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Originally published Thursday, June 14, 2012 at 12:34 PM

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American Indian tribes alarmed by IRS tax audits

John Yellowbird Steele, chief of the Ogalala Sioux Tribe, said the Internal Revenue Service is failing to recognize tribal sovereignty by trying to tax government-funded assistance such as housing, school clothes and burial aid that tribes give their members.

Associated Press

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WASHINGTON —

John Yellowbird Steele, chief of the Ogalala Sioux Tribe, said the Internal Revenue Service is failing to recognize tribal sovereignty by trying to tax government-funded assistance such as housing, school clothes and burial aid that tribes give their members.

Speaking to a Senate panel Thursday, Steele invoked the treaties between the U.S. and his South Dakota tribe as he criticized the IRS for what seems to be a stepped-up effort to tax tribal assistance.

"We fix houses, and they want us to put a value on how much that lumber cost to patch a hole in a roof or a floor, put shingling on, they want us to put a value on that and give the person a 1099" tax form to possibly be taxed on the help, Steele said. "The next year, where are those people going to find the money to pay the IRS?"

The IRS over the years has narrowed its tax exemptions for federally, state and locally funded social benefits for tribe members so that only those with significant financial need do not have to pay taxes on the benefits, tribal leaders said.

The agency has been meeting with tribes to develop and clarify rules on what is taxable under the General Welfare Doctrine, which governs whether the assistance tribal members receive should be counted as income and be taxed. But as the meetings have gone on, tribes are getting notices that they are being audited, Steele said.

Steele said the tribal assistance helps members raise their living standard and in some cases survive. He accused the IRS of launching a fishing expedition, saying his tribe has been asked to provide documentation on payments to employees, council and tribal members; petty cash and bank records; health care benefits to tribal members and employees, and Pow Wow prizes, among other things.

"The IRS violates our treaties when it seeks to tax the basic government services that our tribal government provides our citizens," Steele said in written testimony.

Sen. Daniel Akaka, D-Hawaii, who chairs the committee, said providing for tribal members is "truly critical to the self-determination of tribal governments."

The IRS has been reviewing per capita payments that tribes make to members from trust money raised through tribal businesses.

Athena Sanchey Yallup, executive secretary of the Confederated Tribes and Bands of the Yakima Nation in Washington State, said the IRS has been seeking to tax her nation's distribution of earnings from the timber on its land to each of its 10,400 tribal members for the first time in its history. The IRS' taxation of the trust payments is a "radical change in policy," she said.

All of this comes as the Obama administration has won accolades from Native American tribes and Alaska natives for recognizing their sovereignty and requiring federal agencies to do a better job of explaining changes in policy or adoption of new policies. IRS officials said many of the concerns have been raised as the agency has been meeting with tribes to develop guidance on the exemptions.

The IRS defended its work with tribes. Deputy Assistant Secretary Aaron Klein described meetings on the issue and has been gathering comments and recommendations on what can be taxed as income. Klein said the discussions show that additional guidance is needed, as well as clarification of rules governing when such benefits can be taxed.

Christine Jacobs, director of the Office of Indian Tribal Governments at the IRS, said the exemption for social welfare benefits is not in the federal tax code but is an administrative exemption. She said to be excluded from taxes, benefits and payments must be made under a governmental program, promote the general welfare and not represent compensation for services.

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Online:

Senate Indian Affaris Committee: http://www.indian.senate.gov/

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