Claims for Refund: Combat Injured Veterans Tax Fairness Act of 2016 December 2018 Tax News

The Combat-Injured Veterans Tax Fairness Act of 2016 (Public Law 114-292) allows veterans who overpaid tax attributable to lump sum disability severance payments additional time to file a federal claim for refund or credit to recover the overpayment.  The Department of Defense and IRS began notifying approximately 130,000 affected taxpayers by mail in July 2018. For federal purposes the time for filing a refund claim is the later of:

  1. One year from the date of the Department of Defense notice.
  2. Three years after the due date for filing the original return for the year the disability severance payment was made.
  3. Two years after tax was paid for the year the disability severance payment was made.

The IRS also issued IR-2018-148, which provided standard refund amounts (simplified method) for eligible veterans based on the year they received their disability severance pay. This helps veterans in those instances where it is impractical to file a claim with a specific dollar amount(s).

  1. $1,750 for tax years 1991 to 2005
  2. $2,400 for tax years 2006 to 2010
  3. $3,200 for tax years 2011 to 2016

California does not conform to these special rules extending the statute of limitations and also does not conform, or have the authority to allow, the use of standard refund amounts. However, Revenue and Taxation Code (R&TC) Section 19311 allows taxpayers to file a claim for refund with FTB within 2 years from the date of a final federal determination, which is defined in R&TC Section 18622 as the date the adjustment or resolution is “assessed” or posted to the taxpayers’ IRS account.

Therefore, in those instances where the normal California statute of limitation has closed, taxpayers who file these claims with the IRS may then file claims with FTB within 2 years after the claims are allowed by the IRS. This is true even if the taxpayer used the simplified method and claimed the standard refund amount shown in IR-2018-148, instead of filing an Amended U.S. Individual tax Return (1040X), with the actual excluded amount.

For California purposes though, claims must be based on the actual amount to be excluded and ideally a California Explanation of Amended Return Changes (Schedule X) will be filed with that information.  However, under R&TC Section 19322, a taxpayer can file a refund claim in any format, as long as it is in writing, signed by the taxpayer or the taxpayer’s representative, and states the grounds of the claim, which in this case, is that they improperly included disability severance pay in income.

Taxpayers claiming a refund as a result of the Combat-Injured Veterans Tax Fairness Act of 2016 should follow FTB’s procedures for filing a general claim for refund as well as:

  1. The taxpayer should include a copy of the letter they received from the Defense Finance and Accounting Service (DFAS) or the Internal Revenue Service, a copy of the IRS Form 1040X, and substantiation indicating the IRS allowed the refund (determination letter, refund issued, etc.).
  2. Depending on the taxpayer’s situation, the refund may be claimed on either a California Form 540X or through a letter claim.