Taxes refund. You'll file next year and the severance is added to your income & the tax taken is added to you taxes. Then next year when you figure out your taxes, you may or may not get some or all of it back. Simple...
Yes VA payments are tax free. As for them collecting your 'severance package' AKA money. I to busy at the moment to look up references. But it states that you can not receive two compensations for the same thing. for instance Speration Pay and VA Payments. So three things that could happen:
A. VA holds back payment untill it reaches the amount of your severance.
B. You pay them your severance back (or a combination of both)
C. Keep severance and forget about VA (worst choice for you)