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Bipartisan bill could change tax law nationwide

A criminal conviction can send an individual to prison, sometimes for a very long time. According to a study by The Pew Charitable Trust, Texas had 171,249 prisoners as of Jan. 1, 2010. Recent improvements in DNA testing can sometimes prove that a convicted person is innocent, rather than guilty. When that happens, the former prisoner can sue the government for wrongful conviction, and obtain compensation for that wrongful imprisonment.

Any financial compensation obtained by the ex-prisoner has typically been subject to federal income taxes. A current Congressional bill sponsored by Sam Johnson, a Republican from Texas, and John Larson, a Democrat from Connecticut, would exempt those awards from federal income taxes.

According to news sources, this could have a surprisingly large impact. Exonerations have risen to nearly 4,000 prisoners since 1989. About 300 of those exonerations were due to DNA evidence. Some of these wrongfully convicted individuals may obtain significant settlements from a sympathetic jury.

An additional issue has been raised, that the tax law change would address, is whether or not the prisoner was physically injured. Until 2007, those who were wrongfully imprisoned were awarded tax-free compensation. In 2007 the IRS changed its policy and ruled that the tax-free status only applied if there were an injury to the prisoner.

Some professionals believe that the tax law is currently unclear in this regard. If the prisoner was never injured, was there no wrongdoing? The tax law change that is proposed would seek to clarify the issue.

One of the Congressional sponsors of the bill said that the government should not add "insult to injury" by forcing the wrongfully imprisoned individual to pay Uncle Sam a percentage of an award for damages.

Source: Forbes, "Bill Would Make Wrongful Conviction Awards Tax-Free," Robert Wood, March 30, 2012

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