Scarce Resources Leave Navajo Nation With Few Tax Options

DeAnna Begay volunteers to provide free tax return preparation services from a trailer in a lumber yard located at the heart of the Navajo reservation in the northeast corner of Arizona.

Begay, who is an enrolled member of the Navajo Nation, prepared more than 200 tax returns this year. The demand for her service was so high that she had to turn some taxpayers away before the filing season ended.

That’s when Navajo taxpayers who would otherwise qualify for free return filing might turn to one of the storefront tax return preparers that set up in border towns like Gallup, New Mexico.

In addition to paying hundreds of dollars in fees — and much more if they avail themselves of popular refund anticipation products — people living on the nation’s largest Native American reservation are finding themselves with another problem: tax trouble caused by a lack of preparers who understand the interaction between Navajo law and state law and the cultural differences for tribal members that don’t easily fit into the boxes on IRS tax forms.

“To me the most important help that’s not there for the Navajo Nation is good tax preparation,” said Grace Allison of New Mexico Legal Aid, which has a low-income taxpayer clinic that also serves Native American taxpayers. “That is, of course, something that is endemic, not just to the Navajo Nation, but to all low-income taxpayers,” she added.

These taxpayers lose out on some of the benefits they’re entitled to, like the earned income tax credit and the child tax credit, which help lift people out of poverty. And when issues arise with their tax returns, IRS policies and a lack of local help leave them with few options.

Quality tax help in the Navajo Nation and Indian Country is scarce, according to tax professionals, and low-income taxpayers on the Navajo reservation who need legal help to resolve a dispute with the IRS have little recourse.

Barriers

Rates of poverty and unemployment have historically been higher among members of tribal nations than among the rest of the U.S. population, according to a 2022 report from the Government Accountability Office. About one in three people on the Navajo reservation live in poverty.

The Navajo Nation’s unemployment rate has historically hovered around 50 percent, according to George Hardeen, a spokesman for the Navajo Nation president’s office.

Laura Mike, executive director of Navajo United Way in Window Rock, Arizona, said the Navajo Nation, which covers over 27,000 square miles in Arizona, New Mexico, and Utah, struggles to attract employers. “We don’t even have a Walmart,” she said.

It takes two and a half hours of driving through the desert to get to Window Rock — the Navajo Nation’s capital — from Albuquerque, New Mexico, which is the closest major city.

There are few places along the highway to stop. The landscape on the reservation is both devastating and beautiful, marked by dramatic red rock formations and dotted with dilapidated trailers and circular structures called hogans.

The journey takes one past Gallup, a border town known for its storefront tax preparers and refund anticipation loans, which critics say target Native Americans.

Taxpayers whose adjusted gross income is $79,000 per year or lower can file their tax returns for free using guided tax software offered through the IRS Free File program.

But without a computer or access to the internet, tax preparation software isn’t an option for many people on the reservation. Instead, they might rely on storefront return preparers that charge hundreds of dollars in fees, according to Mike, an enrolled member of the Navajo Nation.

Because the reservation is remote, there is a dire need for internet services and telecommunications in general, Mike told Tax Notes. Many people on the reservation don’t have utilities like electricity or running water, so even if they had a computer, they would have nothing to connect it to, Mike explained.

“A lot of people just don't understand how to use computers . . . and they have a lot of questions about taxes,” Mike said. “If they were to access software, or go on to the IRS website, they wouldn’t really know where to begin.”

Lack of Resources

People who earn $64,000 a year or less, have a disability, or who speak limited English can get free help preparing their tax returns through the IRS’s Volunteer Income Tax Assistance (VITA) program.

IRS spokesperson Yviand Serbones Hernandez said in an email that the IRS has six VITA sites assisting Native Americans in Arizona, with one specifically for the Navajo Nation. The Tucson United Navajo Tribal Utility Authority VITA test site was open during the 2024 filing season for tribal members and prepared about 50 returns. It's uncertain whether it will open next filing season, but the IRS said it is “committed to working to continue these services.”

The VITA program’s services are in high demand on the Navajo reservation.

Tax Notes visited two VITA sites on the reservation — one run by DNA-People’s Legal Services in Chinle, Arizona, and another at the United Way in Window Rock.

The United Way site, which has five volunteers working on taxes, prepared more than 600 tax returns last year, according to Mike. There is a lot of demand for their return preparation services, with people driving for as long as three hours to get help, she said. Representatives at both locations said they have had to turn some taxpayers away.

Mike said when the VITA site first opened, clients who previously used storefront tax preparers that charged hundreds of dollars in fees said it had been difficult to put part of their tax refund toward the fees even though they needed the full refund amount.

“They have expenses, and it is a remote area, so there are not a lot of services available,” Mike said.

Mike added that even though there are other VITA sites in places like Flagstaff, Arizona, some clients say they prefer getting help from people on the reservation at the Navajo United Way.

“They find it easier to talk to us and ask us questions,” Mike said. “They see us out in the community, they see us grocery shopping, they see us at the gas station, and they’ll remember who we are.”

National Taxpayer Advocate Erin Collins said it can be difficult to set up VITA sites because there must be a sponsoring group and volunteers.

The IRS said in a statement, “We appreciate hearing about the additional training needs for VITA sites that serve Tribal taxpayers. The IRS recognizes this is an area where we need to do more work to help this important community, and we will take their training needs into consideration as well as review other aspects of our educational materials that could better reflect this complex situation.”

Bad Returns

Unenrolled, unregulated tax return preparers “notoriously set up shop in towns that border Native American communities,” Leslie McLean of DNA-People’s Legal Services said during a panel at the American Bar Association Virtual Fall Tax Meeting in October 2023.

Tax return preparers who lack credentials are more likely to make mistakes on returns. The IRS has tried to establish examination and education requirements for unenrolled return preparers, but those efforts have been stymied by federal court rulings that have restricted the agency’s ability to regulate return preparers.

“About 92 percent of the total amount of dollars of audit adjustment made on 2020 returns claiming the Earned Income Tax Credit (EITC) occurred on returns prepared by non-credentialed return preparers,” National Taxpayer Advocate Erin Collins said in her 2022 report to Congress.

McLean recently resumed the LITC at DNA-People’s Legal Services through a fellowship funded by Tax Analysts. The clinic provides legal services to members of seven tribal nations, including the Navajo Nation. It is likely the only LITC with offices on a Native American reservation, according to McLean.

While the LITC was closed since 2016, the DNA-People’s Legal Service offered very limited service for helping with tax controversies, according to McLean.

Many of the taxpayers McLean helps are eligible for the child tax credit and the EITC. But getting those benefits isn’t always easy.

“The earned income and the child tax credit are incredibly complicated and very easy for people to fall afoul of,” Allison said.

The big problem is the lack of options for free tax return filing, according to Nathaniel Puffer, director of the LITC at New Mexico Legal Aid. “That gap appears to be filled in by paid tax preparers, who sometimes operate out of pawn shops,” Puffer said.

The lack of resources in Native American communities and their remoteness make it easy for people living there “to become prey to the predators out there,” McLean said. “There are a lot of bad tax returns being prepared.”

‘You Should Know’

With the poor mail service on the reservation, taxpayers have difficulty responding to IRS notices on time, according to Emery McCabe, managing Navajo attorney at DNA-People’s Legal Services.

The IRS should be aware of that issue, but it probably isn’t, McCabe said.

McCabe, who is a member of the Navajo Nation Bar Association, said he is sometimes surprised that even people living in other parts of Arizona haven’t taken the time to understand Native Americans.

“You live in Arizona all these years, you should know something about the Indian tribes that are your neighbors and that you deal with from time to time,” McCabe said.

The IRS trains its employees on tribal issues, according to Kenneth W. Parsons of Holland & Knight LLP, an attorney who represents Native American tribes and has advised the Treasury Tribal Advisory Committee. The IRS said it “takes diversity and understanding taxpayers very seriously” and that it “provides employees with information on protocols for contacting tribes.”

Before its employees contact tribes and tribal entities, they are required to contact the Office of Indian Tribal Governments, which is the IRS’s official point of contact with tribes, according to the IRS.

Still, some tax attorneys said they have spoken with IRS employees who are unaware of the challenges that many Native American taxpayers face with return filing.

Educating IRS employees about Native American culture could be challenging because there are 574 federally recognized tribes, and what works for one tribe might not work for most of the others, according to Navajo Nation President Buu Nygren.

“You’re talking about the IRS, and that’s a big, heavy machine to try to really work with,” Nygren said.

If a low-income taxpayer living on the Navajo reservation needs to resolve a dispute with the IRS, their options are limited.

They can go to DNA-People’s Legal Services. They can also go to New Mexico Legal Aid, which provides free help to low-income taxpayers, and has an office about 30 minutes away from Window Rock in Gallup.

TTAC member Cora White Horse of the Oglala Sioux Tribe expressed concern about the lack of access to taxpayer assistance centers during a January 24 committee meeting.

“IRS recently has been using the word equity a lot to promise changes for communities it previously harmed. It still has inequitable treatment of tribes by not issuing guidance, continuing to audit tribal members who have no access to taxpayer assistance centers because we're on reservations,” White Horse said. “The closest taxpayer assistance center to the town where I live is 134 miles away.”

White Horse said that even the child tax credit is hard to access for many tribal citizens because they have to travel. “When we do . . . that we have to miss a day of work because it's not a short drive and we have to pay for gas. And gas on the reservation is way more expensive than off the reservation,” she said.

Taxpayers on the Navajo reservation who need to resolve an issue with the IRS in person also have limited options: The closest IRS taxpayer assistance center is hours away in Albuquerque.

Getting all the way to Albuquerque is a hardship for some, Nygren said.

The IRS should have a local taxpayer assistance center on the Navajo reservation, according to McLean. “Social Security has offices on the reservation, so I know it can be done,” she said.

McLean acknowledged that staffing might be difficult because of the lack of housing, but she said the IRS could staff the center at least a couple of days a week and have its employees stay at a local hotel if they can’t find a permanent place to live on the reservation.

Nina Olson of the Center for Taxpayer Rights suggested that the IRS bring tax help to tribal nations, rural areas, and disaster zones with mobile vans. “You can't build a working site everywhere, but you can bring yourself,” said Olson, who is a member of Tax Analysts’ board of directors.

Collins said the IRS has been experimenting with bringing pop-up tax sites to underserved communities, and that Native American reservations are on the list of places the IRS would like to bring them to. Right now, it’s mostly related to filing season services, but she said there has been talk about expanding to collections.

The IRS said it is working to expand taxpayer assistance centers with its additional funding from the Inflation Reduction Act, and is offering a special service called community assistance visits to help taxpayers in areas not close to the agency’s in-person offices.

The IRS said that last year, 48 taxpayers received service in Gallup, and it will be offered again July 23-25 at the Octavia Fellin Public Library.

Common-Law Marriage

Navajo taxpayers’ filing status might get misclassified because their return preparer is unfamiliar with Navajo law or the culture, according to McLean.

For instance, many people living on the Navajo reservation are in common-law marriages, not traditional marriages. While common-law marriages are recognized by Navajo law, they are only recognized by the IRS if they’re recognized by the state where the taxpayer lives.

The state of Arizona, where much of the reservation is, recognizes common-law marriage only if it is created under Native American tribal law. But for years there has been confusion about whether people who are considered married under Navajo law can file jointly on their federal tax returns.

Navajo couples in common-law marriages should be filing jointly, but in some instances they are filing separately, according to McLean. Some couples have each spouse file as head of household and claiming different children as dependents, which might give them a bigger tax refund but causes them to get audited, according to McLean.

For instance, McLean said she has a client who has three children with his common-law wife. In 2020 and 2021 the client filed as head of household. His return was audited by the IRS, and his credits were disallowed. The client has taken his case to the U.S. Tax Court, where he now must prove that he was supporting his children. McLean said her client’s 2022 return was accepted when he and his common-law wife filed jointly through the VITA program.

A higher percentage of some taxpayers in ZIP codes on the Navajo reservation — including places like Tuba City and Tonalea, Arizona — filed as head of household compared with the state overall, according to IRS individual income tax data from tax years 2020 and 2021. The data also show that fewer returns were filed jointly in those ZIP codes compared with the rest of the state.

The IRS doesn’t collect data on taxpayer race or ethnicity, nor does it release data on audit rates by ZIP code, making it difficult to know if Native American taxpayers are being audited more frequently. But tax attorneys at LITCs say they see Native American taxpayers — and other low-income taxpayers with nontraditional families — being audited for claims related to credits like the EITC and child tax credit.

McLean obtained a letter in 2003 from the IRS Tax Exempt and Government Entities Division that says members of the Navajo Nation in common-law marriages can file jointly for federal tax purposes, whether they are living on the reservation or in Arizona off the reservation.

While McLean likes the decision, she said she disagrees with the reasoning behind it because it doesn’t recognize the tribe’s sovereignty.

“If, for example, the state of Arizona decides it no longer recognizes Navajo common-law marriage, the status of many Navajo taxpayers could change,” McLean said.

Because the law in New Mexico is different, Allison said Navajo taxpayers in common-law marriages can’t file jointly for federal tax purposes there.

“The federal law, as I understand it, will not respect a marriage that is not legal in the state, and New Mexico does not respect common-law marriages,” Allison said.

Training at the IRS VITA sites on the reservation doesn't seem to incorporate information from the letter; McLean said she completed IRS training at the Chinle VITA site, and there was no mention of it.

The IRS said that VITA training “does not cover circumstances around determining whether a couple is in a common-law marriage, because those rules are complex and vary between jurisdictions. Accordingly, VITA volunteers do not determine whether taxpayers are in a common law marriage.”

Nygren said he’d like to ask the IRS to partner with his office and with DNA-People’s Legal Services to educate people on the reservation about how to file their tax returns correctly.

“One of the best ways of communication is the radio — AM radio,” Nygren said. “It could be a series on taxes, do’s and don’ts, and this is what gets people on the wrong side of the IRS.”

Fighting Back

Begay recalls when she was a single mother of six and needed money quickly and used her tax refund to obtain cash around the holidays.

Like others in her community, she paid fees from her projected tax return through a “holiday loan” — a type of tax refund anticipation loan offered by a local tax preparation company around Thanksgiving and Christmas. The loan was calculated before Begay’s return was prepared and was based on an estimate of what her tax refund would be. She says she paid $15 for every $100 she was loaned.

Begay heard the loan advertised on the radio. Presented with an opportunity to buy the things she needed for her family, she walked into the business in the Rio West Mall in Gallup and signed the loan paperwork.

“I knew VITA was here and I was a tax preparer here, but I needed the money,” Begay said, sitting at a table in the DNA-People’s Legal Services office in Chinle. At the time her kids were still in school.

A 2009 study by the First Nations Development Institute found that EITC recipients in Native American communities use refund anticipation loans more frequently than EITC recipients in other areas.

IRS data from tax years 2020 and 2021 show that taxpayers in some of the ZIP codes on the Navajo reservation in Arizona use refund anticipation products at higher rates than the rest of the state does.

In 2015 the Consumer Financial Protection Bureau announced an enforcement action with the Navajo Nation against a border town tax refund loan service for allegedly orchestrating a scheme steering low-income individuals, including many members of the Navajo Nation, into high-cost tax refund anticipation loans.

Tax preparation services operating near the reservation have also faced class action lawsuits over refund anticipation loans.

New Mexico lawmakers reduced the interest rate cap on loans of up to $10,000 from an annual rate of 175 percent to 36 percent under H.B. 132, which became effective on January 1, 2023.

In 2018 T&R Tax Service Inc. agreed to settle a class action lawsuit against it and two associated businesses.

According to the lawsuit, T&R and the related businesses make “thousands of tax refund anticipation loans each year” to people living on and around the Navajo Nation in northwest New Mexico.

The lawsuit, filed in U.S. District Court for the District of New Mexico by Navajo couple William and Sammia DeJolie, says the DeJolies were approved for a $1,250 “holiday instant cash loan.”

The contract for the loan disclosed a 264 percent annual percentage interest rate, but the actual rate was 385 percent, according to the complaint.

The complaint argues that the loans offered by T&R “imposed hidden charges, deceptively understated the APR, and engaged in other unlawful and deceptive conduct.”

T&R couldn’t be reached for comment.

Nicholas Mattison of Feferman, Warren & Mattison, which represented the taxpayers, told Tax Notes that his firm has brought at least five class action lawsuits in the past decade or so over tax refund anticipation loans in areas near the Navajo reservation such as Gallup and Farmington, New Mexico.

The cases have had a similar theme, which is that the lenders weren’t disclosing the true cost of the loans as required by the federal Truth in Lending Act, Mattison said.

“What we were seeing when we were doing these cases is that there were these lenders that were taking advantage of that and siphoning a lot of that money off for themselves,” Mattison said.

Class action lawsuits can be a useful tool for holding businesses accountable, but businesses are increasingly using mandatory arbitration clauses to insulate themselves from liability, according to Mattison. Tax preparation contracts reviewed by Tax Notes require consumers to waive their right to bring a class action lawsuit.

Mattison said the result is that “businesses can do this stuff and never be held responsible,” and that legislative action at the federal level is needed.

To address issues with refund anticipation loans, Olson said regulating the industry so that interest rates aren’t too high is important.

Observing that traditional economics assumes everyone is a rational actor and is making decisions from a position in which they have choices, Olson said that assumption ignores all the issues attendant to poverty and scarcity.

“The key is not to tell people they are making poor economic decisions. That ‘advice’ is coming from a position of privilege and completely ignorant of what it is like to be poor,” Olson said.

Olson said it’s important to look at “every link in the chain — including consumer protection: Do taxpayers understand how much they will pay?”

IRS processing is also important, Olson said. If tax refunds are being held up because of claims for children, the law should be reformed so that non-relatives who are caring for the children can claim them as dependents, she said. Getting IRS refunds out quickly is critical, eliminating much of the wait time and reducing the attractiveness of return anticipation loans, according to Olson.

Caitlin Mullaney contributed to this article.