Are Indians still being taxed on tribal benefits?
Robert Odawi Porter
Four years ago, the Tribal General Welfare Exclusion Act became federal law and ensured that benefits provided to American Indians by their tribal governments would not be subject to federal income taxation. This law is a great victory for Indian people. However, it appears now that many Indians are unnecessarily still paying federal tax on their tribal benefits.
Before the General Welfare Act was enacted, the Internal Revenue Service had conclude that Indians should pay tax on such things as health care, housing, education, and ceremonial benefits that many tribes provide to their people. To enforce the law, the IRS would often audit both individual Indians and the tribal governments that provided those benefits, incurring great back tax bills and penalties. In contrast, benefits provided by the federal and state governments to their citizens had long been exempt from taxation because the IRS had adopted a “general welfare exclusion” procedure. But the IRS never adopted such a procedure to apply to tribal government benefits (although the agency was working on adopting one when the General Welfare Act was passed).
To address this outrageous situation, a few tribal leaders and their federal advocates began a campaign to approach Congress for a permanent fix. I served a lead role in the development and advocacy of the General Welfare Act on behalf of the Lummi Nation and helped lobby the legislation to success. I continue to advocate for the full implementation of the Act and the Tribal Advisory Committee that the Act created. Over the last two years, however, I have become increasingly concerned that the law is not being fully implemented by tribal governments to the detriment of their own people.
First, it appears that there are some tribal officials who have never even heard of the General Welfare Act or, if they have, don’t fully understand how the law is supposed to work to protect tribal benefits from taxation. Ordinarily, unless a tribal official reads about passage of a law firsthand, a tribe’s lawyer, lobbyist, or financial officer would likely bring it to their attention. At minimum, they should brief their officials of the potential benefits and help to implement the law within the tribal government administration.
The primary benefit of the General Welfare Act is that a tribal government no longer must issue a Form 1099 to tribal citizens for the benefits they receive, and thereby not report any taxable income to the recipient for the value of those benefits. To implement the law, a tribal council must adopt a written policy or ordinance establishing the tribal general welfare benefit program and follow certain other requirements set forth in the Act and IRS guidance. It is not a super hard or complex process, but it must be done right to be fully effective.
However, I have heard of situations that even when the tribal council has adopted a tribal general welfare benefit policy, tribal citizens are still being issued 1099s by the tribe’s financial staff for the value of non-compensation benefits. This suggests, that despite the existence of the General Welfare Act, it may be the tribal government’s own financial staff that are denying tribal citizens their right to non-taxable tribal benefits.
If true, I doubt that this practice is malicious. Good financial professionals are notoriously conservative, which is what you want with the people handling your money. In talking with a few of them over the last couple of years, however, I believe there are at least three potential problems.
One, tribal financial professionals have a hard time believing how generous the General Welfare Act is in exempting tribal benefits from taxation. It is a major change in the law and, in my view, exempts nearly all tribal benefits from taxation. Two, financial staff may not be properly defining what an authorized “general welfare benefit” is, thereby too narrowly restricting its application. Or, three, financial staff have not updated the tribe’s financial system to incorporate the General Welfare Act and tribal policy. In short, Indians may still be getting taxed on tribal benefits because the folks implementing the Act don’t fully understand its power, or they are applying the Act incorrectly, or they are too loyal to the old system.
The cost of failing to fully implementing the General Welfare Act properly is that Indian people are paying federal taxes on benefits that should be fully tax-exempt. This is wrong and unfair! Doing so undermines what is one of the greatest federal law benefits available to individual Indians.
The good news is that the fix to this problem is straight forward. And, it must be kept in mind, the General Welfare Act includes a provision that any ambiguities in interpreting the Act are to be resolved in favor of the Indians, not the IRS. Thus, even if a tribe wrongly interprets what constitutes a tribal general welfare benefit during implementation, the IRS and the courts must err on the side of tax exemption for Indians not tax collection for the IRS.
Tribal leaders, their lawyers and their financial staff must consciously and deliberately review whether the Tribal General Welfare Exclusion Act is being fully and properly implemented within tribal government. Failure to do so will result in Indians being subject to unnecessary income taxation. It is rare that we ever score such a big win against the federal government. We shouldn’t miss out when it happens.
Robert Odawi Porter, Esq., is a former President of the Seneca Nation and provides legal services to Indian nations and Native-owned companies at Odawi Law PLLC and federal relations services at the Capitol Hill Policy Group LLC in Washington, D.C.He can be reached firstname.lastname@example.org