Abusive Tax Schemes Involving Indian Tribal Governments

April 23, 2012

Federally recognized tribes are sovereign legal entities, similar to state governments, with all the rights and attributes of a sovereign entity such as a state. They have a constitutionally guaranteed status as sovereign entities. An Indian tribe, as an income producing entity, is not subject to income taxation. However, income earned, if not otherwise exempt from income taxation, must included in the gross income of the Indian tribal member when distributed or constructively received by the tribal member.

When a business is organized and operated by an Indian tribe, that enterprise is considered a private tribal activity, and services performed in its employ constitute employment subject to employment taxes. Services performed in the employ of the tribal government also constitute employment. However, due to the relationship between federally recognized tribes and the United States government, there may be statutes, treaties, court decisions, regulations, revenue rulings, and other authority to exempt specific items from the general rules.

The economy of Indian tribes is rapidly growing, with an annual increase in employment of over 20 percent in recent years. Unfortunately, unscrupulous individuals are using this rapid growth and self-governance of the tribes to promote illegal tax schemes, many of which are adopted without the direct knowledge of the tribe and without an accurate understanding of the ramifications of the schemes. The promoters often use the tax and legal status of Indian tribes to shelter various transactions from taxation and oversight. Both the Internal Revenue Service and the tribal governments are increasingly concerned about these tax schemes and the consequences on tribal sovereignty, the developing economy, and the opinion of Congress and the general public.

The IRS has identified numerous abusive schemes aimed directly at Indian tribes, including the following:

  • Disguising enterprises to appear as tribally-owned in order to evade federal unemployment tax and oversight by state insurance regulators.
  • Embezzlement from tribal enterprises.
  • Illegal activities in enterprises where tribes lack adequate internal control.
  • Improper sheltering of taxable gains by passing third party transactions through Indian tribes.
  • Improper treatment of net gaming revenue, including misclassified distributions to tribal members.

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