California residents may agree that dealing with the IRS can be a pain, but this feeling is mainly due to the hassle of extra paperwork, lengthy processing and pesky audits. There are some groups, however, who feel that the IRS is infringing upon their legal territory. In fact, a recent report indicates that the IRS is attempting to increase taxes on government-funded assistance for American Indian tribes in the U.S. The tribes have also expressed alarm over stepped-up tax audits.

Tribal leaders say the IRS asked them to provide 1099 forms for small jobs that should be covered by the government assistance programs. In an effort to clarify exactly what can be considered taxable income, the tribal leaders and the IRS have been meeting to discuss the General Welfare Doctrine, which is the document that designates what kinds of tribal assistance are counted as taxable income. Since the beginning of the meetings, tribes have been notified that they are being of audited.

In Washington State, the executive secretary of the Confederated Tribes and Bands of the Yakima Nation said the IRS intends to tax trust payouts from timber earnings for the first time in the Yakima Nation’s history. She regarded this attempt to tax as a “radical change.”

In defense of the IRS, a deputy secretary claimed the agency has been working to clarify the rules for taxing certain kinds of benefits. In particular, the Office of Indian Tribal Governments at the IRS stated that social welfare benefits and payments have to be made under a government program in order to be exempt from taxation. Additionally, the payments cannot be made in compensation for services.

As government agencies are further squeezed for funding, our readers in California may see an increase in attempts by the IRS to collect taxes, and that may mean more audits. To reduce the hassle of dealing with the IRS, taxpayers will want to be fully aware of their legal options.

Source: Bloomberg Businessweek, “American Indian tribes alarmed by IRS tax audits,” Suzanne Gamboa, June 15, 2012