A Senate committee held a hearing on the tax challenges confronting Indian tribal members who are increasingly subjected to Internal Revenue Service audits.

John Yellow Bird Steele, president of the Oglala Sioux Tribe, testified Thursday before the Senate Indian Affairs Committee about how the IRS is violating longstanding treaties with the federal government by interfering with Native Americans’ right to self-government. He noted that the Apportionment Clause of the Constitution also excludes “Indians not taxed” from apportionment of Congress and from the per capita taxation originally levied by the states to fund the federal government in its formative period.

Under IRS regulations, individual Indians are generally subject to federal income taxation, but they are exempt from paying taxes on certain kinds of income such as fishing rights-related activity and income derived from restricted allotted land held in trust by the U.S. government.

He acknowledged that the IRS has recognized the principle that federal tax laws are not intended to interfere with tribal self-government or treaty rights, but sees violations in audits of tribal government programs and services intended to help individual tribe members.

“Because of this failure of vision, the IRS has become a menacing, interfering and overwhelming bureaucracy in Indian Country,” said Steele. “The IRS apparently has an unspoken plan to audit each and every Indian tribe in the country, in a harassing manner that negates Indian sovereignty and interferes with our relationship with our tribal members. Will any tribal member want to work with tribal government when the IRS hands them a tax bill any time they receive government services or participate in government programs?”

Steele said the IRS had sent an “incredibly burdensome” audit form to the Oglala Sioux tribal government, seeking records of payments to employees, and tribal members, including expense reimbursements, distributions from gaming revenue, fringe benefits, bonuses, and accountable plan documentation. The IRS also wanted petty cash records, information on gifts and loans to tribal members and employees, health care and educational benefits, utility and housing assistance, recreational activities provided on behalf of tribal members and employees, and pow-wow prizes and related tribal contest prizes. The IRS also asked for all bank records, credit card statements, expense receipts, and tribal government program plans.

“This is what we would call a fishing expedition,” said Steele.

Athena Sanchey Yallup, executive secretary of the Confederated Tribes and Bands of the Yakama Nation, testified about similar audits. “The real threat to the Yakama Nation began in the last year and a half when the IRS began auditing and seeking to tax per capita distributions of trust funds to each of Yakama’s 10,400 tribal members for the first time in the history of this Nation,” said Yallup. “This is an extraordinary action that is contrary to Congress’ express intent to exempt trust resources and trust funds from federal tax. It is contrary to our Treaty of 1855.”

Aaron Klein, deputy assistant secretary in the Treasury Department’s Office of Economic Policy, said the Treasury Department has been engaged in a consultation program with the tribes since 2000 on issues such as the general welfare doctrine for tribes for tax purposes. “This exclusion governs the types and kinds of benefits that Tribes can provide to their members without creating a taxable event,” he noted. “To be clear, it does not govern what benefits a Tribe can provide its members. Tribes are free to provide benefits on whatever basis they see fit, subject to other provisions of law. What this exclusion does govern is whether the provision of such a benefit constitutes taxable income on the part of the recipient.”

The Treasury and the IRS have been continuing these consultations in recent months and two weeks ago held a national conference call to try to resolve the issue.