Amat Victoria Curam

Financial Planning Information for Military Professionals

Retroactive VA Disability Payments and Your Taxes

26 Comments

A lot of the readers of this blog are military members or retired military members.  For those who have or will retire from the military there is a potential tax issue you will need to resolve.  This issue comes from the fact that VA Disability Benefits are often awarded retroactively to a prior date.  To my experience, 99.99% of those us who do receive VA Disability Benefits, will receive them retroactively.  And if that is the case, that means your taxes are/will be messed up.  Here is what to do about your situation.

First the good news.  You have the right to reduce your military retirement income by the amount that your pay should have been reduced if your VA Disability Benefits would have started on time.  This right was established by the courts in the Strickland decision (Strickland v Commissioner, 4th Cir. 1976) and is codified in Revenue Rule 78-161.  That is about the end of the good news.

Now, the bad news.  You are going to get little to no “automatic” help to do this.  You won’t receive and updated 1099-R.  You might get a note from the VA saying that you have rights under the Strickland Decision.  You won’t get a notice from the IRS letting you know you overstated your income in a prior year due to the VA offset not being taken.  So, you are going to have to do this yourself or bring in a pro from Dover.

What needs to be done?

If you were awarded retroactive VA benefits in 2011 you will need to adjust the amount on your 1099-R by the reduction that should have occurred and use the adjusted amount on your tax return.  If you are like me, you’ll need to do two separate calculations, as I had to prove my sons were in college to get an increase in the Disability payment amount.  So I had a period where the offset was correct, a period where the offset was too little and a period of where there was no offset.  Now, when you file your return you’ll have to decide whether you want to e-file or not.  I’m not 100% sure, but I think your return will go through.  But your 1099-R and your tax return won’t agree and this could trigger an audit or at least some questions.  The other option is to file on paper, include a letter explaining that you reduced your 1099-R income IAW Rev Rul 78-161 and also include a copy of the letter from the VA establishing your retroactive benefits (including your 214 might not hurt either).  Easy, right?

If your retroactive benefits span two years (for example you retired in 2010 and didn’t get a determination until 2011) you’ll have to decide if it is worth your time to try to get the refund that is probably due.  If you are rated more than 50% disabled, the tax benefit may be small and you might want to just let it go (you could send a letter to the President and let him know you did your part to reduce the deficit…sorry, editorial comment there).  If you are rated less than 50% disabled it may be worth your time.  What you will do in this case is file an IRS Form 1040X (amended tax return) changing your retirement income to reflect the offset that should have been taken.  Then include all the documentation mentioned above.  Even easier…

So the bottom line is: when you get retroactive VA Disability Benefits, you have the right to retroactively reduce your income.  But you’re going to have to do it yourself or hire someone to do it for you.

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26 thoughts on “Retroactive VA Disability Payments and Your Taxes

  1. Pingback: Tax Season is Over, Beware the Tax Scam | Amat Victoria Curam

  2. Curt- You are right on with this one.

  3. I am stuck in a bad situation because my VA appeal has taken over 5 years and is still not over. I was originally at 50% VA disability, with 50% CRSC, but now it’s 80% VA and 70% CRSC. This goes back to April 2007. Currently my disability is 90% VA and 80% CRSC, but that didn’t take effect until July 2009. The continuing appeal is to get the disability corrected to start in April 2007, and that appeal is at the BVA in Washington DC.

    I was taxed on $9000 that should not have been taxed in 2007, $5600 in 2008, $5000 in 2009, $3500 in 2010, and $2100 in 2011. And the 2012 1099R doesn’t look right for the new disability rating either, even though it’s supposed to be corrected by the end of the year when a VA decision is made in the same year.

    What does someone do when the VA drags their heels so much that the 3 years for amended tax returns is past? That’s just not fair, and I was hoping there was some kind of waiver request for people like me who are getting hosed by the VA, by no fault of my own.

    And, on top of all that, my calculations of my back pay indicate that the VA has shorted me $1500 over the time period of 2007-2012. Who do I talk to about that?

    I’d really appreciate any help, since I can’t seem to find a decent advocate in my area (Oakland CA).

    • Sandy,

      I haven’t run into this situation before, but let me take a look around and see what I can find out.

      Curt

      • I think there are a lot of veterans out there who don’t realize that they need to file amended tax returns, but there is only a 3-year limit. It seems pretty unfair that we get penalized because the federal government is so slow they can’t make a decision within 3 years.

        I think I found out the right people to talk to about the shorted $1500. But, it will involve a lot of paperwork. If you send an email to COR-CLAIMS@DFAS.MIL the auto-reply email will have all the details. And there is a 6-year limit on back pay as well. Good thing my 6 years is still good.

        Thanks for your help, Curt, I look forward to your reply.

      • Sandy,

        I did some research, but didn’t find an obvious solution.

        Your first avenue might be to contact the Taxpayer Advocate Service at 1-877-777-4778. They work for the IRS and their job is to help with these types of situations. IRS Pub 556 does give some information, but it doesn’t address your situation or any similar to it.

        A second option would be to file the 1040x returns even though it has been more than 3 years. Include all the details of the VA delays and reference the Strickland Decision and see what they do. If they accept it, good. If they don’t, then you could consider going to the Tax Court to file an appeal of the IRS decision. But…that may cost you more than the money you get back. Remember, if you are more than 50% disabled the offset is less than dollar for dollar.

        I know this isn’t a solution tied up pretty with a bow. But, I don’t think one exists. I’d recommend you hire an EA that specializes in representing clients in front of the IRS if you want to proceed. Again, look at the cost benefit trade-off.

        Best of Luck,

        Curt

      • Thanks, Curt, every bit of information helps, and I really appreciate your time. I sent everything to my accountant, but of course I’ll have to sign all the paperwork eventually. I will definitely include the Strickland Decision. We were planning on sending everything including 2007 and 2008 and see what they did, even with the evidence provided about the huge delays in VA decisions. Another option I have already started is contacting my Senator, who has helped me with VA problems in the past. If I find out anything useful, I’ll make sure to post it here for others. I am already planning on writing Letters to the Editors of all the military newspapers and magazines, to make sure the word gets out to all military members and veterans about these problems. Most probably haven’t even thought about auditing the money they get, or that they need to file amended tax returns when they get retroactive pay.

        However, I don’t understand your comment about more than 50% disabled. Since I have 90% VA disability and 80% CRSC, it turns out that I paid tax on $26,000 too much money over 5 years. My VA disability is taken completely out of my retired pay, so any increase in VA disability equals a tax refund on my retired pay. Or am I missing something?

      • Sandy,

        You are right. I’m the one that missed something. I was thinking of CRDP, which is what I what I normally deal with. What is the old saying? RTFQ.

        One other thing. I was talking with a collegue who works at MOAA. He couldn’t quote me chapter and verse, but he is pretty sure that in your situation, you could get five years to file an ammended return. He does a lot of work with this stuff and I trust him

        Sorry if I caused you any confusion/stress.

        Curt

      • Hi Curt,
        The amended tax returns are sent now with the Strickland Decision letter attached, thanks for your help. I was reading the auto-reply from DFAS COR-Claims (what you get when you send them an email), and this came up:

        CLAIMS OLDER THAN SIX YEARS FROM THE DATE OF ACCRUAL:
        31 USC 3702 (The Barring Act) was passed into law in 1940. It establishes a six-year statute of limitations on claims against the government. This means that if are making your claim more than six years after it accrued it is barred from consideration by law. Please read more about The Barring Act at http://codes.lp.findlaw.com/uscode/31/III/37/I/3702

        I’m not sure how to interpret this, but it sounds like you only have 6 years to file a claim according to this other act. Or does this apply to retroactive pay?

        By the way, I got a very nice response from my Senator’s office, so they’re aware of the problem with the VA, and Oakland in particular. It’s nice to know they’re going to follow my case and hopefully make sure things get taken care of properly.

        Thanks
        Sandy

  4. Dear Curt:

    What if you were told, e.g., in 1984 that you condition was not service connected and offered a chance to file a claim and you didn’t file a claim because you were told that your condition was not service connected and you accepted the severance pay and was discharged with an aggravation, and in 2011 you find out that you condition of aggravation is service connected and you file your claim then and get a 100% rating. My question is, since the military told you back in 1984 that it wasn’t service-connected, relative to retropayment, is it lawful to file a claim relative to the miscommunication you were given in 1984 in an appeal to try and get retropayment from 1984 since it was the military’s fault and negligence in telling me that my condition wasn’t service connected then? I feel I have been robbed blind and kicked to the curb, can you feel my aggravation?

    • Vester,

      The general rule for taxation is you must file an amended return for a refund within 3 years of filing the original return or 2 years of paying the tax, whichever is later. So, you may be out of luck there.

      As far as appealing to the VA, if you have documentation (medical records from your time on active duty), you may be able to file with the VA…I’m not sure on that. I don’t have experience with the VA appeal process. I would recommend that you contact an authorized Veteran’s Service Organization (VSO),like the American Legion or VFW. You can find a list of them at http://www.va.gov/vso/ . The site also has a link to attorneys and others that are accredited. The VSO will help you for free. I suspect you will need to pay an attorney for help.

      • I am currently going through the IRS refunds greater than 3 years ago because of the long time for the VA to make disability decisions. As long as you file the returns on the correct forms, AND you mention the “Strickland Decision” in your cover letter for each tax return (send them separately is best), you should be able to get all your refunds. This applies to state taxes as well, so don’t forget them. But don’t delay. The quicker you get all your paperwork together, the better.

        Also, you won’t get much of a refund unless you are also getting CRSC (combat-related disability). If you don’t have CRSC because you didn’t qualify before, make sure you check if you now qualify for back pay with CRSC too. That is a HUGE sum of money and a huge tax break. But, you can’t get CRSC and the VA pay simultaneously (something called CRDP). Your best bet is to take all the VA money out of your retired pay (so you pay less taxes andn thus qualify for a refund) and get the VA and CRSC pay separately, if the VA disability and CRSC amounts are similar in size.

        I hope this helps.

  5. Pingback: Stake Your Claim | Amat Victoria Curam

  6. Hi Curt,
    The amended tax returns seem to be going well. I am only waiting for 1 refund now out of the 5 years that I sent in. However, I am currently facing a problem with DFAS. I did an audit of all the money that I received and all the changes in retroactive payments from the VA and CRSC, and I think that ‘they’ (DFAS, VA, CRSC) owe me $1334. However, DFAS claims that ‘they’ don’t owe me money. The main question is, does CRSC start at the same time as VA, or is there some rule that says that CRSC starts in the month AFTER the VA? I retired 31 Mar 2007. I received my VA disability since 1 April 2007 (entitlement month), and paid on 1 May 2007 (pay month). CRSC says it started 1 May 2007, which I always assumed was pay month. Of course this all occurred after the fact because of how slow the VA is in making decisions, so it was all retroactive pay. I asked the CRSC guys at Randolph AFB if CRSC and VA started at the same time, and they said yes. But, I can’t find the 38 CFR or other regulation that tells me if this is correct. Do you know about the rule with CRSC and VA disability starting at the same time, or not? Thanks so much.

    • Sandy,

      I’m not 100% sure, but I THINK that CRSC and VA start at the same time. This would be because the CRSC replaces the VA offset from your pay. If you’re not receiving VA compensation, there is nothing to offset. I suspect that your CRSC should have started on 1 May.

      Sorry I can’t give you a more definitive answer.

      Curt

      • Hi Curt,
        Thanks for the reply. I always ask multiple people about any question regarding this complicated stuff, and the CRSC guy at Personnel told me the same thing. However, I gave him an example of my rating changing in mid-month. If the VA said that my disability changed on 26 Jun 2009 (the date of my letter to them that generated the change), then I am eligible for the new VA rating on 1 July 2009 (first full month after). That is my entitlement month. Then I would see that pay in Aug 2009, my pay month.

        So, it turns out that I was misinterpreting the law for the beginning of my pay. I was eligible for VA pay on 1 Apr 2007, after my retirement date of 31 Mar 2007. Even though it was the beginning of the month, it doesn’t count, so my disability and CRSC started on 1 May (entitlement month). Then I saw the pay on 1 Jun (the pay month). It’s a sucky system, but at least now I understand it. Because of this, DFAS is right, and they don’t owe me any money. However, I am currently fighting the VA (at the Board of VA in Washington DC) because Oakland VA screwed up my case so badly that they actually reduced my disability illegally (can you believe that), and ignored one of my medical conditions (that’s worth 50% all by itself).

        Unfortunately I have to wait 3-5 years before the Board will get to my case, with their current backlog of incompetent VA office decisions around the country. Once they finally figure it out, I will be due a lot of money. Thanks again for your help, and I hope that the information I provided here will help another vet understand this impossible system.

      • Sandy,

        Glad I could be of some help.

        Curt

  7. I just went from 30 to 70 percent on my mil. Disibilits . Will I ever get my navy pension back?

    • Every situation is a little different but…

      1. You should receive a check from the VA for the amount of Disability you should have received from the date of the percent change. That income should be tax-free

      2. You may have some issues with your 1099 for the retroactive award. It seems it is at least possible that your tax bill could go up.

      • After every thing is said and done, will I ever get my navy pension back?

      • Glen,

        I’m not 100% sure I understand what you mean by “get my navy pension back”. If the determination is retroactive, you will receive a check from the VA for the amount of retroactive disability compensation you should have received since you are now rated at 50% or higher disabled.

      • will I ever get my navy pension back?

  8. You were right. I Received every thing today. Thanks again.

  9. Hi Kurt,
    I wanted to correct my previous entries. It turns out that I was denied my back taxes for 2007 and 2008 because I did not file my back taxes within 1 year of the VA paperwork that changed the taxes. There are 2 rules: You must file your back tax refund within 1 year of the paperwork that changed your tax status, and you can only go back 5 years in taxes from the date that you file. With the current *^&^%^$^% way that the VA is operating these days, no one will get their taxes back because it takes longer than 5 years just to get a proper decision. I am still waiting for the Board of Veterans Appeals in DC to rule on my case, which was butchered by the Oakland VA office. Even when I get the ruling in my favor, changing my taxes from 60% to 90% starting in 2007, I won’t be able to do anything about it with the current laws. The IRS lady who called me (yes, she was actually helpful) explained all this to me, and she mentioned that someone else out there is started a lawsuit in the US District Court to get the time extended because of the complete incompetence of the VA. I need to find this guy and piggyback on his lawsuit. This is a significant amount of money, about $2500 in back taxes that I am due, and that’s only from changing from 60% to 70% disability. I can’t even imagine how much they would owe me when my disability goes to 90% where it belongs. Anyway, I thought you should know, and all your readers, that they cannot sit on any VA paperwork, even if they are still fighting to get the CORRECT disability. If you get any increase in disability, you must file for back taxes right away. Thanks again for your help, since at least I got 2009, 2010, 2011, and 2012 straightened out, for now.

    • Sandy –
      Thank you for this update. My father received his letter in September, 2012 and gave it to his accountant to figure out what he needed to do. Unfortunately the accountants at this office were not familiar with the process and gave my mother the run around for months saying that they were looking into it. When my parent’s filed their return this year for 2013, I went with them to question the status and they didn’t know diddly squat so I asked them for the letter and they had the nerve to say to me, “Let me know what you find out”! Well, as you can see, by the time I got involved it was over the one year mark so we were not able to go back to 2008 and 2009 for the amendments. I had sent them completed and sent in anyway, just in case, and my mother received a certified denial letter from the IRS last month. It’s really unfair when you have senior citizens who don’t know enough about these things and don’t use a computer and put their faith in the tax preparers to know what they’re doing. These accountants should have just told my parents that they were unfamiliar with CRSC amendments – then I could have done my research a whole lot sooner and my parents could have been able to get their refunds for 2008 and 2009. They need that money now more than ever – my dad is currently bed ridden and needs 24 hour care which is not cheap! Thanks again.

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