Military Disability Income

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Purpose of bulletin

To inform staff that tax preparers are incorrectly excluding military disability income on amended returns.


Beginning in 1995, we have encountered tax preparers filing amended returns to reduce taxable income based on calculations that used the taxpayer’s disability rating from the Veterans Administration based on Treasury Regulation Section 1.122-1.

This calculation appeared to be erroneous because the excluded income had already been excluded from the taxpayer’s Form 1099-R used to report taxable income. The Information Validation Section (IVS) denied claims because the calculation was erroneous based on application of Treasury Regulation Section 1.122-1.


There are approximately 3,000 amended returns received filed by 21 different tax preparers.

  • 1500 unprocessed claims
  • 1500 processed claims

Fraud and Discovery Section (FADS) began sending denial letters for unprocessed claims. FADS will issue audit letters in early April for claims that have processed with refunds issued to taxpayers.

If the account has not been resolved within 60 days after we issue the audit letter, we will send a Notice of Proposed Assessment (NPA). The taxpayer will have another 60 days to comply with the NPA before it goes final. If we don’t receive a response, we will send a Statement of Tax Due (STD) and the account will go to collections.

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