In 2011, John Smith was incarcerated for 24 months for a crime he didn’t commit. In the process of trying to clear himself, he lost his job, his wife, many friends, and his reputation – not to mention all the legal fees he paid defending himself. Turns out that some of the witnesses were faulty and the charges had been trumped up by a disgruntled past employee.
The judge freed John and vacated his conviction. John sued for compensation for his losses and was awarded a sizeable monetary reward as restitution for the wrongful incarceration. John used the money to attempt to start his life over; he found a job, and put the experience behind him – or so he thought. But his nightmare wasn’t quite over—John owes taxes to the IRS for the money awarded to him.
That was then.
The benevolent IRS, at last, agreed that even they aren’t hard-hearted enough to go after these folks. Wrongfully incarcerated individuals are now permitted to exclude from income “any civil damages, restitution, or another monetary award” that they received as compensation under the new Sec. 139F that went into place last December.
But what about poor John Smith and others in his situations? The IRS went further and is allowing taxpayers to claim refunds based on the new provision. They are even allowing eligible individuals to file amended returns for closed years, as long as they file their claim for refund by December 19, 2016.
A wrongfully incarcerated individual is one that was convicted of a covered offence, served all or part of a sentence of imprisonment for the offence (s), and meets one of the following requirements:
- The individual was pardoned, granted clemency, or granted amnesty because they were innocent
- The judgment of conviction was reversed or vacated and the indictment, information, or other accusatory instrument was dismissed
- The judgment of conviction for the individual was reversed or vacated and the individual was found not guilty at a new trial.
The exclusion from income encompasses past awards, current awards, or those in the future.
After December 19, 2016, refund claims must be filed by the normal deadline of the later of three years after the return was filed or two years after the taxes were paid. Even if taxpayers were previously denied a refund, they can try again.
So it took long enough the agency to make this situation right, but they did. If you are in a situation that requires you to file for a refund, contact Esquire Group and will help you through the process.