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ISCR Case 16-00707.h1 — CASE

ISCR Case 16-00707.h1granted

Case Headnote

ISCR Case No. 16-00707.h1

grantedJun 6, 2017· Hon. Elizabeth M. Matchinski· hearing

Summary

A 60-year-old systems engineer was granted a security clearance despite initial concerns under Guideline F (Financial Considerations). The Statement of Reasons cited a 2013 federal tax lien of $148,065 and a failure to timely file federal income tax returns from 2007 to 2010, as well as state income tax returns from 2006 to 2010. These issues were attributed to a contentious divorce.

Disqualifying conditions F.1 and F.2 were raised, but mitigating conditions F.3 and F.4 were applied. The applicant demonstrated significant efforts to resolve his financial obligations. He entered into an installment agreement with the IRS in November 2013 and has consistently made monthly payments of $1,000 towards his tax debt since then.

Furthermore, all delinquent tax returns were filed by July 2012, and the applicant has remained current with all tax obligations since that time. The judge found that the applicant provided credible evidence explaining the financial difficulties caused by his divorce and had taken substantial steps to address his tax issues, leading to the granting of the security clearance.

Why the Applicant Prevailed

The applicant has been making consistent monthly payments of $1,000 towards his tax debt since November 2013.
He filed all delinquent tax returns by July 2012 and has been current with his tax obligations since then.
The applicant provided credible evidence of the financial difficulties stemming from a contentious divorce.

Conditions Referenced

Disqualifying

F.1raisedInability to Satisfy Debts
F.2raisedDelinquent Accounts

Mitigating

F.3appliedThe Conditions That Resulted in the Financial Difficulties Were Largely Beyond the Applicant's Control
F.4appliedThe Applicant Has Made Good Faith Efforts to Repay Overdue Debts

Key Rule Quoted

“"The security clearance decision is a determination that an individual is eligible for access to classified information, and the burden is on the applicant to demonstrate that they are eligible for a security clearance."”

Procedural Posture

SOR issuedJul 8, 2016
Answer filedJul 28, 2016
Hearing heldNov 29, 2016
Decision dateJun 6, 2017Adjudicated under new AG effective June 8, 2017.

Cite For

Mitigating Conditions Under Guideline F Regarding Financial Difficulties Due to Uncontrollable Circumstances
Good Faith Efforts in Repaying Tax Debts
Impact of Personal Circumstances on Financial Obligations

Editorial summary generated for research. Not legal advice; not a prediction. Verify against the full decision before relying on any quoted language.

Standardized Decision Profile

SEAD-4 Guideline F · descriptive summary of a decided case

Posture: Decision on RecordDecided: granted

The judge found that the applicant had financial concerns related to a tax lien and failure to file tax returns, but ultimately ruled in favor of the applicant. The applicant demonstrated a commitment to resolving his tax issues through an installment payment plan and had made significant efforts to catch up on his tax filings, which contributed to the favorable decision.

¶	Allegation	Finding	Type	Response	Disqualifying (¶19)	Mitigating applied (¶20)	Mitigation
1.a	Applicant owes the federal government for a 2013 tax lien of $148,065 $148,065	For Applicant	Tax Unpaid	Admitted	—	—	—
1.b	Applicant failed to timely file his federal income tax returns for tax years 2007 through 2010	For Applicant	Tax Filing Failure	Admitted	—	—	—
1.c	Applicant failed to timely file his state income tax returns for tax years 2006 through 2010	For Applicant	Tax Filing Failure	Admitted	—	—	—
1.d	specific text not stated in this decision	For Applicant	Unspecified Financial	Unknown	—	—	—

Descriptive standardized rendering of a decided public case (Guideline F). The verbatim source decision is shown in full below.

Full decision

The complete, official text — footnotes and signatures included — is in the original PDF.

Decision text, by section

DEFENSE OFFICE OF HEARINGS AND APPEALS

HEARING

APPEARANCES

DEPARTMENT OF DEFENSE DEFENSE OFFICE OF HEARINGS AND APPEALS

In the matter of: ) ) (Redacted) ) ISCR Case No. 16-00707 ) Applicant for Security Clearance )

For Government: Carroll J. Connelley, Esq., Department Counsel For Applicant: Francis J. Flanagan, Esq.

06/06/2017 ______________

STATEMENT OF CASE

______________

MATCHINSKI, Elizabeth M., Administrative Judge:

Applicant did not timely file federal and state income tax returns for tax years 2006 through 2010 because of a contentious divorce. He caught up on his returns in July 2012, but the IRS filed a $148,065 tax lien in February 2013 for unpaid taxes for tax years 2007 through 2011. He has been repaying his tax debt under an installment plan at $1,000 a month since late November 2013, a period of more than three years. Clearance is granted.

Statement of the Case

On July 8, 2016, the Department of Defense Consolidated Adjudications Facility (DOD CAF) issued a Statement of Reasons (SOR) to Applicant, detailing the security concerns under Guideline F, financial considerations, and explaining why it was unable to find it clearly consistent with the national interest to grant or continue security clearance eligibility for him. The DOD CAF took the action under Executive Order (EO) 10865, Safeguarding Classified Information within Industry (February 20, 1960), as amended; DOD Directive 5220.6, Defense Industrial Personnel Security Clearance Review Program (January 2, 1992), as amended (Directive); and the Adjudicative Guidelines for Determining Eligibility for Access to Classified Information (AG) effective within the DOD on September 1, 2006. On July 28, 2016, Applicant answered the SOR allegations and requested a decision on the written record without a hearing. On August 19, 2016, under ¶ E3.1.8 of the Directive, the Government requested a hearing before an administrative judge from the Defense Office of Hearings and Appeals (DOHA). On October 28, 2016, the case was assigned to me to conduct a hearing to determine whether it is clearly consistent with the national interest to grant or continue a security clearance for Applicant. On November 1, 2016, I scheduled a hearing for November 29, 2016.

I convened the hearing as scheduled. Counsel for Applicant entered his appearance at the hearing. Six Government exhibits (GEs 1-6) and ten Applicant exhibits (AEs A-J) were admitted into evidence without objection. Applicant and three witnesses testified, as reflected in a transcript (Tr.) received on December 8, 2016.

While this case was pending a decision, Security Executive Agent Directive 4 was issued establishing National Security Adjudicative Guidelines (AG) applicable to all covered individuals who require initial or continued eligibility for access to classified information or eligibility to hold a sensitive position. The AG supersede the adjudicative guidelines implemented in September 2006 and are effective for any adjudication made on or after June 8, 2017. Accordingly, I have adjudicated Applicant’s security clearance eligibility under the new AG.1

FINDINGS OF FACT

The SOR alleges under Guideline F that Applicant owes the federal government for a 2013 tax lien of $148,065 (SOR ¶ 1.a) as of July 8, 2016, and that he failed to timely file his federal income tax returns for tax years 2007 through 2010 (SOR ¶ 1.b) and his state income tax returns for tax years 2006 through 2010 (SOR ¶ 1.cand ¶ 1.d). In his response to the SOR, Applicant admitted the allegations. In detailed chronologies, Applicant explained that circumstances outside of his control caused his tax issues; that he took action before the tax levy to mitigate the problem; and that he has been repaying the IRS.

After considering the pleadings, exhibits, and transcript, I make the following findings of fact.

Applicant is a 60-year-old systems engineer with a master’s degree awarded in June 1982. From March 1987 to July 1998, Applicant worked as a civilian electronics engineer for the U.S. military. He provided software engineering services to the same military office as a self-employed consultant from December 1999 until 2004. In January 2001, he co- founded a corporation. In 2004, his company as a subcontractor took over the work that he had been performing as a self-employed consultant. In early 2006, Applicant’s company withdrew as a subcontractor to focus on full-time software development and marketing of its own technology. Later that year, he returned to contract work for the military. When the contact ended in March 2015, Applicant became a full-time employee of the defense contractor that took over the contract. (AE J; Tr. 50-52.) Applicant seeks to retain the DOD secret clearance that he has held since 1979. (Tr. 31.) It was last renewed on May 26, 2004. (GE 1.)

Applicant and his ex-wife were married from June 1985 to November 2009. (AE J.) They have three grown daughters, who were born in 1987, 1990, and 1993. (GE 1; Tr. 30- 31.) His ex-wife handled the household finances until 2007, when it became evident that his spouse mishandled their finances because the bank issued a foreclosure notice on their home. Applicant and his ex-wife obtained a $50,000 home-equity line of credit to consolidate bills, pay a corporate debt, and cover personal expenses. (AE J.)

When the loan papers were returned in January 2007, Applicant learned that his ex- wife had secretly incurred additional credit card debt of approximately $15,000. Applicant became intoxicated and was arrested for misdemeanor assault following an altercation with his ex-wife.2 A no-contact order was issued prohibiting any contact with her, which Applicant indicates extended to even financial matters. Applicant vacated the marital home in mid-January 2007. His ex-wife took $30,000 of the home-equity loan, quit her job, and filed for divorce in February 2007. Applicant borrowed $20,000 from his parents in March 2007 to cover legal fees for his assault case, his living expenses, and the family expenses, including the $3,200 monthly mortgage payment on the marital home. (AE J.) He was ordered by the court to pay the monthly mortgage, utility, cable television, cell phone, lawn service, and auto insurance bills plus an extra $1,000 a month. (Tr. 36.) Applicant indicates that he provided $15,100 to his ex-wife in 2007 for her household. (AE J.) According to his divorce attorney, from the outset of the divorce petition, Applicant was restricted in his use of his income and marital assets per automatic court orders. (AE A.)

Applicant’s ex-wife filed her own federal and state income tax returns for 2006 as married filing separately. A nurse by profession, she had started a part-time business selling cosmetics. She reported adjusted gross income of $23,948, and claimed all three daughters as dependents and half of the property tax and mortgage interest deductions, even though he made the mortgage and property tax payments. She was issued a $450 refund. (AEs D, E.) Applicant understood from his accountant that he could not file as married because his ex-wife had already filed as married filing separately. She would not cooperate in filing an amended joint return. Applicant could have filed as married filing separately, but he would have incurred an additional tax liability exceeding $10,000. (Tr. 46.) Applicant could not file his state return without first filing his federal return, so the deadline for filing his income tax returns for tax year 2006 passed without Applicant filing federal or state returns. (AE J.)

In January 2008, Applicant’s middle and youngest daughters were told to vacate their home by their mother. They moved in with Applicant, who had a one-bedroom apartment. In February 2008, Applicant agreed to pay his ex-wife $1,100 a month and an extra $150 per week in return for her vacating the marital home. Applicant and his daughters moved back into the marital home in early March 2008. Applicant’s ex-wife continued to incur consumer credit charges on accounts held jointly with Applicant. Applicant requested through his accountant from his ex-wife her tax filing information for 2006 and 2007, so that he could file amended joint returns, but she would not communicate with him. She filed her own income tax returns for tax year 2007, claiming her and Applicant’s middle and younger daughters as deductions. In August 2008, Applicant and his ex-wife agreed to sell their marital home, and it sold in 2009. (AE J.)

Applicant understood from his accountant that he had to file his 2006 return before he could file for 2007 and 2008. (AE J; Tr. 47.) Applicant and his ex-wife executed a property settlement agreement in March 2009, stipulating in part that she would amend her 2006 federal and state income taxes to change her filing status from married filing separately to married filing jointly. The 2007 and 2008 returns were to be filed separately. Applicant’s ex-wife was to receive $50,000 of the net proceeds from the sale of the marital home, with the balance of her share to go toward the IRS tax debt for tax years 2006 first and then 2007 and 2008. Applicant agreed to pay $1,800 per month in alimony to his ex- wife for six years, to terminate on remarriage or the death of either Applicant or his ex-wife. (AE J.) Applicant had to file motions holding her in contempt for not complying with the requirement to amend her tax filings. (Tr. 34.)

In June 2009, Applicant’s accountant advised Applicant that, based on his calculations, filing jointly for 2006 would result in savings of $11,000, but his ex-wife would have to amend her original tax return. He had prepared a draft return, which he would finalize once Applicant’s ex-wife signed a waiver. The accountant also informed Applicant that there would be a minimal advantage to filing jointly for 2007 and 2008. (AE J.)

On September 18, 2009, Applicant’s accountant completed a joint federal income tax return for Applicant and his ex-wife for tax year 2006. When their divorce was finalized on November 13, 2009,3 Applicant’s ex-wife stipulated in court to the release of the joint tax return, which was filed on May 2, 2010. (AEs D-E, I-J.) Based on adjusted gross income of $184,772, they underpaid their federal income taxes for 2006 by $32,745.4 Applicant, who had to borrow funds from family members to pay his expenses, could not afford to pay his federal tax debt. (Answer; AE J.) They filed an amended 2006 state income tax return in May 2010 along with payment of $13,443 to cover taxes, interest, and estimated penalties. (AEs C, D, J.)

In December 2010, Applicant consulted with a tax attorney, whom he retained in March 2011 on payment of half his $5,000 retainer fee. (AE B; Tr. 39.) Applicant’s accountant provided the tax attorney with a copy of Applicant’s filed 2006 federal tax return, and with federal and state income tax returns for 2007 through 2009 signed and ready for filing. As of April 2012, his returns for tax years 2007 through 2010 had not been filed. In an email of April 26, 2012, to his tax attorney, Applicant apologized for “being remiss in performing the actions that [the tax attorney] had outlined. He indicated that he had “no good reason for the delay.” (AE J.) At his hearing, Applicant clarified that the delay in filing his delinquent returns was because he did not have the funds to pay the rest of the tax attorney’s retainer fee. (Tr. 48.)

Available tax records do not show that Applicant had any federal income taxes withheld or that he paid any estimated taxes for tax years 2008 or 2009. He made no estimated payments of federal taxes for 2010, but he had federal tax withheld of $14,054. Applicant filed his federal and state income tax returns for 2011 on time. He had $16,876 in federal income taxes withheld, but owed $5,467. He submitted his state tax underpayment of $232 with his state return, but did not pay his federal tax debt. In mid-2012, Applicant’s ex-wife died. In late summer 2012, he hired an attorney to handle probate of his ex-wife’s estate to protect his daughters from their mother’s creditors.5 Apparently, his ex-wife’s former boyfriend was the beneficiary of her life insurance proceeds. (AE J.)

IRS tax account transcripts for 2007 through 2010 indicate that the IRS received Applicant’s delinquent returns for 2007 through 2010 in July 2012. Applicant filed as head of household and reported adjusted gross income of $64,886 in 2007, $117,764 in 2008, $125,250 in 2009, and $133,116 in 2010. (AE J.) In November 2012 Applicant resolved all his outstanding state tax liabilities on a payment of $17,628 under a tax-amnesty program. (GE 1; AE J.) He focused on paying his state taxes because he was told by his tax attorney that failure to do so could have implications in other areas of his daily life, such as not being able to renew his driver’s license. (Tr. 50.) On February 12, 2013, the IRS filed a federal tax lien for $148,065 in unpaid federal income taxes, penalties, and interest for tax years 2007 through 2011. As of October 28, 2013, his federal income tax debt had accrued to $161,351. On November 4, 2013, Applicant entered into an installment agreement to repay the delinquent federal taxes at $1,000 a month with his first payment due on November 28, 2013. (AE J.) Applicant does not know the end date for the installment agreement because of the interest and penalties. (Tr. 53.)

On December 31, 2013, as the only cleared employee and acting as facility security officer for his corporation, Applicant filed an adverse information report with the Defense Security Service (DSS) reporting the tax lien and explaining that he was in arrears on his federal income taxes because of a “lengthy contentious divorce.” He indicated that he was current with his state and federal tax filing responsibilities and that he had no outstanding state tax debt. Applicant submitted another adverse information report on April 26, 2014, by which he forwarded to the DSS the IRS notice of federal tax lien, his installment agreement with the IRS, and a letter from his tax attorney confirming his first payment under the installment agreement. (GE 5; AE J; Tr. 43.) On April 1, 2015, Applicant completed and certified to the accuracy of a Questionnaire for National Security Positions (SF 86). He disclosed that he had yet to pay his federal income taxes for tax years 2007 through 2011. He listed his state tax liabilities for tax years 2007 through 2010, which he paid in November 2012 under a tax-amnesty program. Concerning any delinquency involving enforcement, he disclosed the federal tax lien, which he has been repaying under an installment agreement. Applicant indicated that he was current with all withholding taxes (payroll), quarterly estimated taxes, and the installment agreement. (GE 1.)

A check of Applicant’s credit on July 11, 2015, confirmed the IRS tax lien. Applicant had paid off all his credit card debts on terms acceptable to his creditors. His credit report showed no history of late payments on student loans with an aggregate balance of $69,790 obtained for his daughters’ educations. (GE 3.) Applicant has apparently made some late payments since then, although the loans have not been seriously delinquent. (Tr. 64.)

On September 22, 2015, Applicant was interviewed by an authorized investigator for the Office of Personnel Management (OPM). He explained that he became delinquent on his federal taxes in 2007 because of the dissolution of his marriage. He had to maintain two households, incurred approximately $10,000 in legal fees for his divorce, and from 2007 until November 2009, had to pay his ex-wife $1,100 a month in court-ordered maintenance payments. He estimated that $60,000 of his federal tax liability was for penalties and interest. Applicant indicated that he has been making his $1,000 monthly installment payment to the IRS on time, and that $50,000 in escrow from the sale of his marital home will likely be applied to his tax debt. He was awaiting advice from his attorney to determine when and how the payment will be made. Applicant reported net monthly income of $6,632, monthly expenses of $3,325, and debt payments of $1,000 to the IRS, $1,800 toward student loan debt, and $500 toward $3,300 in unidentified personal debt. (GE 2.)

In response to interrogatories, Applicant explained in December 2015 that his income tax filings for 2006 through 2009 were the subject of a very contentious divorce and started because his ex-wife unilaterally filed her income tax returns for 2006 as married filing separately and that he had been advised by his accountant that he could not file jointly as a result. He also indicated that his accountant advised him that he could not file tax returns for subsequent tax years while a tax filing was unresolved. He incurred “great expense” in legal bills, accounting fees, tax penalties and interest while continuing to raise his three daughters and put them through college. Applicant provided the DOD CAF with account transcripts from the IRS for tax years 2007 through 2014, which showed that he had filed his federal income tax returns for tax years 2011 through 2014 on time. The transcripts also indicate that he made $1,000 monthly payments from November 2013 through November 2015. His payments were applied to taxes owed for 2007, 2009, and 2011. As of January 2016, the IRS was reporting the following balances plus accruals: $10,795 for 2007, $57,780 for 2008,6 $52,767 for 2009, $25,341 for 2010, and $0 for 2011. Applicant had satisfied his federal tax debts for 2012 and 2013 through withholdings and estimated tax payments. He had also satisfied his federal tax liability for 2014, although he had issued one bad check of $3,200 for an estimated tax payment in November 2014. (GE 6; AE J.) Applicant’s explanation for his insufficient funds check is that he “was just a guy earning money and spending every dime he can right at the financial water line.” (Tr. 61.) Applicant testified that he has been doing the best that he can to maintain all his financial responsibilities, but that it is not easy. (Tr. 63.)

Applicant filed his federal and state income tax returns for tax year 2015 on time. On adjusted gross income of $144,145, he underpaid his federal income taxes by $3,725. He submitted payment in full with his return. Tax payment receipts show that Applicant continued to make his $1,000 monthly installment payments to the IRS through at least July 2016. (AE J.) He intends to continue to honor that commitment for as long as it takes to pay off the debt. (Tr. 40.) He has found it “very, very overwhelming and [he knows] it is going to take a long time.” (Tr. 53.) Applicant still has his income tax attorney on retainer. One year into the installment plan, the IRS sent a monthly installment notice demanding payment of $100,000 and so he had to re-engage the attorney to resolve the issue. (Tr. 66- 69.)

Applicant’s youngest daughter started graduate school at her expense in the fall of 2016. (Tr. 73.) Applicant’s financial situation has improved somewhat since he moved out of his apartment and into the home of a close female friend in July 2016. (Tr. 63.) He estimated that he has $1,600 in monthly discretionary income, which is what he had been paying in rent before he moved. He does not pay any rent currently, but he pays the utilities, some food costs, and his insurance costs. (Tr. 65-66.)

Character References

A senior program manager has known Applicant for approximately 30 years. He supported the same military program when he was general manager for the prime contractor that held the contract until March 2015. He has always known Applicant to be honest and trustworthy and someone who takes pride in developing systems that support the U.S. military. (AE G.)

Applicant’s middle daughter attested to Applicant being a hardworking and caring father when they were young, and to providing the financial and emotional support that she and her younger sister did not receive from their mother. He continued to support her in college, including obtaining student loans in his name, and he paid for her mother’s funeral even after the tumultuous divorce proceedings. (AE F.)

Applicant’s longtime accountant attested to Applicant’s ex-wife being the cause of Applicant’s income tax issues starting with tax year 2006. He corroborates her failure to provide information about her income needed for Applicant to file a joint return that year. When asked about his purported advice to Applicant that he had to file his income tax returns for 2006 before he could file returns for subsequent tax years, the accountant responded, “I remember holding the returns, yes. I believe so, yes.” (Tr. 85.) As to what prevented Applicant from filing timely returns for tax year 2010 after his divorce, Applicant’s accountant recollected that they were going to file all the late returns at the same time. (Tr. 86-87.) Accrual of tax penalties and interest for delayed filing did not motivate them to file earlier because the larger penalties are assessed within five months of the tax filing deadline. (Tr. 87.) The accountant is unaware of any efforts on Applicant’s part to have his penalties abated. (Tr. 93.) He considers Applicant to be “a man of great character and strength,” and as someone “honest without question. (AE H.)

A chief engineer, who has worked with Applicant on the military program and known him for more than 25 years, knows of Applicant’s divorce and some of the impacts of that divorce on Applicant’s living situation, including that Applicant took custody of his daughters. He has observed Applicant to live within his means and has no concerns about Applicant retaining security clearance eligibility. He understands from Applicant that there were some late tax payments. On being told that Applicant has significant IRS debt arising from his divorce, the engineer responded that it would not change his opinion. Applicant’s expertise is in computer technology found in commercial industry, and he has not sought out classified data not needed for his duties. (Tr. 101-106.)

The project lead for the trainer program also has known Applicant for over 25 years. They met as professional colleagues and have had some social interaction over the years at cookouts and golf tournaments. Applicant recently revealed to him that he has IRS debt arising from his divorce. Applicant has displayed no indications of any substance abuse, gambling, or frivolous spending. Applicant works hard every day and continues to perform excellent work. He sees no reason why that should not continue. (Tr. 109-111.)

POLICIES

The U.S. Supreme Court has recognized the substantial discretion the Executive Branch has in regulating access to information pertaining to national security, emphasizing that “no one has a ‘right’ to a security clearance.” Department of the Navy v. Egan, 484 U.S. 518, 528 (1988). When evaluating an applicant’s suitability for a security clearance, the administrative judge must consider the adjudicative guidelines. In addition to brief introductory explanations for each guideline, the adjudicative guidelines list potentially disqualifying conditions and mitigating conditions, which are required to be considered in evaluating an applicant’s eligibility for access to classified information. These guidelines are not inflexible rules of law. Instead, recognizing the complexities of human behavior, these guidelines are applied in conjunction with the factors listed in the adjudicative process. The administrative judge’s overall adjudicative goal is a fair, impartial, and commonsense decision. According to AG ¶ 2(c), the entire process is a conscientious scrutiny of a number of variables known as the “whole-person concept.” The administrative judge must consider all available, reliable information about the person, past and present, favorable and unfavorable, in making a decision.

The protection of the national security is the paramount consideration. AG ¶ 2(b) requires that “[a]ny doubt concerning personnel being considered for access to classified information will be resolved in favor of national security.” In reaching this decision, I have drawn only those conclusions that are reasonable, logical, and based on the evidence contained in the record. Under Directive ¶ E3.1.14, the Government must present evidence to establish controverted facts alleged in the SOR. Under Directive ¶ E3.1.15, the applicant is responsible for presenting “witnesses and other evidence to rebut, explain, extenuate, or mitigate facts admitted by applicant or proven by Department Counsel. . . .” The applicant has the ultimate burden of persuasion to obtain a favorable security decision.

A person who seeks access to classified information enters into a fiduciary relationship with the Government predicated upon trust and confidence. This relationship transcends normal duty hours and endures throughout off-duty hours. The Government reposes a high degree of trust and confidence in individuals to whom it grants access to classified information. Decisions include, by necessity, consideration of the possible risk that the applicant may deliberately or inadvertently fail to safeguard classified information. Such decisions entail a certain degree of legally permissible extrapolation about potential, rather than actual, risk of compromise of classified information. Section 7 of EO 10865 provides that decisions shall be “in terms of the national interest and shall in no sense be a determination as to the loyalty of the applicant concerned.” See also EO 12968, Section 3.1(b) (listing multiple prerequisites for access to classified or sensitive information).

ANALYSIS

Guideline F, Financial Considerations

The security concerns about financial considerations are articulated in AG ¶ 18:

Failure to live within one’s means, satisfy debts, and meet financial obligations may indicate poor self-control, lack of judgment, or unwillingness to abide by rules and regulations, all of which can raise questions about an individual’s reliability, trustworthiness, and ability to protect classified or sensitive information. Financial distress can also be caused or exacerbated by, and thus can be a possible indicator of, other issues of personnel security concern such as excessive gambling, mental health conditions, substance misuse, or alcohol abuse or dependence. An individual who is financially overextended is at greater risk of having to engage in illegal or otherwise questionable acts to generate funds. Affluence that cannot be explained by known sources of income is also a security concern insofar as it may result from criminal activity, including espionage.

Applicant did not timely file his federal and state income tax returns or pay income taxes when they were due for tax years 2006 through 2010. He filed his delinquent income tax returns for 2006 in May 2010 and for tax years 2007 through 2010 in July 2012. In November 2012, he paid $17,628 to resolve his outstanding state taxes through an amnesty program. However, his federal income taxes went unpaid, and in February 2013, the IRS filed a federal tax lien of $148,065 for tax years 2007 through 2011. As of October 28, 2013, his federal income tax debt had accrued to $161,351. Three disqualifying conditions under AG ¶ 19 are established, as follows:

(a) inability to satisfy debts; (c) a history of not meeting financial obligations; and

(f) failure to file or fraudulently filing annual Federal, state, or local income tax returns for failure to pay annual Federal, state, or local income tax as required.

Application of the aforesaid disqualifying conditions triggers consideration of five potentially mitigating conditions under AG ¶ 20:

(a) the behavior happened so long ago, was so infrequent, or occurred under such circumstances that it is unlikely to recur and does not cast doubt on the individual’s current reliability, trustworthiness, or good judgment;

(b) the conditions that resulted in the financial problem were largely beyond the person’s control (e.g., loss of employment, a business downturn, unexpected medical emergency, a death, divorce, or separation, clear victimization by predatory lending practices, or identity theft), and the individual acted responsibly under the circumstances;

(c) the person has received or is receiving counseling for the problem from a legitimate credible such as a non-profit credit counseling service, and there are clear indications that the problem is being resolved or is under control;

(d) the individual initiated and is adhering to a good-faith effort to repay overdue creditors or otherwise resolve debts; and

(g) the individual has made arrangements with the appropriate tax authority to file or pay the amount owed and is in compliance with those arrangements.

AG ¶ 20(a) and AG ¶ 20(b) have some applicability in that Applicant’s failure to timely file his income tax returns for tax years 2006 through 2008 is reasonably attributable to his divorce, a circumstance not likely to recur, and by his ex-wife’s lack of cooperation over which he had no control. Applicant’s ex-wife unilaterally filed her own tax returns for 2006 without his knowledge, which precluded him from filing jointly without her agreement to amend her return. While he admitted that he could also have filed as married filing separately, he would have incurred at least $10,000 in additional tax liability which he could not afford and which would have been fundamentally unfair, given he was paying his ex- wife’s expenses. Concerning his 2007 and 2008 income tax returns, Applicant was advised by his accountant that he had to file his delinquent returns for tax year 2006 before he could file returns for subsequent tax years. Applicant’s ex-wife would not agree to file joint returns for 2006 until their property settlement in March 2009, and then she did not release their 2006 returns until November 2009. However, Applicant’s case for mitigation under AG ¶ 20(a) or AG ¶ 20(b) is undermined somewhat because of his delay in filing his separate income tax returns after his divorce. Applicant’s property settlement of March 2009 specified that separate returns would be filed for 2007 and 2008. His ex-wife was no longer involved in his returns for 2007, 2008, 2009, or 2010, and yet he did not file his income tax returns for those tax years until July 2012. Applicant’s accountant testified that their intent was to file all the returns at the same time. Applicant had an obligation to file timely returns, irrespective of whether he could afford to pay a tax attorney or taxes owed. At his hearing, Applicant attributed the delay to the resolution of his tax matters being “above his head.” He had been referred to a tax attorney and did not have the money for the retainer fee. An email of April 16, 2012, to the tax accountant is telling in that he apologized for “being remiss” in that he had not taken the actions the tax attorney had outlined for him over a year ago. He acknowledged to the attorney that he had “no good reason for the delay.” There is no evidence of an unexpected circumstance outside of his control for the delay. Rather, it appears that Applicant was overwhelmed by the situation and likely had a cash-flow problem.

AG ¶ 20(c) partially applies in that Applicant has caught up on his tax filings, and he settled his state tax debts on a lump-sum payment of $17,628 under a tax-amnesty program in November 2012. He has not had any credit counseling of the type contemplated in AG ¶ 20(c). However, perhaps more appropriately in his case, he sought the advice of his accountant and a tax attorney to address his tax problems. In part because of penalties for not pre-paying taxes, for late payment of taxes, and for filing late returns, Applicant’s federal income tax delinquency for tax years 2007 through 2011 had accrued to $161,351 as of late October 2013. After paying $1,000 a month since late November 2013, as of January 2016, he owed $146,683 in past-due federal taxes, interest, and penalties for tax years 2007 through 2010. His tax debt for 2011 was satisfied. In tax penalties and interest on unpaid balances, he is bearing the cost for his own delay in filing his delinquent returns and paying his tax debts. This sizeable tax delinquency appears to be a source of stress for Applicant, who candidly admitted that it is “very, very overwhelming,” and that it is going to take a long time to pay off. The evidence also shows that he issued an insufficient funds check of $3,200 for an estimated tax payment in November 2014. While he made another payment of the same amount 20 days later that cleared his account, the bad check raises some concerns about Applicant’s financial management and his cash flow. His adjusted gross income totaled $146,130 in 2014. It is also noted that he took tourism trips to South America in August 2014 and to Canada in October 2014, but he was not asked about his expenses for those trips.

Applicant showed some good faith under AG ¶ 20(d), “the individual initiated and is adhering to a good-faith effort to repay overdue creditors or otherwise resolve debts,” by retaining the tax attorney to resolve his tax issues in 2011, and by filing his delinquent returns in July 2012, which the IRS then reviewed to assess his tax liabilities and issue the tax lien in February 2013. AG ¶ 20(g), “the individual has made arrangements with the appropriate tax authority to file or pay the amount owed and is in compliance with those arrangements,” is established in that Applicant entered into an installment agreement with the IRS in early November 2013, and he has made his $1,000 monthly payments as required under that plan. Available IRS account transcripts and payment receipts confirm timely payments through July 2016. Applicant testified at his hearing in late November 2016 that he was in compliance with his payments. Applicant’s tax attorney confirmed that Applicant is in compliance with his installment payments as of November 2016. (AE B.) While Applicant has paid $37,000 to the tax lien, he would have had a stronger case in mitigation had he applied his $50,000 in escrow from the sale of his home to his federal tax debt as he intends. He was apparently still awaiting advice from his tax attorney on that issue.

The Appeal Board has held that even where an applicant has corrected his federal tax problem and is motivated to prevent such problems in the future, the administrative judge is not precluded from considering an applicant’s security worthiness in light of prior behavior evidencing irresponsibility. See ISCR Case No. 14-01894 at 4-5 (App. Bd. Aug. 18, 2015). Failure to comply with federal or state tax laws suggests that an applicant has a problem with abiding with well-established government rules and regulations. See ISCR Case No. 14-00221 at 4 (App. Bd. Jun. 29, 2016). Applicant’s failure to timely comply with his income tax filing and payment obligations was primarily due to lack of funds because of his divorce and not because of an unwillingness to file timely returns or pay debts. The salient issue at this juncture is whether Applicant’s financial situation is sufficiently stable to where he can be counted on to continue to make his installment payments. He testified that he is doing all that he can to maintain his financial responsibilities, but that it is not easy. However, he also testified that his financial situation is improving with his recent cohabitation and his youngest daughter’s graduation from college in June 2016.

WHOLE PERSON CONCEPT

In assessing the whole person, the administrative judge must consider the totality of an applicant’s conduct and all relevant circumstances in light of the nine adjudicative process factors in AG ¶ 2(d).7 The analysis under Guideline F is incorporated in my whole- person analysis. Some of the factors in AG ¶ 2(d) were addressed under that guideline, but some warrant additional comment.

Applicant’s tax problems started because of a contentious divorce. He should have been more proactive in ensuring that his delinquent tax returns were filed more promptly, but his decision to retain a tax attorney to negotiate with the IRS on repayment issues was reasonable in light of his sizeable tax delinquency. Applicant self-reported the federal tax lien to the DOD in December 2013. Although he should have advised the DOD about his tax issues more promptly, his self-report weighs in his favor in assessing whether the Government can reasonably rely on his representations, including his stated intention to continue to resolve his tax delinquency. Character references indicate that Applicant has been honest and trustworthy and that he has met all the requirements associated with his security clearance responsibilities.

It is well settled that once a concern arises regarding an applicant’s security clearance eligibility, there is a strong presumption against the grant or renewal of a security clearance. See Dorfmont v. Brown, 913 F. 2d 1399, 1401 (9th Cir. 1990.) Applicant exacerbated his tax problems by not filing his delinquent returns for 2007 through 2010 until July 2012, but his accountant testified that the largest penalties are assessed within five months of the filing deadline.

The security clearance adjudication involves an evaluation of an applicant’s current judgment, reliability, and trustworthiness in light of the security guidelines in the Directive. See ISCR Case No. 09-02160 (App. Bd. Jun. 21, 2010). Concerns that Applicant may not comply with government rules are allayed in that he has held a security clearance for years without any evidence of security violations. Applicant took responsible steps to address his tax problems well before they became an issue for his security clearance. Three years of timely installment tax payments show that he is likely to continue to comply with his agreement provided he has the income to do so. He managed the payments when his financial situation was less stable than presently. After considering all the circumstances, including that Applicant had no tax problems before his divorce, I conclude that it is clearly consistent with the national interest to continue Applicant’s security clearance eligibility.

FORMAL FINDINGS

Formal findings for or against Applicant on the allegations set forth in the SOR, as required by section E3.1.25 of Enclosure 3 of the Directive, are:

Paragraph 1, Guideline F: FOR APPLICANT

Subparagraphs 1.a-1.d: For Applicant

CONCLUSION

In light of all of the circumstances, it is clearly consistent with the national interest to continue Applicant’s eligibility for a security clearance. Eligibility for access to classified information is granted.

_____________________ Elizabeth M. Matchinski Administrative Judge

FOOTNOTES

1 Application of the AGs that were in effect as of the issuance of the SOR would not change my decision in this case. 2 In October 2007, Applicant pleaded nolo contendere, and the case was filed for one year. Applicant was required to completed domestic violence counseling and a substance abuse screening. (GEs 1, 4.) 3 It took more than two years to finalize Applicant’s divorce because his ex-wife’s first divorce lawyer became ill when he was overseas, and the attorney’s cases were held in abeyance. The attorney’s son took over, but he then became appointed to the bench in 2009. The attorney who represented Applicant at his security clearance hearing represented Applicant’s ex-wife when she agreed to release the joint tax return for 2006. (Tr. 33-34.)

4 An IRS account transcript for 2006 under his ex-wife’s social security number shows that an amended return was filed on May 17, 2010. (AE E.) Applicant’s ex-wife was listed as primary on a joint state income tax return filed for 2006. (AE C.) 5 According to Applicant’s longtime accountant, Applicant’s ex-wife was $132,000 in debt when she died, and she had no assets. (AE H.) 6 On September 17, 2012, the IRS assessed $8,311 in penalties and $5,168 in interest for 2008. (GE 6; AE J.) 7 The factors under AG ¶ 2(d) are as follows:

(1) the nature, extent, and seriousness of the conduct; (2) the circumstances surrounding the conduct, to include knowledgeable participation; (3) the frequency and recency of the conduct; (4) the individual’s age and maturity at the time of the conduct; (5) the extent to which participation is voluntary; (6) the presence or absence of rehabilitation and other permanent behavioral changes; (7) the motivation for the conduct; (8) the potential for pressure, coercion, exploitation, or duress; and (9) the likelihood of continuation or recurrence.