Found this on the DFAS web page. We cannot change previously issued 1099R forms, nor can we recover any funds sent to the Internal Revenue Service to cover the taxes on the payments already made to you. When we recoup VSI/SSB payments, we treat it like a pre-tax deduction. That is, we reduce your taxable income by the amount we deduct for the recoupment each month. For Example: If you received a gross separation payment for $60,000 less Federal Income Tax Withholding of $12,000, you would have received a net check for $48,000. We will recoup the gross amount of $60,000. If you become eligible for $2,500 per month from retired pay, less a VA waiver of $200 you would have an adjusted gross taxable income of $2,300. We recoup at the rate of 40% of gross income, which would be $920. Your adjusted gross taxable income will be reduced by the amount being recouped ($2,300 less $920) leaving a new taxable income amount of $1380. http://www.dfas.mil/retiredmilitary/plan/separation-payments/vsi-ssb-recoupment.html