Civil Rights

American Indians, IRS, and Congress; Unlikely partners making progress

This week, Congress passed legislation to permanently increase tribal authority to provide governmental services to their citizens without creating a taxable event. This action is the culmination of a multi-year engagement between Indian Country, the Treasury Department, the IRS, and Congressional leaders. It dates back to when President Obama came to office riding a wave of promises and commitments made during his epic 2008 campaign. One of these promises was to promote dialogue and consultation between the federal government and tribal governments.

A new law is a welcome moment but the story behind this legislation goes well beyond the halls of Congress. During Treasury’s first consultation with tribes, issues with the IRS’s application of general welfare were immediately raised. Thus a long and difficult process of fixing the problem began.

{mosads}Bad blood between tribal governments and the IRS has existed for decades. The IRS has taken several steps to address these long-standing problems including the formation of an internal Tribal Government Office. However, confusion, conflict and tensions have continued to define the relationship.  

A core problem involved the treatment of programs administered by tribal governments for the general welfare of their citizens. With little clarity, unfair and disparate treatment, tribal citizens were frequently subject to random, unforeseen, and sometimes inaccurate tax liabilities. Yet because the IRS is a vast bureaucracy and tribal citizens represent a small fraction of the taxpayer population, often with the lowest income, senior leadership at the agency was not focused on this problem.

The IRS has long recognized that state and local governments provide a wide range of benefits for their citizens, which do not constitute income and are therefore exempt from federal income tax. Tribes provide a range of cultural, religious, and or educational services to their citizens, albeit ones that differ significantly from that of a state. Providing language programs to preserve Native languages or gifting ceremonial blankets and performing traditional burials are some of the many services that tribal governments provide to enhance the welfare of their citizens

Until earlier this year there were no clear rules dictating which tribal governments services were subject to taxation under this “general welfare exclusion.” Without clear guidance, IRS field agents were issuing arbitrary, inconsistent and sometimes harsh rulings. This resulted in significant tax burdens being placed on some of the poorest families in America for receiving basic government services.

Treasury and IRS continued consultations with tribes and solicited input in meetings, public and private, and in writing through the notice and comment process. Real, meaningful dialog occurred, just as the President had envisioned.

The process was slow. The IRS did not issue its first public statement that tribal governments could rely upon until November 2012, almost three years after process began. Another round of consultation, comment and feedback ensued and the IRS’s final new procedures were issued this past June.  These rules have real effect; tribal governments and tribal citizens can rely on them.

Yet as we know all too well, new rules alone do not solve every aspect of a problem. IRS agents must be trained in administering them, and in the absence of such training, audits continued and bad blood remained. In addition, rules can be changed, however unlikely or difficult it may be, far more easily than law.

Congress was not silent. Bipartisan legislation, built upon the work of Treasury and IRS, was proposed by Rep. Devin Nunes (R-Calif.) and by Sens. Jerry Moran (R-Kan.) and Heidi Heitkamp (D-N.D.), which provided concrete rules and a legislative framework to deal with this situation. These important bills underscored not only the bipartisan support to fix the problem, but also legitimized many of the issues raised by tribal governments throughout the process.

This legislation helped shaped the regulation. In turn, seeing senior IRS and Treasury leadership steer the regulatory progress, helped garner support for the legislation. In an extraordinary demonstration of bipartisan support, the general welfare exclusion was passed by a simple voice vote in the House followed by Unanimous Consent in the Senate.

Congress, in building upon the work of Treasury and IRS, took the matter of IRS training and deference to tribes seriously and applied a mandate for both. Congress instructed the IRS to stop any audits of tribes until proper training on the new law and regulation occurred. This will not only stop inaccurate audits, it will also prioritize much needed training by field agents. Tribes need to continue to focus on this issue and take full advantage of this focus on retraining field agents. 

The most important takeaway from this process is the process itself. When the executive and legislative branches of the federal government take the time to consult and listen to tribes, on a government-to-government basis, problems can be identified and solutions can be found. Tribes can learn to trust in a process that, while sometimes incredibly slow and frustrating, can produce significant and substantive results. 

Ten years ago, the notion of the IRS, Treasury, and Congress working in partnership with Indian Country would have been dismissed by most tribal leaders as wishful thinking. But change has occurred.

Desiderio, an actice member of the Sappony, is the executive director of NAFOA, a national organization focused on growing tribal economies.

Tags Heidi Heitkamp Jerry Moran

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