Filing Late? Even if the IRS forgives you, DoD may not.
Missing your tax deadline can cost you your clearance even if you are due a refund. Seem like common sense? Some former clearance holders would disagree.
It’s common knowledge that taxpayers are required to file federal (and some state) tax returns by a set deadline each year or secure an extension. Unfortunately, however, many people think that the deadline does not apply if they are due a refund. Now, we are not here to tell you what to do with your taxes. We are (thankfully) not tax attorneys and this is not tax advice. What we are here to tell you is that relying on this ill-conceived assumption could jeopardize your clearance or Public Trust eligibility.
For example, in 2019, a Navy veteran and clearance holder for over 30 years explained that his returns were repeatedly late “because [he] assumed [he] had a refund coming and there are no penalties for late personal returns. . .” He also explained that he had disclosed his late filings in earlier security clearance applications without revocation or suspension of his clearance. DOHA (the office of the Administrative Judges who decide these cases for DoD) was not persuaded: “Applicant’s argument that the law is complex and therefore capable of being misunderstood is not a reason to excuse a multi-year failure to have complied with Federal and state tax laws, especially in light of his 2012 realization that his late filings could imperil his clearance.” In that case, the clearance holder continued to file his returns late even after receiving notice during a 2012 investigation that filing late could be a problem.
In 2021, another applicant who had held a clearance for over 30 years offered a similar explanation—his eligibility was also revoked, even though he began to timely file after receiving the SOR.
What is the basis for this assumption, you ask? Good question. It appears to be based on the “three-year rule,” for receiving a refund from the federal government (in “most cases”). According to the IRS (not us), “[t]here is usually no penalty for failure to file, if you are due a refund” and “[i]n most cases, an original return claiming a refund must be filed within three years of its due date for the IRS to issue a refund.” But, as you can see from the decisions discussed above, DOHA is concerned with an untimely filed return regardless of whether the IRS issues a penalty.
In both cases, the clearance holders argued that they believed their actions were permissible and, in both cases, the argument was rejected. Bottom line? When it comes to late taxes, the IRS may forgive you but DoD probably won’t. That said, every adjudication considers potential mitigating factors and the “whole person concept.” Anyone who has concerns about their clearance should consult with a security clearance attorney regarding their options.
Part 2 of this series explains why your security clearance or a Public Trust position may be compromised by tax debt, even if you were not aware of the debt because your spouse handled the taxes:
‘Tis the (Tax) Season: Tax Blunders Clearance Holders Should Avoid (Part 2)
Part 3 of this series outlines why involuntary repayment of tax debt is unlikely mitigating for clearance holders, even if you unintentionally ignored the tax debt.
‘Tis the (Tax) Season: Tax Blunders Clearance Holders Should Avoid (Part 3)
Elisabeth (Lisa) Baker-Pham is part 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. She 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.
This article originally appeared in FEDweek on March 15, 2022