A bill that will exempt tribes from taxation on social welfare programs has made its way through Congress and is awaiting the president’s signature. The bill was introduced in response to the Internal Revenue Service’s increased auditing of tribes over the last few years and is part of a national initiative to give tribes the same tax status as local and state governments.
John Dossett, an attorney for the National Congress of American Indians, says this whole thing started in 2005 when the IRS Tax Exempt and Government Entities Division went to the National Indian Gaming Commission and got a list of its tribal members.
“They started at the top with the most wealthy tribes and they started auditing them around 2005,” Dossett says. “And then they started working their way down the list.”
While some of the larger tribes complained about the audits, it wasn’t until smaller, less wealthy tribes started getting audited that NCAI started looking into the issue. Dossett notes one of the most egregious examples was when the IRS went after the Oglala Sioux tribe. The IRS expected families to claim charity – such as $200 vouchers to buy their children new school clothes – as income on their individual tax forms.
“It’s ridiculous. It’s absolutely off-the-Richter-scale ridiculous,” Dossett says. “And then when they started doing that kind of stuff, that’s when it just lit the tribes up. “
To be clear, the IRS was targeting tribal general funds. So if a tribe was operating a social welfare program with its own money, the IRS wanted those benefits to be taxed. If a tribe was operating a program funded by the federal government, that was OK.
In Alaska, Native interests in oil, timber or other business investments are most often held by the corporations. In turn, most tribes have little if any general funds and instead operate most of their services with federal funding.
Still, Dossett brought a warning to last year’s Alaska Federation of Natives convention in Fairbanks. He told delegates that the same IRS division that had been under fire for targeting Tea Party and conservative groups was also targeting tribes. While the IRS does not disclose who it audits, there haven’t been any publicized reports of Alaska tribes subjected to the targeted audits.
Despite that, tribes like the Central Council of Tlingit and Haida Indian Tribes have become involved in the NCAI’s Inter-Tribal Organization Tax Initiative, which seeks to put Alaska Native and American Indian tribes on a level playing field with local and state governments.
“We need to, one, be on par with state and local government,” says Will Micklin, a vice president with Tlingit and Haida. “And, two, we need access to capital to monetize tax credits that would allow us to operate those economic ventures that would generate those general funds or enterprise funds that we could use for our own purposes to supplement the decreasing federal funding.”
Micklin is also the CEO for the Ewiiaapaayp Band of Kumeyaay Indians in San Diego and the executive director of the California Association of Tribal Governments. He says numerous tribes in California were subjected to the IRS audits.
“It was burdensome. It was unproductive and resulted in hardship on the tribes and the tribal citizens,” Micklin says.
In June the IRS issued formal instructions on how to deal with tribal welfare programs. It essentially gave tribes the benefit of the General Welfare Doctrine, which allows federal, state and local governments to operate tax-exempt social programs. Despite the change in IRS regulation, the Tribal General Welfare Exclusion Act of 2013 passed both the House and Senate last week with strong bipartisan support and numerous cosponsors, including all of Alaska’s congressional delegation.
Dossett says key elements of the legislation include the temporary suspension of the targeted audits and a mandate for IRS field officers to receive training in federal Indian law, but he hopes that training includes tribal representatives.
“That’s one of the things we’re really advocating for: that it isn’t just a bunch of IRS agents going in a room and talking to themselves, but that the tribes are involved and they bring in key people who know what’s going on and that there’s really more consultation with the IRS so they can better understand what the tribes are doing,” Dossett says.
The bill also establishes a Tribal Advisory Committee within the Treasury that will advise the Secretary on Indian tax policy and authorizes the Secretary to waive any penalties or interest imposed on tribal governments or members. The bill allows tribes to file claims for any taxes or fines imposed on its social programs in the last three years and directs the Secretary to resolve any ambiguities in the act in favor of tribal governments.
Another bill that NCAI advocated for through its initiative- the Tribal Tax and Investment Reform Act of 2013- would have allowed tribes to issue tax-exempt bonds for community infrastructure. The bill is in a House committee and has no companion bill in the Senate. With Congress in recess until November, it’s unlikely to advance.