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Being Fair to the Wrongly Incarcerated


By Orlando Gotay

There are few things that, in my mind, could be more damaging and catastrophic than being wrongly accused, convicted, and incarcerated for a crime that one did not commit.

As I was looking into the subject, I was shocked to learn that on average, the wrongly convicted person spends about 12.5 years behind bars. The US National Registry of Exonerations reports that from 1989 to 2012, there were 873 exonerations and “almost all are tragedies.”

The federal government, the District of Columbia, and 30 states have compensation statutes of some form. These try to compensate those former inmatesby making cash payments of various kinds. Ostensibly, this would help them reenter the society from which they were improperly taken away.

In addition to the statutes I just described, some former inmates sue the government that prosecuted them and win civil awards for the wrongful incarceration.

Some of these payments are substantial and can easily run into the six or seven-figure range.

As it turns out, those payments (and awards) were subject to US federal income tax, like any other income. But the IRS just issued guidelines regarding recent changes in federal law, providing for the exclusion from federal tax of payments (and civil lawsuit awards) made in favor of the wrongly incarcerated. In some instances, the federal exclusion may operate as an exclusion from state income tax as well. “Wrongful incarceration” includes reversals of convictions on appeal, pardons that decree the innocence of the person, and others.

To qualify, such persons must prove they have received payments on account of the wrongful incarceration, and, of course, have included them on prior federal income tax returns. If the money was taxed in prior years, the person can file amended returns to get refunds on the tax paid. A special provision ending in December 2016 allows refunds even from previous years that are normally closed to refunds.

It is far better not to find oneself in this situation, but this special tax benefit lessens the burden.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at


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