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 is part 2 in a series of frequently asked questions about the Wrongful Incarceration Exclusion. Answers to other frequently asked questions can be found at Tax Exclusions under Wrongful Incarceration Exclusion, Part 1.
What is the deadline by which a wrongfully incarcerated individual must claim a refund of an overpayment of taxes for an award included in a previous tax year that qualifies for the Wrongful Incarceration Exclusion?
The individual must file the claim for a refund by the later of three years from the date when the individual filed the income tax return in which they reported the award or two years from the date the individual paid the tax on the award. There was an exception for individuals who could not me either deadline. However, this exception required that the individual filed his claim by December 19, 2016.
What is the process for filing a claim for a refund of an overpayment of tax on an award that qualifies for the Wrongful Incarceration Exclusion?
The individual must file the claim for a refund on an amended federal income tax return using Form 1040X, noting “Incarceration Exclusion PATH Act” at the top of the form.
Can an individual who was previously denied a refund or exclusion for a refund of overpayment of tax related to an award apply for a refund under the Wrongful Incarceration Exclusion?
Yes, an individual or was previously denied a refund or exclusion may apply for a refund under the Wrongful Incarceration Exclusion.
Can an individual who was wrongfully incarcerated but released before going to trial or being convicted of a crime exclude an award from income under the Wrongful Incarceration Exclusion?
No, an individual who was not convicted of a crime cannot exclude any reward under the Wrongful Incarceration Exclusion. However, the individual may be able to exclude any portion of the award relating to personal injuries or physical sickness under section 104(a)(2) of the Internal Revenue Code.
May a spouse, child, parents, or other individual other than the convicted individual exclude from income an award related to loss of companionship or derivative claims?
No, the Wrongful Incarceration Exclusion applies only to awards directly related to an individual’s wrongful incarceration.
Are payments received for wrongful incarceration considered civil damages?
Yes, payments received related to wrongful incarceration are classified as civil damages.
Will the Internal Revenue Service pay interest on amounts refunded under the Wrongful Incarceration Exclusion?
Yes, the Internal Revenue Service will pay interest on any amount refunded under the Wrongful Incarceration Exclusion.
If an individual excluded an award from income and was forced to pay penalties and interest, can the individual apply for a refund of the penalties and interest paid?
Yes, once the Internal Revenue Service determines an individual is due a refund on an award under the Wrongful Incarceration Exclusion, the individual will also receive a refund of any related penalties and interest paid to the Internal Revenue Service.
Can the estate of an individual exclude from income any award related to a wrongful conviction when such an award is paid posthumously?
Yes, the estate may exclude a posthumously rewarded award from income as is done with when a living individual excludes such an award from income.
Where can I get more help with my questions about income taxes?
If you have further questions about what income you can exclude or you need help filing your income taxes, you can get answers and the help you need from a tax attorney. A tax attorney has the education and experience to answer your tax questions and help file your tax return, as well as the legal training to help you deal with the IRS in legal matters.
If you complete the form below or call the telephone number at the top of this web site, you can speak with a tax attorney and get the help you need. The initial consultation is free of charge, so take the free step today to putting your tax issues behind you.
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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.