Defense officials are working with state tax collectors to help out when states mistakenly go after service members and spouses for delinquent taxes.
"It's not a new issue, but it's an issue people are struggling with," said Army Lt. Col. Samuel Kan, executive director of the Armed Forces Tax Council.
"It's happening in many different jurisdictions," Kan said. "As states and governments overall are struggling with their budgets, I think we might have more problems in the future because everyone is looking for more revenue."
Under the Servicemembers Civil Relief Act, troops don't have to pay state income taxes where they are stationed if their legal domicile is another state. This prevents service members from having to pay taxes in two states.
But as states match up their information with Internal Revenue Service data about taxpayers living in their state who have filed federal tax returns, they question why a state return is not filed. States don't know the taxpayer is military and has a legal domicile in a different state, Kan said. They also may see that a person is new to the area and has bought a house, for example.
So the states start the process of collecting those taxes, but One problem is that this process may not happen until two or three years later, and that’s an issue for mobile military members, Kan said. The state sends letters, but the service members and/or spouses don’t get the letters because they have moved once or twice. The state turns the matter over to debt collectors, Kan said.
"Then the debt collectors go after the member, and it's not a good situation," he said.
"We're trying to work with states to minimize the problem," Kan said, noting that officials from the Armed Forces Tax Council met in late February with the District of Columbia Office of Tax and Revenue, for example. "We've begun to identify points of contact [within states and other jurisdictions]," he said. "The issues are getting resolved fairly efficiently."
He advises service members not to ignore any letters they receive from states or debt collectors.
"Even if you don't think it's a valid letter, engage," he said. "Go to the tax center or legal assistance office, but don't ignore it. Ask them how to proceed."
Kan declined to name all the states where the problem is happening.
Military Times reported on the problem in 2012, when some service members were receiving mistaken notices from the California tax board about taxes owed. One Air Force staff sergeant said at the time that she was notified that taxes from 2008 amounted to about $100, but with penalties, fees and interest, the amount had grown to about $500. The first notice she and her husband received was a notice that if they didn't pay the taxes, penalties and interest within a month, their account would be turned over to collections. She pays taxes in New York.
Although a California tax official said previous notices were sent, the staff sergeant said she had received none.
Military officials have found that spouses are having similar issues. The 2009 Military Spouse Residency Relief Act allows eligible spouses to claim a state of legal residence. Most states have a form spouses must fill out to claim this right. The form notifies the state that the spouse’s legal residence is another state, that the spouse is there with a service member on military orders, and is not subject to tax withholding.
But spouses can’t just pick any state for the legal residence to qualify — it must be the same state of legal residence as the service member; they have to properly establish domicile in that state by must actually have lived there; and they need to maintain that domicile, for example, by continuing to vote in that state, have property in the state, have a driver’s license and perhaps a professional license in the state. "As many ties as possible to the state," Kan said. Spouses and service members alike should "talk convincingly of their intent to return to the state."
The states have always had some compliance activities in this area, especially heavily military states like California and Virginia, according to Verenda Smith, deputy director of the Federation of Tax Administrators. She continues to see regular appeal decisions out of Virginia where someone was claiming they were not domiciled in Virginia because the spouse was a military member, and they claimed legal domicile in a different state, she said.
Another issue that has cropped up is that spouses lose this protection when they remain in a state after the service member is stationed elsewhere — for example, if the service member leaves on an unaccompanied tour.
Kan said, for example, that if a service member and spouse move from their legal domicile of Texas to the service member's new duty station in New York, and want to continue with Texas as the legal domicile, the spouse files a form so not to pay income taxes in New York. A couple of years later, when the service member is transferred to South Korea on an unaccompanied tour, the spouse remains in New York but has lost the protection and must pay New York state income tax because the service member is no longer there.
"Spouses have to notify the state immediately to let them know they've lost coverage," Kan said. "Many [states] have significant penalties." In some cases, those penalties may be as much as an extra 50 percent of the amount of taxes due.
Karen Jowers covers military families, quality of life and consumer issues for Military Times. She can be reached at kjowers@militarytimes.com.
Karen has covered military families, quality of life and consumer issues for Military Times for more than 30 years, and is co-author of a chapter on media coverage of military families in the book "A Battle Plan for Supporting Military Families." She previously worked for newspapers in Guam, Norfolk, Jacksonville, Fla., and Athens, Ga.
