I've written about the Strickland Decision here before. If you missed those articles, you can read them on my blog here and here. But, what I haven't talked about is how the IRS statute of limitations rules affect your ability to claim refunds on the taxes that you paid that shouldn't have been paid under Strickland. That's the objective for today. Let's start with a review though...

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. Significant 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) the tax benefit is minimal or non-existent due to the phase in of CRDP over the last 7 years.

This results from the reality that it will take a long time to fully develop a claim for Veteran's Disability and during that time you are accrue retro-active benefits. For those rated less than 50% disabled the benefits, in essence, change some of your taxable Retired Pay into tax-free Veterans' Benefits. Unfortunately DFAS won't retroactively update/correct your 1099-R and you have to do it yourself.

So...bottom line is 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.

IRS Statute of Limitations

At the 50,000 foot level, you 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 early, use the due date); or
• Two years after the date the taxpayer paid the tax

These rules apply to all taxpayers. But, 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 Disabled Veterans.

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.

OK...sorry for quoting the law, but I wanted to get it down on paper for you. What does it 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. So...

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 seriously doubt 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.

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 the 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. But...that is for another article (actually I've written one and you can read it here).

While the U.S. stock market, as represented by the S&P 500 Index, has risen a stunning 205.66% as of March 31, 2015, since its low on March 9, 2009, some investors are still reluctant to participate after the near market collapse that accompanied the 2007-2008 financial crisis.(1)

Fleeing the market certainly may have felt like the right thing to do at the height of the financial crisis. But history shows that making investment decisions based on emotion has never proven successful. For instance, greed may have led an investor to own too many technology stocks when the bubble burst on that industry in 2000. Alternatively, fear may have caused investors to cash out of stocks following the crash of 1987 and miss some or all of the subsequent rebound.

Fast forward to 2015, and the reality is that investors who missed the extraordinary rally that has occurred since March 2009 may have helped to put their long-term accumulation goals at risk. This is especially true for investors with shorter time horizons, such as those approaching retirement. Consider this: From 2010 through 2014, U.S. stocks recorded an average annualized return of 15.5%, compared to 0.1% for money market securities.(2) The nearly nonexistent returns associated with cash-like investments could have a powerful impact on investors' purchasing power over time.