Federal Tax

Client has been on disability related to her illness since January 2012. Her disability company coordinated her Social Security as part of the disability payment.  In late of 2012, she cashed in her state retirement pension.  Per the terms of the disability policy, the state pension should have been deducted from the disability payment for all these months --- since Jan 2012 -- which it was not.   There is now a request (read = demand) for repayment of significant dollars.

IRS Publication 525, page 34, outlines the method for deducting the overpayment on her 2016 tax return.  I have only handled a few of these situations in the past and not for such a large sum of money.  I am in the itemized deduction realm (over $3,000) with the possibility of choosing the tax credit.

Preferably we would want to amend prior years and file 2015 as if the repayment was made.   I cannot find any supporting tax law or rulings for this logical position.  (Yes I know it is tax and logic does not apply).  Logically, since paying taxes on both the state pension and the full disability distribution for the entire time, she should be entitled to some sort of tax refund tied to the pending repayment to the disability company.  Also with this method there is no effect on the state taxes paid.

Has anyone used another method to adjust prior years for the repayment of disability successfully?  I am looking for a way around the cash basis.