“Wrongful Convictions Tax Relief Act” Would Exempt Restitution Awards From Federal Taxation
In the 112th Congress, Rep. Sam Johnson (R-TX) and Rep. John Larson (D-CT) introduced H.R. 4241, a bill to “amend the Internal Revenue Code of 1986 to provide tax benefits to individuals who have been wrongfully incarcerated.” After being announced and referred to the House Ways and Means Committee, the bill failed to gain traction and eventually died, and was subsequently tabled in the 113th Congress while a larger tax reform proposal made its way through the legislature.
Yesterday, Rep. Johnson re-introduced the bill as H.R. 3086—the “Wrongful Convictions Tax Relief Act.” The bill’s operative section specifically inserts new language into the Internal Revenue Code of 1986, stating that:
“In the case of any wrongfully incarcerated individual, gross income shall not include any civil damages, restitution, or other monetary award (including compensatory or statutory damages and restitution imposed in a criminal matter) relating to the incarceration of such individual for the covered offense for which such individual was convicted.”
Simply, it creates a tax exemption on all forms of restitution awarded to wrongfully convicted individuals, which would additionally serve to alleviate much of the unevenness that currently exists in the tax code related to this issue.
Currently, the IRS, in determining the tax status of those wrongfully convicted, asks whether such an individual was physically injured and/or sick while they were imprisoned. If so, their awarded restitution is tax free, in the same way normal physical injury recoveries would be.
But what if there was no physical injury or sickness? According to Robert Wood, in a Forbes column from 2012 regarding the subject, the IRS has avoided providing direct guidance:
“What if an exoneree isn’t physically injured? In IRS Chief Counsel Advice 201045023, the IRS said a recovery was exempt, but the IRS sidestepped whether being unlawfully incarcerated is itself tax-free. The Tax Court (and Sixth Circuit) in Stadnyk suggest persons who aren’t physical injured may be taxed.”
Rep. Johnson’s and Larson’s bill would remove any such ambiguity, and make all restitution awards tax-exempt.
In the end, this is sensible policy. The entire point of providing restitution in the first place is to right a grievous wrong and make victims whole, which includes those wrongfully charged and convicted of a crime. Also, it’s of little sense to award monetary damages to an individual with one hand, just to rattle a collection tin with the other at the same time.
Many such exonerated individuals, as Wood states, “experience severe hardship acclimating to society, finding jobs, housing and reconnecting with family.” This bill would remove one such barrier to re-entry, preventing them from experiencing, in the words of Rep. Larson, an “insult on top of their injury”; an injury that was inflicted by the state.