The IRS has provided guidance on how wrongfully-incarcerated individuals are to make claims for a retroactive exclusion from income for any civil damages, restitution or other monetary award received in connection with their wrongful incarceration. The Protecting Americans from Tax Hikes (PATH) Act of 2015, signed into law on December 18, 2015, permits such an exclusion.
Code Sec. 139F dictates the treatment of income resulting from wrongful incarceration. The provision outlines that there are no reporting requirements for receipt of an award qualifying for the wrongfully-incarcerated exclusion. Therefore, new recipients of such awards do not need to report the award on their returns.
For those taxpayers wishing to make retroactive exclusion claims, they must file the requisite forms and supplemental information. The guidance provides further details on who qualifies for the exclusion, types of payments that qualify for the exclusion and the documentation requirements that apply. Accordingly, affected taxpayers are to submit Forms 1040X, along with supplemental documentation, to make claims for wrongful incarceration exclusions.
For retroactive claims pertaining to tax years before December 18, 2015, the deadline for mailing a claim is December 19, 2016. Taxpayers are told to allow up to 16 weeks for the processing of their claims. For more information on the wrongful incarceration income exclusion, visit http://www.irs.gov.