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Throughout 2007 a taxpayer was incarcerated, and has been incarcerated since 1997, serving a 40-year sentence.
While incarcerated, he filed his 2007 federal income tax return reporting wages of $15,640 and claimed an earned income credit of $4,667. The taxpayer was unable to disclose how the income reported on his 2007 return was earned, but asserts that the income was not from work within the prison.
The IRS determined that the taxpayer was not entitled to an earned income credit; and also determined that he was liable for the accuracy-related penalty based on negligence or disregard of rules or regulations.
IRC Section 32(c 2)(B) provides that "no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account" in determining earned income.
The court held that because he was an inmate throughout 2007, all of his income was excluded from the computation of the earned income credit.
Sections 6662(a) and (b)(1) impose a penalty of 20 percent of the amount of any underpayment attributable to negligence or disregard of rules or regulations.
Section 6664 provides an exception to the accuracy-related penalty if the taxpayer establishes that there was reasonable cause for, and the taxpayer acted in good faith with respect to, the underpayment.
However, the court held that the taxpayer did not have reasonable cause to believe that he was entitled to the earned income credit and did not act in good faith within the meaning of Section 6664, and held that he was liable for the accuracy-related penalty.
It's not quite clear how he earned wages outside the prison, when he was sentenced to 40 years. Maybe work-release? Or he escapes for a weekend? And, maybe it's rubbing it in to hit him with the accuracy-related penalty. After all, he is in jail, and has plenty of time to file an accurate return. See Albert Lawrence Bomer, Jr., v. Commissioner, April 26, 2010.
Interesting story, Rich! I wonder where he got the idea to claim an earned income credit? Someone must have suggested it to him. I googled "earned income credit" with "prisoner" and the first hit was an article about earned income credit written just for prisoners. It says "many prisoners may be eligible" for the earned income credit but does not provide specific details. Perhaps this fellow received some misguided advice. Another result from my google search was the personal profile page of the inmate from the MI Dept. of Corrections website, including photo. I had no idea there was a public catalog of prisoners like this.