‘Tis the (Tax) Season: Tax Blunders Clearance Holders Should Avoid (Part 3)

Photo of Elizabeth M. Baker, associate with DC employment law firm KCNFDon’t Lien on Me: Involuntary Repayment of Tax Debt is Unlikely Mitigating for Clearance Holders

Let’s say you find yourself with tax debt because you failed to pay (or underpaid) your taxes on time. Let’s say you decide to ignore the debt, or you forget about it after you miss several IRS notices because who reads their mail in 2022 anyway? (We’ll throw in a bonus tip: the answer should be you if you hold a clearance. Tax documents, bills, and debt notices still regularly come by snail mail. So take a deep breath,  sift through the mass mailers, and make sure you aren’t missing something important.)* So, you’ve ignored the tax debt, and you eventually receive a notice that (1) the IRS has issued a lien on your real estate, personal property, or other financial asset and (2) if you don’t pay your tax debt, the IRS can levy (i.e., take) your property to repay the debt.

If you continue to ignore the tax debt and wind up having your property levied, you may believe that at least the matter is behind you. If you’ve read our last two articles, however, you can say it with us: for clearance holders, that may not be the case. What about the mitigating factors for repayment of debt in good faith under Guideline F, you ask? The Defense Office of Hearings and Appeals (DOHA), the office that hears appeals of security clearance and public trust eligibility determinations, has repeatedly concluded that involuntary payment is not payment in good faith. Essentially, you probably won’t get credit for paying off a debt you didn’t intend to pay. Here are a couple of examples:

In ISCR Case No. 16-03122 (2018), the DOHA Appeals Board overturned an administrative judge’s favorable decision in part because the clearance holder’s tax debt was not repaid voluntarily but by levy of his military retirement. The Board reiterated earlier decisions that “[t]he satisfaction of a debt through the involuntary establishment of a garnishment or a tax levy is not the same as, or similar to, a good-faith initiation of repayment by the debtor.”

In ISCR Case No. 12-08972 (2016), the security clearance applicant provided evidence that his state had levied over $18,000 against his bank account to repay delinquent tax debt. Although this applicant was denied eligibility for several reasons, the administrative judge made clear that “[w]aiting for a state tax authority to levy against your bank account is not indicative of a good-faith effort to repay creditors.”

Now, that said, involuntary repayment is not a death knell. Eligibility determinations are based on the “whole person concept” and an administrative judge will consider all relevant mitigating factors under Guideline F. For example, in one case, an administrative judge found in favor of a clearance holder who had significant tax debt, a portion of which was being repaid by levy of her husband’s military retirement pay. The clearance holder attested that she considered the regular withholdings of her husband’s retirement to be a sort of payment plan and the administrative judge did not address voluntariness one way or another. In that case, the favorable decision was based, in part, on the extenuating circumstances that led to the debt and the clearance holder’s responsible actions under the circumstances which included several voluntary efforts to repay the debt and an adjustment to her withholdings to prevent the issue from recurring.

The takeaway? Don’t ignore tax debt. If you want to be best situated to protect your clearance or public trust eligibility, make arrangements for repayment before the IRS or local tax authority make arrangements for you.

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)

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)

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.

This article also appeared in FEDweek on April 21, 2022.