It just might happen, if this gets in front of President Trump.  We can hope anyway because otherwise, this can be hard on the veterans and hard on the tax pros that try to help them, but first, we’ll look at the easy way.

The Easy Way Out

Instead of recomputing tax for the year in question, the veteran can claim a standard refund amount.  The amount is $1,750 for tax years 1991-2005, $2,400 for tax years 2006-2010 and $3,200 for tax years 2011-2016.  I haven’t been able to figure out how those numbers were arrived at or even what the authority was for setting them.  Whatever.  It is what it is.  And, as these things go it is very easy for a veteran who chooses to take this route.  Filling out the 1040X is a piece of cake.

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.

But Is That A Good Deal?

I spoke with Bill LeBeau. State Adjutant of the Massachusetts Veterans of Foreign Wars.  He told me that the Veterans Service Officers in Massachusetts towns and cities are on top of this issue.  Dealing with the amending is challenging though. The one example he told me about was a veteran whose W-2 amount went from $51,000 to $34,000 for 2007.  Just looking at the rate table the $2,400 seems light, but then there is eligibility for the child credit which might shift depending on what else is going on with the return.

In other situations, there are other possibilities.  Reilly’s Sixth Law of Tax Planning – Don’t do the math in your head.  The income change could bring the earned income credit into play or affect the taxability of social security benefits or the amount of deductible medical expenses or miscellaneous itemized deductions.  My back of the envelope is that it will be rare that the gimme amount is the better deal, so you really will want to do the math to see what the difference is and claim the higher amount.  And that is where it gets hard.  Really hard.

Before we get into how hard figuring the actual refund will be there is a practical reason why many veterans will settle for the lower amount.  Divorce.

The Problem With Joint Returns

If the veteran is claiming the basic amount the 1040X can be signed just by the veteran and the check will be issued to the veteran.  If an actual computation is done and the original return is joint, it is harder.  The spouse or ex-spouse has to sign and the refund might be split between them.  This is from the Internal Revenue Manual.

Both spouses must sign the claim if the adjustment relates to a joint return, refer to IRM 21.5.3.4.4, Signature Requirements for Claims. For divorced or separated taxpayers, refer to IRM 21.5.3.4.4.1, Special Handling of Signature Requests. If veteran is claiming the standard amount in (11) above only the veteran needs to sign the claim, issue refund in veteran’s name only. Since these claims can go back to tax year 1991, research the entity for the tax year of the claim to determine if spouses are the same as showing on the claim. An allocation of the refund may be needed, refer to IRM 21.6.1.5.8, Allocating Married Filing Joint Cases. If a refund was not previously issued from the married filing joint return and the Service can conclusively determine ownership of all income and payments claimed/allowed on the married filing joint return using internal information, the employee must prepare the allocation instead of rejecting the claim. To determine if a manual refund is required, refer to procedures in IRM 21.4.4, Manual Refunds. For decedent refunds, refer to IRM 21.6.6.4.22.2, Processing Decedent Account Refunds.

The question about joint returns was one of the first things that I thought of and I did not find it addressed on the IRS website.  I called them up and then went digging into the Internal Revenue Manual to confirm the answer that I got on the phone.  I have not seen this issue addressed elsewhere.

I’m wondering if there will be fights in probate courts with spouses demanding that the veteran go after the full refund that will be split.  When military pay interacts with taxes and divorce, it gets complicated quickly.

Good Luck Finding A Preparer

130,000 amended returns to prepare, we must be real excited to be getting all that extra business.  Well not so much.  You see, nobody does returns by hand anymore except for Robert Flach, the Wandering Taxpro, and he is not taking new clients.  I did a small survey of a few accountants to determine software availability and appetite for doing amended returns for veterans.  In my little boutique practice, we have software going back to 2012 and we are retiring next month and won’t be doing tax returns for anybody.  Thank you for your service, but no amended return from us.

The only other on-the-record response I got was from Andrea Carr, who is continuing to hang onto her day job till her career as a twitter comic takes off.  She wrote me: “Our software goes back to 2005 I believe, but I haven’t attempted to use 2005 in a long time, so I’m not sure it would work.”

As far as interest in the work goes -“It would depend on the veteran and the time I had available.  And priority would be given to family members, friends and existing clients. ”

Other responses, off the record.

We have software back to 2010. I would ask how many years are involved, and ask what returns they have, and then see whether it would make sense, especially if doing manual returns would be necessary.

If a bunch “descended,” it might be possible to do more of them as you would get some efficiencies.

And

If a client of ours had that issue I’d advise that we could prepare the amended returns but only using the simplified method. The difficulty of obtaining copies of returns (or transcripts) and getting access to software that dates back that far is too much for us to handle efficiently. As far as I know, our software goes back to only 2010 so a complete return would likely require manual calculations on archived forms.

Another reason to consider the standard amount is compliance costs if audited. I’m imagining the IRS will struggle to process and/or audit returns that claim more than the standard refund amount. Different issue, but we’ve handled audits of NOL carryback claims to otherwise closed years and the IRS often struggles with computing tax in their software for older years. I feel it is likely they will have computational issues if trying to match our calculations that will result in delays and additional compliance costs.

And

I have software that goes back to 2001.  I would not take on the engagement – veteran or not.  As a sole prop, I do not have the resources or time to take on 1 shot clients.

 I had a long talk with a friend of mine who runs a fifteen or so person practice.  We figured that you would end up spending around $1,000 in billable time trying to figure out whether the full amendment might be the better way.  He ended up deciding he wouldn’t do it unless it was somebody he knew.  And then he said that if a veteran came walking in off the street asking for help he would help him, but would tell the guy not to tell his buddies about the help he got.
This could be a bad sample as it is all CPAs, but here is what you should consider in looking for somebody to help you with this.  They are likely to have time to deal with it between October 15 and January 31.  So if you have somebody who usually prepares your return, don’t throw the letter in a “tax stuff” folder and bring it into the office on April 1.  Call them now and arrange to go over it in November or December.
Also, don’t rule out doing it yourself.  You can find the forms and instructions on line and do your return by hand. I mean you are a veteran after all, which nowadays means you are smarter and more capable than the average person.
Just for fun I called up my firm’s provider Walters Kluwer to find out what it would cost us to gear up to do a whole bunch of amended returns.  They will sell a disk with the software for a year for $500 or a “library” of five years for $1,400.  Of course due to changes in operating systems, you can’t be sure that their 2003 disk, for example, will run on a current machine, but how hard can it be to find some old laptops.  They go back to 1996, so I guess you would have to do the First Gulf War veterans by hand.  In principle somebody could set up shop for about $10,000 and there are 130,000 potential clients out there.
H&R Block has a page dedicated to the military, but I could not find anything about the combat injured refunds.  It seems like it would be a great marketing opportunity for them, but I’m not very good at marketing tax services.
Summary
There is some serious money waiting for veterans who qualify.  Tax refunds bear interest.  With the older ones, that will be, as we say “a number”.  Don’t forget that even though the refund is not taxable, the interest on it is.
Remember tempting as the gimme amounts might be, it really makes sense to try to determine what a fully worked out refund claim would yield.  Don’t put the DFAS letter aside to deal with later.  Now, or right after October 15, is a great time to get started.  Assuming you did not save all your tax returns  (I have never thrown any of mine away, but that is not the norm) just getting the information on what was on your original return from the IRS will be a project
If you have a lot of veterans in your practice, try to check in with all of them.  Remember the “combat” part is actually misleading.  I saw an article in Task and Purpose that had:
…meaning troops injured in conflicts spanning from the Gulf War to the wars in Iraq and Afghanistan might have been taxed thousands of dollars improperly.

And think about contacting the White House and telling them that you think it should be easier than they are making it.  Have the IRS compute the refunds and send them out. The President listens to veterans, so maybe there is hope.