The Strickland Decision:

The Strickland Decision:

The Strickland Decision and Internal Revenue Ruling 78-161 give a retired service member the ability/right to adjust military retirement income reported on Form 1099-R. Defense Finance and Accounting issued a letter detailing the understanding of the law. Tax benefits will only apply to those who are rated less than 50% disabled or those who receive Combat Related Special Compensation (CRSC). For those rated 50% or more disabled and receiving Concurrent Retirement and Disability Payments (CRDP) tax consequences are essentially non-existent.

If you are less than 50% disabled you can reduce your taxable income in the year of award and if your claim spanned more than one tax year you can file an amended return to claim a larger refund or reduce the amount you paid in for that year as well.

IRS Statute of Limitations

Taxpayers can amend a tax return for a refund or credit for up to 3 years after the date you file the return. More specifically, the taxpayer must file an amended return within the later of:

Three years (including extensions) after the date the taxpayer filed the original return (if the return is filed timely, use the due date); or

Two years after the date the taxpayer paid the tax

Extension to the Statue for Refunds

These rules apply to all taxpayers, however, Congress realized that it is likely that a Disabled Veteran could be in “negotiations” with the VA and go beyond the 3-year limit, so there is a special rule for amended returns filed by Retired Disabled Veterans. The rule is in Section 6511 of the Internal Revenue Code.

Section 6511(d)(8)

Section 6511(d)(8) of the IRS Code, Special rules when uniformed services retired pay is reduced as a result of award of disability compensation, specifically states the following:

(A) Period of limitation on filing claim

If the claim for credit or refund relates to an overpayment of tax imposed by subtitle A on account of

(i) the reduction of uniformed services retired pay computed under section 1406 or 1407 of title 10 United States Code, or

(ii) the waiver of such pay under section 5304 of title 38 of such Code

as a result of an award of compensation under title 38 of such Code pursuant to a determination by the Secretary of Veterans Affairs, the 3-year period of limitation prescribed in subsection (a) shall be extended, for purposes of permitting a credit or refund based upon the amount of such reduction of waiver, until the end of the 1-year period beginning on the date of such determination.

(B) Subparagraph (A) shall not apply with respect to any taxable year which began more than 5 years before the date of such determination.

What Does that Mean?

There are two parts. First is the amount of time that you have to file the amended return. Second, is how far back you can go.

Once you receive the letter from the VA, you have one year to file the amended returns.

Now…the law doesn’t say it specifically but I don’t think Congress intended to shorten the amount of time you have to file your “recent” returns (i.e. under the normal 3-year statute of limitation). With that said, I can’t guarantee that and the prudent retiree would get the returns filed within one-year of the date of the letter.

Since I can’t imagine that you would get a letter from the VA dated 1 Jan and since most of us file based on a calendar year, 99% of us will be able to file amended returns for the 4 previous years only rather than the 5 years addressed in the law.

Here is an example from the US Court of Federal Claims (Jonathan L Haas, Plaintiff, v The United States, Defendant).

• VA rating decision on plaintiff (Haas) was issued on 1 Dec 09
• Plaintiff’s statute of limitations for filing his refund claims was extended for one year from that date, or until 1 Dec 10
• The five-year maximum limits the extended statute of limitation to the five tax years preceding the date of the determination.
• Five years before the date of determination is 1 Dec 04
• Because the 2004 tax year began on 1 Jan 04, the 2005 tax year is the earliest year for which plaintiff may receive the benefit of the extended stature of limitations.
• Plaintiff’s refund claims for 2001-2004 are not subject to that extension (Haas retired in 2001)

To summarize, you’ve got one year to file from the date of disability letter and at least the top-level you’ll only be able to file amended returns for 4 tax years prior to year of the date of determination.

If you think you might be in this situation in the future (you are appealing a VA determination) you might be able to file a protective claim for refund. 

Protective refund claims preserve a taxpayer’s right to claim a tax refund when the taxpayer’s right to the refund is contingent on future events that may not occur until after the statute of limitations expires.  The “protective claim” concept is not contained in the Code or Treasury regulations but is instead established by case law.

A protective refund claim is an informal claim, formal claim, or amended return for credit or refund typically based on expected changes in the Code, regulations, legislation or current litigation.  Claims identifying a pending court case or decision (as a contingency) are generally considered protective claims.

In order to be effective and recognized by the IRS, a protective refund claim should comply with the rules established by applicable case law and administrative practice.  For example, the claim must have a written component and must properly identify and describe the contingencies affecting the claim.  The claim must also be sufficiently clear and definite to alert the Service to the essential nature of the claim and must identify a specific year or years for which a refund is sought.  A protective refund claim may be ineffective if it does not comply with all of the requirements established by case law.

To set up a phone conference to discuss your case, current files, any amendments and even a protective refund claim, click the link below.

Strckland Decision- What Do I Do Now!