterans must file an amended tax return with the IRS. However, many taxpayers missed the 3-year deadline for claims for refund under Section 6511(a). To remedy this, Congress passed a law called the Combat-Injured Veterans Tax Fairness Act in 2016, which allows veterans to file an amended return within 1 year after the Department of Defense provides the taxpayer with a letter describing their right to a refund of improperly withheld amounts. As of October 2018, according to TAS, 13,000 letters have been returned as undeliverable. The IRS has advised that the 1-year time period does not begin to run on undeliverable letters. According to TAS, as of October 26, 2018, only 26,000 of the 130,000 veterans had made refund claims for the improperly withheld taxes.
What You Can Do: Reach out to your community partners, veterans groups, and other allies to make sure we help all qualified veterans get the refunds they deserve. Some ideas: post information to your facebook page, send information to your community partners, set up a table at a Stand Down event in your area, or request to give a presentation at your local Purple Heart chapter.
Resources Available: The resources below, created by TAS, are available for dissemination.
For any readers who have already engaged in an effort to obtain refunds for these veterans, we welcome your comments on how the effort is going or your advice on how to make the effort more effective.
I tried to find online a specimen letter 6060-A or 6060-D from the Defense Department, but apparently it is classified or, more likely, deemed not essential to helping disabled veterans.
The IRS website tells us that
“You must complete and file IRS Form 1040X, Amended U.S. Individual Income Tax Return, for the tax year the disability severance payment was made carefully following the instructions in the notice mailed by the Department of Defense in July 2018. You must mail the claim generally by the later of:
1 year from the date of the Department of Defense notice, or
3 years after the due date for filing the original return for the year the disability severance payment was made, or
2 years after tax was paid for the year the disability severance payment was made.
If you did not receive the notice from the Department of Defense and you received a disability severance payment after January 17, 1991, that you reported as taxable income, you can still file a claim as long as you attach the necessary documentation to your Form 1040X. You may contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs to obtain your documentation for submission with the required Form 1040X. See the FAQs for additional information.”
I found the sixth question on the FAQs that eligible claimants who don’t happen to have copies of their tax returns from the 1990s can claim a standard amount, as follows.
“There are two options for claiming your tax refund if the disability severance payment was paid after January 17, 1991, and before January 1, 2017. You can:
“1. File a claim based on the actual amount of the overpayment attributable to your lump sum disability severance payment, or
“2. Choose to claim the standard refund amount listed below that corresponds to the year the disability severance payment was made. Simply write “Disability Severance Payment” on Form 1040X, line 15, and enter the standard refund amount listed below on line 15, column B, and on line 22, leaving the remaining lines blank.
$1,750 for tax years 1991-2005
$2,400 for tax years 2006-2010
$3,200 for tax years 2011-2016
“Claiming a standard refund amount is the easiest way to request a refund because it doesn’t require you to find your original tax return or ask the IRS for information from the return. This may be larger or smaller than the refund based on the actual amount from your return.”
If the average refund ($717 million divided by 130,000) is more than $5,500, this standard refund amount is saving the government a lot of money. Or perhaps that total includes interest. Does the DoD letter mention interest?
The NTA blog from November 2018 reports,
“At present, it is not clear what the DoD or the IRS is doing to obtain a better address for the veterans whose letters have gone undeliverable. The IRS is using the last known address on the most recent return to contact veterans. However, it’s not uncommon for veterans to have not filed returns for several years since some did not have a filing requirement or had extensions to file while deployed in combat zones, and thus, the IRS has sent letters to obsolete addresses. How can the homeless veterans be reached, for instance? The IRS could look for alternate addresses by researching various commercial databases to which it has access, including, for example, state driver’s license databases.”
I’m so old I can remember when the Social Security Administration helped find missing persons. However, I found this on the SSA website:
“Letter Forwarding
Previously, Social Security provided letter-forwarding services to aid in locating missing individuals, plan participants, and/or beneficiaries on matters of great importance. As of May 19, 2014, Social Security will no longer process requests to locate these individuals, due to advances in technology and cost savings.
In the absence of Social Security’s letter forwarding services, family members, sponsors, administrators and qualified termination administrators may use a variety of other methods to locate missing individuals, participants and beneficiaries, including:
• Commercial locator services
• Credit reporting agencies
• Internet search tools
• Social media websites”
But perhaps this service is still available to IRS? Or would be, if Congress ordered it?
The Department of Defense is trying to contact these individuals. While the DOD may have lost touch with many of these veterans, the IRS generally has a more current address. When the DOD requested the current addresses the IRS refused to release this information to the DOD based upon Sec. 6103. Instead the DOD and IRS decided that the IRS would mail a DOD letter to the last known address of the veteran, using an IRS envelope. My guess is that people, even veterans, are not particularly enthused about receiving a random letter from the IRS. Anyone who works at an LITC has met with clients who have many unopened IRS letters.
At last December’s LITC conference the IRS conducted a session on these DSP refunds. It was suggested to the IRS that the low response rate to the prior mailing might improve if a DOD envelope was used to send the DSP letters. Prof. Book has written about using behavioral economics theory in the tax world, something Nina Olsen has also studied. Switching envelopes might be a good place to start.
Will the IRS pay you interest on your disability severance pay?