By Elisabeth Baker-Pham, Kalijarvi, Chuzi, Newman & Fitch, P.C.
Ignorance is not bliss: Trusting your spouse to handle tax filings does not excuse a clearance holder’s joint tax debt.
Does your spouse prepare and file your taxes? You may be counting your blessings as this year’s tax deadlines near, but don’t count yourself out of the process completely. If you have a security clearance or a Public Trust position (or want to have one in the future), your eligibility may be compromised by tax debt even if you were not aware of the debt because your spouse handled the taxes.
We’re sure plenty of people reading this post trust their spouses and feel sorry for the poor souls who aren’t so lucky. As the Brits would say, good on you. But, at the end of the day, trust is the most common denominator in many tax cases where the spouse is blamed, though the reasons vary. Let’s take a look.
Unawareness is generally not an excuse.
In ISCR Case No. 19-01949, a 71-year-old clearance holder had worked as a secretary for naval contractors. At the time of the hearing, she had held a secret clearance for almost 40 years. When questioned about an undisclosed debt, she testified that she permitted her husband of nearly 50 years to file their taxes and she signed the returns without reviewing them. She attested that she was unaware of the debt because she was “left in the dark” on a lot of things, and the debt related to her husband’s business with which she was not involved.
The Administrative Judge concluded:
While [the clearance holder] could reasonably rely on her spouse to handle the preparation of their joint income tax returns, this did not relieve her of the responsibility to review the returns before she signed them. It was her choice not to review them. There is no showing that she questioned her spouse about items on their returns prior to their filing, so she accepted the risk of any errors on the returns.”
In ISCR Case No. 11-09757, the clearance holder testified that his wife was responsible for their taxes but would not discuss their taxes with him. The extent of this silence was evident—the clearance holder did not know why his taxes were not timely filed for three years, and his wife “did not reveal the full extent of their tax debt to [him] until three days before the hearing.”
The Administrative Judge concluded:
Repeatedly, Applicant stated that he deferred to his wife with regards to their taxes and relied on her to resolve any related issues as a matter of trust. Trust is essential in a marriage. However, candor amongst spouses with regard to issues such as finances is equally essential when one or both of the spouses maintain a security clearance. One’s financial situation is a significant issue in these matters, as Applicant surely knew when he received the SOR, if not before.
Here, Applicant presented his case handicapped by his lack of knowledge regarding both his own, and his household’s, finances. While Applicant stresses that his lack of knowledge about the debt at issue is based not on negligence, but ignorance, the distinction is moot.
In ISCR Case No. 18-01674, another clearance holder testified that the tax debt was not his but his wife’s due to her failure to properly withhold taxes.
The Administrative Judge concluded:
[The clearance holder’s] tax issues, while primarily caused by his spouse’s failure to pay his taxes, were within [his] control, as [he] permitted his spouse to handle their family’s finances and file joint returns. By doing so, [the clearance holder] accepted responsibility for all the taxes owed as a family unit.
In at least one case, however, the clearance holder was not held accountable for her failure to review the joint filings where she attested that her former spouse was abusive and “refused to allow her to file their taxes or have control over her finances.” Nevertheless, the Administrative Judge pointed out that her tax problems were within her control once the couple divorced and, aside from some “sporadic” efforts, she had not resolved the tax debt.
In all of these cases the clearance holders were denied continued eligibility, but that’s not to say that the accumulation of tax debt, alone, was to blame. How the clearance holder responds once on notice of the debt is crucial.
How a clearance holder responds to the debt once they are aware of the debt is crucial.
For some, this warning might be too late. So, what’s a tax-debt-laden gal or guy to do? The good news here is that, generally, the accrual of debt itself was not fatal—what mattered the most was what the clearance holder did once they learned of the debt. For example, while the “my wife won’t talk to me about it” guy above (ISCR Case No. 11-09757) ultimately lost his clearance due, in part, to his continued reliance on his wife to handle the matter, another clearance holder who had relied on his wife to file their taxes overcame the issue by showing that he took several steps to mitigate the government’s concerns, including:
· “He attempted in good faith to file [missing tax filings] with both the Federal government and the state, but was not permitted to do so because substitute filings had been prepared and the time for amendment had expired.”
· “The late filing for 2009 occurred due to a transmission error, which was eventually rectified in 2013 when he met with IRS representatives.”
· “[He] is engaged in financial counseling.”
· “He completed a budgeting class and is enrolled in additional financial classes to aid him in managing his family’s finances.”
· “[He] can be trusted to continue to resolve his small remaining debt to the IRS.”
In another case, the clearance holder successfully demonstrated that:
· a divorce decree named her ex-husband responsible for the tax debt, which stemmed from his self-employment;
· although the IRS would not accept the decree, the clearance holder was filing for “innocent spouse relief” with the IRS; and
· two remaining debts were “small” and therefore could not “be a source of improper pressure of duress.”
The amount of debt and ability to pay matter.
As you can see from these last two cases, the amount of the debt and the clearance holder’s ability to pay debt for which they are responsible is another crucial factor. In the case of the 71-year-old secretary mentioned above, the total tax debt was nearly $100,000. The clearance holder attested that she “begged” her husband (from whom she was separated) to handle it but he had not. Although the Administrative Judge also took issue with the clearance holder’s failure to take steps to relieve herself of liability (such as applying for “innocent spouse relief” discussed in more detail below), the judge also made clear that the significant debt itself was an issue: “[t]his case is primarily one of an inability to repay the debt rather than an unwillingness to do so. Her annual income from her employment [is] $50,000, from which she is repaying the state income tax delinquency at $150 each pay period.”
If a clearance holder argues they should not be responsible for the tax debt, DoD may expect the clearance holder to seek relief from the IRS.
As noted above, in cases where a clearance holder or applicant argues that they should not be responsible for the debt because of their spouse’s actions, Administrative Judges often point to the options IRS makes available to taxpayers, including: “innocent spouse relief,” “separation of liability relief,” and “equitable relief.” A clearance holder who is facing a tax debt which they believe may be eligible for relief should contact a tax professional for advice on these possible avenues of relief.
Moral of the story? Review your tax filings (even if you think your spouse can do no wrong), maintain open communication regarding your finances and tax obligations when filing jointly with your spouse, consult a tax professional, if necessary, and pay any tax debt as soon as it is incurred if you are able. And, of course, contact a security clearance attorney immediately if you have any questions or concerns about financial concerns impacting your clearance.
In Part 1 of this series, we wrote about the perils of habitually filing your taxes late even if you are due a refund:
‘Tis the (Tax) Season: Tax Blunders Clearance Holders Should Avoid (Part 1)
Elisabeth (Lisa) Baker-Pham is co-chair of Kalijarvi, Chuzi, Newman & Fitch, P.C.’s security clearance practice, advising applicants through the clearance process and representing federal employees and contractors whose clearances have been threatened or suspended, or whose suitability for federal employment has been challenged. Lisa contributed to the firm’s 2021 edition of “Security Clearance Law and Procedure.” If you have any concerns or questions regarding activities that may implicate a security clearance, the attorneys at KCNF are experienced in clearance matters and are available to assist.
*Nothing in this article is intended as tax advice. The attorneys at Kalijarvi, Chuzi, Newman & Fitch, P.C. are not tax professionals. You should consult with a tax professional regarding any tax matters, including any conclusions you may draw from this blog post.