Tax Exclusions under Wrongful Incarceration Exclusion, Part 1

When a person is wrongfully incarcerated, it is common for them to receive financial compensation in the form of civil damages, restitution, or other monetary awards. As a result of the Protecting Americans from Tax Hikes Act of 2015, the money a person in compensation for being wrongfully incarcerated is not included in their income for tax purposes.

The following article answers frequently asked questions about the Wrongful Incarceration Exclusion.

Who is considered to be wrongfully incarcerated under the Wrongful Incarceration Exclusion?

A wrongfully incarcerated person is one who is convicted of a covered offense, serves some or all of a prison sentence from the conviction, and meets one or more of the following requirements:

  • The person was granted amnesty, granted clemency, or pardoned for the covered offense because the individual was innocent of the covered offense,
  • The conviction of the individual for the covered offense was reversed or vacated and the indictment was dismissed, or
  • The conviction of the individual for the covered offense was reversed or vacated and the individual was found not guilty at a new trial.

What is the definition of a covered offense?

A covered offense is any criminal offense under federal or state law.

Does the Wrongful Incarceration Exclusion apply to compensatory or statutory damages or restitution paid to the individual?

Yes, the exclusion applies to compensatory or statutory damages or restitution an individual receives for a covered offense for which the individual was convicted.

Does the Wrongful Incarceration Exclusion apply to awards received in tax years before the exclusion was enacted?

Yes, for an award the individual included in their income in the previous tax year and therefore made an overpayment of taxes, the individual may be able to file an amended Form 1040X to receive a refund. However, the individual must file the amended return within three years of the date when they filed the original return or within two years of when the individual paid the tax on the income, whichever is later.

What documentation must an individual submit with their amended tax return to claim a refund?

Along with Form 1040X, the individual must include two additional pieces of documentation:

  • Documentation providing the award was previously reported as income, when it was reported, and the amount. Such documentation may include federal income tax returns, Forms 1099-MISC, and any other documentation related to reported income.
  • Documentation establishing the award was made because of a wrongful incarceration. Such documentation may include court orders awarding the compensation, signed settlement agreements accepting the award, and letters that accompanied the award payment.

How does an individual submit a claim for a refund of an overpayment of taxes related to an award?

The individual must submit the claim in writing, mailing the Form 1040X and the two required types of supporting documentation to the following address:

IRS

333 W. Pershing

Stop 6503 5th Floor

Kansas City, MO 64108

In the year an award is received, what must the individual report concerning the away on their income tax return?

The individual does not have to follow any reporting requirements in the year the award is received. The individual simply omits reporting the award as income on their income tax return.

What documentation must the individual maintain concerning their award?

The individual must retain documents proving the award was made because the individual was wrongfully incarcerated. The individual must retain this documentation for three years after the date when the tax return is file for the tax year in which the award was received. Such documentation may include court orders awarding the compensation, signed settlement agreements accepting the award, and letters that accompanied the award payment.

Where can I get more help with my questions about income taxes?

If you need help filing your income taxes, dealing with the IRS, or getting answers to your tax questions, you need to speak with a tax attorney. Only a tax attorney has the training and experience to answer your tax questions and help you file your tax return, as well as the legal training to help you deal with the IRS in legal matters.

By completing the form below or calling the number at the top of this web site, a tax attorney will get in touch with you. The initial consultation is free of charge, so take the free step today to putting your tax issues behind you.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.