HELP! Combat related severance

I recieved the 10c designation for my severance pay which means its tax free. I filed the necessary paperwork with DFAS to get the taxed portion back, which they promptly did. Now come tax time and my tax exempt severance pay is being reported to the irs as income. Anyone have any knowlege or experience with this? Ive been googling and searching for help with this and im at my wits end

 

[Ruptured Duck]

26 USC 104...

 

[owen8472]

when you enter it into your tax for it wont count against your taxs !! it looks bad but its not you wont have to pay anything for it. however it will put you in a higher tax bracket in your income status. this will mean you get less of a refund because of it.