I just found this in the Internal Manual of IRS.
Combat Related Special Compensation (CRSC) and Concurrent Receipt of Disability Pay (CRDP) are programs managed by the Army, Navy, Air Force or Marines for retired veterans. CRSC payments are non-taxable ... The taxpayer must attach the Defense Finance and Accounting
Service (DFAS) Letter and the appropriate copies of the Form 1099-R
From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRA's, Insurance Contracts, etc., to claim a refund of taxes paid on the excludable amount, before adjusting the military retirement pay from taxable to non-taxable.
Note that this says nothing about an AMENDED 1099-R.
I had a client that had what I think is a similar issue. OAS would NOT amend the 1099-R to say nothing was distributed from the pension ... BUT the did put an asterisk on the 1099-R that said that the client had the credit
AGAINST this income available, under Section 1341.
IRS front lines also kicked this back, and she ended up going to the taxpayer advocate and presenting this under section 1341, and eventually three years of refund were generated.
She was able to get hold of someone in the Legal area of IRS and was made aware of the ability to do this... Later when trying to get it done, the front lines told here that Legal was only there for certain months of the year, and that the credit could only be done in the year paid back (rather than applying retroactively to the three years she had paid tax on the pension while the disability claim was being processed).
But by preparing the case and pushing it through both appeals and the taxpayer advocate service
she was refunded the tax paid on that pension, because the pension was paid back by the department issuing the disability payments (because it was retroactive)
Again let me know if I've understood your questions correctly and we can go from there...