You may prepare a tax return for your nephew, and he would be entitled to a recovery rebate. You can't sign for him unless you have a power of attorney, or he signs and gives you a form 2848, which you attach to his tax return and mail in. (This form is like a power of attorney but it only gives you authority to file his tax return.). Or, you can print the return and take it to the prison, have him sign, and mail it to the IRS.
You can list the inmate income as "other income". At that amount, it won't be taxable.
The IRS will only direct deposit a refund into a bank account with the taxpayers name and social security number. If your nephew does not have a bank account, he will have to request a check. It will be mailed to whatever address you use on his tax return (you could list your house, or his parent's, etc.). Don't try to get the direct deposit into your bank account.
*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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