How big a torsion bar nick is ok?

My point exactly. It can be done, but it ain't worth it.

I think you missed my point. It can’t be done.

Removing enough material to remove the stress risers from the damage will create a section of bar with a different diameter. With the way a torsion bar carries load that section will operate at a different torsional rate then the rest of the bar. It might last longer than running it as is, but eventually it will break in that spot. You’re just trading a stress riser fracture for a fatigue fracture in the section of bar with a narrowed diameter.