Taxing the Wrongfully Convicted

For years, innocent men and women have faced tons of financial challenges when released from prison. A recently passed law may make things a bit easier.

A wrongfully convicted man, Robert Lee Stinson, hugs a friend after his release. (Andy Manis / AP)

If it seems like stories of men and women being released after years behind bars for crimes they didn’t commit are becoming more commonplace, it’s because they are. According to a report from the University of Michigan, there were a record 149 exonerations in 2015. That’s about five times as many exonerated men and women as there were 20 years early in 1995. On average, those released last year had spent 14.5 years in prison.

Many assume that following the acknowledgment of such a gross error is a wave of apologies both public and private, lots of assistance to help exonerees re-acclimate to daily life, and some form of restitution. But all too often that is not the case. Few services exist to help the growing population of exonerated Americans once they are free. Instead, many are left with either the same services available to released convicts or are entirely on their own, with no guidance for finding jobs or housing, or even transportation, says Jon Eldan, the director of After Innocence, an organization that works to help exonerated individuals get back on their feet. And one of the things that exonerees need help with: their taxes.

Often exonerees receive some sort of compensation from the state for their time wrongfully served. Is that money taxable? For years that was unclear, but a law that President Obama signed at the close of 2015, the Wrongful Convictions Tax Relief Act, will mean that exonerees can keep the entirety of these sums.

Prior to the passage of this new law, in order to be exempt from taxation on wrongful-conviction awards, former prisoners and their lawyers would have to prove that the compensation was awarded due to injury or illness suffered while behind bars. If they couldn’t prove that, compensation was often considered a replacement for wages forgone during a period of incarceration, and like wages, it was taxed. But unlike wages, the provider of the compensation (usually the state) didn’t provide an option for withholding taxes. Instead, they would simply give the newly freed individuals a lump-sum check, and file notice of the payment with the IRS. And that type of payment system can be financially dangerous not only for the exonerated, but for anyone, says Harry Stein, a tax expert and the director of fiscal policy at the Center for American Progress. “The tax bill comes as a surprise. That’s always a problem, and I think the tax law should always try to avoid that,” he said. “I think certainly with wrongful convictions you can have this problem.”

While some might think that lawsuits over years spent behind bars can provide a payday big enough to ward off financial distress, lawsuits, Eldan says, are much trickier than they might seem. The formerly incarcerated can’t simply sue for a wrongful conviction since some in the judicial system, namely prosecutors, are granted significant immunity from such suits. Instead the wrongfully convicted and their lawyers would need to prove that something illegal happened during the course of a police work or investigation, not that law enforcement and the judicial system simply got the wrong person. And even if they do have grounds, such lawsuits can often involve years of legal battles that some exonerees aren't up for.

In cases when compensation was in fact taxable, that could create extreme difficulties for exonerees. If an exonerated individual spent a significant portion of their compensation on things like housing, clothing, and food, and then later faced a tax bill and possibly additional fines for nonpayment, what was he or she to do? To make matters worse, the lack of clarity in this area meant that even if an exonerated person sought out professional advice from a lawyer or accountant about his or her compensation, it was often difficult to get a correct answer since the law is so nebulous and interpretations can vary based on the case, compensation, or geography. The result is few tax experts are well versed in this particular area. (A fact that became apparent as I sought out sources for this story.)

The new tax law, passed at the close of 2015, should hopefully change all that. “This law seems quite clear in saying that if you’re compensated for wrongful conviction, that’s not taxable. It provides really meaningful tax relief to people who are in a terrible situation,” says Stein. He added that the clarity alone is significant, as it means exonerees have one fewer legal nightmares to navigate following their release.

Stein says that altering the tax law is hugely important when it comes to correcting the injustices done to those who were wrongly convicted. “This is very important for the people it affects, but it’s a trivial cost to the federal government,” he says. Stein estimates that the loss of tax revenue would be about $1 million annually, and points out that in 2016 the federal government will collect well over $3 trillion. He also notes that this type of tax relief has been attempted before, but the bill survived this time as a part of a much larger tax package that included several important tax compromises. “It’s just one of those things. When the gears of Congress are able to turn a little bit, things like this can happen, that otherwise just get lost for no reason.”

Not only will compensation for the wrongfully convicted no longer be taxable, but the law is also retroactive, meaning it provides a refund for any exonerated persons who paid a tax bill on their compensation in the past. But the window to file for reimbursement will only last for a year, requiring those who paid taxes on such compensation awards to re-file by the end of 2016. And that presents another challenge for Eldan. Though he says that it’s definitely possible to get filings done for all the people who’ve paid taxes, those who’ve been exonerated must be notified of the law change and then their cases evaluated to see if they qualify for reimbursement. Then they would need to actually file. And finding professionals with an in depth knowledge of this area of law and taxes can be a challenge, “This is such a niche area, [many] don't really understand it and so they are not prepared to deal with this,” he says. So for now, he’s calling around, helping to spread the word and trying to find accountants who are willing to tackle these cases, particularly for low-income individuals.

“It’s wonderful that this change is coming about, but what often is required is someone to actually make sure it gets done,” Eldan says. “I’m intending to get to everyone possible.”