Included in the 2015 passage of the Protecting Americans from Tax Hikes (PATH) Act was a provision preventing the Internal Revenue Service (“IRS”) from taxing restitution or civil damages awarded to individuals determined to be wrongfully incarcerated. The law also applies retroactively, so those who paid tax on such awards at any time in the past are entitled to refunds of that tax.

The IRS has issued new guidance (in the form of Q & A) on how taxpayers who qualify can benefit from this law. Individuals who previously paid tax on restitution payments should file a refund claim by filing a Form 1040X for each year they paid tax. On the top of each form, taxpayers should write “Incarceration Exclusion PATH Act.” Taxpayers may file a refund claim for any year in which they paid the tax; their claim is not barred by the typical three-year statute of limitations. However, in order to receive a refund for years outside of this three-year window (which would include any tax year prior to 2013), taxpayers must file for a refund by December 19, 2016.

Taxpayers with additional questions should contact a tax professional.