Indian Tribes' Income and Tax Payments Have Increased, TIGTA Says

1*** = Tax Return/Return Information

Impact on the Taxpayer

Tribal economies, stimulated largely by gaming,¹ have experienced dynamic growth and represent one of the fastest growing segments of the United States economy. Analysis of the tax data for Tax Years 2000 through 2004 shows that, as overall income reported by tribal entities² increased, tax dollars reported and the associated tax revenues to the Federal Government also increased. Additionally, tribal entities have generally fully paid their reported tax obligations.

Synopsis

Some Indian tribes have become more economically self-sufficient by entering into a variety of enterprises. Many tribes with gaming enterprises, such as casinos and bingo halls, have experienced dynamic growth, which has resulted in significant increases in revenues reported, number of employees hired, compensation paid, and taxes reported. This growth has encouraged more tribes to enter the gaming industry. Currently, 27 percent of the tribes have casino operations.

As overall income reported by tribal entities increased, tax dollars reported and the associated tax revenues to the Federal Government also increased. Although the tribes generally do not report or pay Federal income taxes,³ tribal entities are required to file employment and excise tax returns and pay any associated taxes. The ITG office customers are more diligent in paying their tax obligations than the general Internal Revenue Service (IRS) taxpayer population. For example, Tax Year 2001 statistics show ITG office customers paid 99 percent of the amounts originally reported as owed, while all IRS customers paid approximately 84 percent of what was reported as owed.

Response

We made no recommendations in this report. However, key IRS management officials reviewed it prior to issuance and agreed with the facts and conclusions presented.

Copies of this report are also being sent to the IRS managers affected by the report conclusions. Please contact me at (202) 622- 6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

² "Tribal entities" refers to the businesses owned by the Indian tribal government for which there is a Taxpayer Identification Number established with the IRS. "Tribes" refers to the general governmental entity and its collective business entities.

³ Tribal entities (not tribes) organized as State- chartered corporations are required to report income and pay Federal income tax. Tribal entities organized as partnerships report their income to the IRS but do not pay Federal income tax. Any associated Federal income tax is the responsibility of the partners.

Some tribal economies, stimulated largely by gaming,³ have recently experienced dynamic growth and represent one of the fastest growing segments of the United States (U.S.) economy. Tribes without gaming continue to rely on traditional sources of income, such as agriculture and fishing revenues, and have markedly different tax filing and payment characteristics from those with gaming enterprises.

Generally, Federally recognized tribes are sovereign governments and are not required to report income or pay Federal income tax. However, tribal entities are responsible for filing employment and excise tax returns and paying any associated taxes where applicable. Tribal entities (not tribes) organized as State-chartered corporations are required to report income and pay Federal income tax. Tribal entities organized as partnerships report their income to the IRS but do not pay Federal income tax. Any associated Federal income tax is the responsibility of the partners. Appendix IV contains a list of tax forms that tribal entities can use to report their tax obligations.

The ITG office divided its customer base into 3 market segments: tribes with Gaming (226 tribes and 1,246 entities), tribes without Gaming (Non-Gaming) (238 tribes and 372 entities), and tribes located in Alaska (227 tribes and 264 entities).⁴ Tribes located in Alaska are generally smaller and have different filing characteristics from tribes in the Gaming and Non-Gaming market segments.

This review was performed at the ITG National Headquarters office in Washington, D.C., and the Compliance and Program Management office in Buffalo, New York, during the period October through November 2006. The dollar amounts presented in this report are the amounts reported by the tribal entities on their tax returns and have not been verified by the IRS. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.

Although some tribes have experienced dynamic growth, the amount of tax reported annually by all tribal entities is a small percentage of the tax paid by all of the IRS' business taxpayers.⁵ For Tax Years (TY) 2000 through 2002,⁶ the IRS reported an average business tax paid of more than $441.4 billion, compared to an average tax reported for the tribal entities of more than $1.8 billion. The tax reported by the tribal entities increased over these 3 tax years, from .27 percent to .51 percent of the total.

Analyses of the tax data for TYs 2000 through 2004 provide several indications of the growth in the ITG office customer base. Gaming operations had the greatest economic impact on the tribal entities and, as overall income reported by tribal entities increased, tax dollars reported and the associated tax revenues to the Federal Government also increased. Details of our analyses of the ITG office customers' data for TYs 2000 through 2004 are presented below.

Analysis of market segments

The ITG office divided its customer base into three market segments to learn more about the demographic and tax-filing characteristics that are unique to the respective market segment: tribes with gaming (Gaming), tribes without gaming (Non-Gaming), and tribes located in Alaska (Alaska).

 

Figure 1: Number of Tribes and Related Entities in

 

the ITG Office Market Segments

 

 

 

Figure 1 shows the Gaming market segment has the most entities (66 percent). The Gaming market segment includes businesses that conduct gaming (e.g., casinos) and other business enterprises such as restaurants or gasoline stations, some of which are close to the gaming sites. The income generated from the gaming operations provides additional opportunities for economic development.

Account balance analysis

Overall, for TYs 2000 through 2004, most of the tribal entities in the ITG office customer base fully paid their taxes and do not have a balance due on tax returns filed.⁸ Figure 2 shows the percentage of tax returns filed that have no balance due on the account (i.e., they are fully paid).

       Figure 2: Percentage of Tax Returns Filed for Which

Figure 3 compares the total tax dollars reported on accounts that were fully paid to the total tax dollars reported for all accounts, including those that were fully paid or those that have a balance due.

      Figure 3: Percentage of Tax Dollars Paid for Accounts

Tribal entities reported taxes totaling more than $10.7 billion for TYs 2000 through 2004. The taxes reported more than doubled from TY 2000 to TY 2004. As seen in Figure 4, the Gaming market segment reported most of the taxes.

         Figure 4: Tax Dollars (in thousands) Reported by Market

         Figure 5: Number of Tax Returns Filed by Tribal

In TY 2001, tribal entities paid more than 99 percent of the tax reported as owed. In contrast, IRS statistics show that all IRS customers paid approximately 84 percent of what they owed for TY 2001. While a direct comparison cannot be made due to the makeup of the populations, this does indicate the ITG office customers are more diligent in paying their tax obligations than the general IRS taxpayer population.

Income reported by tribal entities

Overall, income from tribal partnerships and corporations increased between TYs 2000 and 2004. Partnership income is reported to the IRS on the U.S. Return of Partnership Income (Form 1065), and corporate income is reported on the U.S. Corporation Income Tax Return (Form 1120 series). Analysis of the income reported for the partnerships and corporations owned by the tribes identified the following trends.

Partnership income¹¹ -- Form 1065

Tribal entities in the Gaming market segment reported total partnership income of almost $1.9 billion during TYs 2000 through 2004, for an annual average of approximately $379 million. The income almost tripled from TY 2000 to TY 2001 then decreased slightly through TY 2004. In contrast, tribal entities in the Non-Gaming market segment reported income of less than $3.5 million, and 1***. Figure 6 shows the partnership income for the Gaming market segment.

 

Figure 6: Total Partnership Income (in millions) Reported

 

by the Gaming Market Segment (TYs 2000 - 2004)

 

 

 

Figure 6 shows the dramatic increase in the amount of partnership income in the Gaming market segment from TY 2000 to TY 2001, even though the number of returns filed remained constant.

Corporate income¹² -- Form 1120

Tribal entities in the Gaming and Non-Gaming market segments reported total corporate income of almost $219 million during Tys 2000 though 2004. 1*** Figure 7 shows the income and tax reported for the Forms 1120 and 1120S for the Gaming and Non-Gaming market segments. ITG office management expressed concern about the tribal entities that have filed a Form 11 20s because the tribal entities cannot be shareholders in these enterprises. ITG office management determined they were already conducting examinations on some of the tribal entities we identified and started performing additional research on the others to determine whether examinations are warranted.

        Figure 7: Total Corporate Income and Tax Reported on

Employee compensation reported by tribal entities¹³

Employee compensation reported by tribal entities increased during TYs 2000 through 2004. Figure 8 shows the calculated average compensation per entity by market segment.

 

Figure 8: Average Compensation (in thousands) per

 

Entity by Market Segment (TYs 2000 - 2004)

 

 

 

The average compensation for all 3 market segments increased over the 5-year period, with the most notable increase in the Gaming market segment, which had a more than a 150 percent net increase in total compensation reported (from more than $3.6 billion to almost $9.2 billion).

Number of employees reported by tribal entities

The number of employees reported by tribal entities more than tripled from TY 2000 to TY 2004, as shown in Figure 9.¹⁴

 

Figure 9: Total Number of Employees Reported by

 

Tribal Entities (TYs 2000 - 2004)

 

 

 

The number of employees reported by tribal entities increased from almost 82,000 to more than 283,000. The Gaming market segment showed the largest increase, 276 percent, from more than 69,000 employees in TY 2000 to almost 261,000 in TY 2004. This increase in the number of employees can be attributed in part to an increase of more than 288 percent in the number of Forms 941 and 943 filed by the Gaming market segment.

Taxes reported by tribal entities

Total income, employee compensation paid by the tribal entities, and the amount of taxes¹⁵ reported by the tribal entities increased during TYs 2000 through 2004. Our analysis of taxes reported by the tribal entities identified the following trends.

Employment taxes reported by tribal entities

Tribal entities reported more than $9.1 billion in employment taxes on Forms 941 and 943 during TYs 2000 through 2004. Figures 10, 11, and 12 show the employment taxes reported by the three market segments.

 

Figure 10: Employment Taxes (in thousands) Reported

 

on Forms 941 and 943 by the Gaming Market Segment Entities

 

(TYs 2000 - 2004)

 

 

 

 

Figure 11: Employment Taxes (in thousands) Reported on

 

Forms 941 and 943 by the Non-Gaming Market Segment Entities

 

(TYs 2000 - 2004)

 

 

 

 

Figure 12: Employment Taxes (in thousands) Reported on

 

Forms 941 by the Alaska Market Segment Entities

 

(TYs 2000 - 2004)

 

 

 

All three market segments show an increase in the amounts of employment taxes paid.

Federal income tax withheld

Tribal entities reported more than $2.28 billion in Federal income tax withheld from nonpayroll payments on Annual Returns of Withheld Federal Income Tax (Form 945)¹⁶ for TYs 2000 through 2004. Figure 13 shows the amount reported as taxes withheld increased each year for TYs 2000 through 2004.

 

Figure 13: Annual Withholding (in thousands) of

 

Federal Income Tax (TYs 2000 - 2004)

 

 

 

Federal Unemployment Tax Act (FUTA)¹⁷tax reported

Federal unemployment tax¹⁸ reported by tribal entities on Forms 940 decreased significantly from TY 2000 to TY 2004. Tribal entities are required to pay Federal unemployment tax unless they are complying with and paying State unemployment taxes. Figure 14 indicates a decrease in Federal unemployment tax of more than 50 percent from TY 2000 to TY 2001 for the Gaming market segment. The combined Federal unemployment tax reported by the Alaska and Non- Gaming market segments is approximately 7 percent of the total Federal unemployment tax reported by the ITG office customers.

 

Figure 14: Amount of Federal Unemployment Tax (in thousands)

 

Reported by Market Segment (TYs 2000 - 2004)

 

 

 

ITG office management stated the tribal entities may have shifted from paying Federal unemployment tax to paying State unemployment taxes due to a legislative change¹⁹ in Fiscal Year 2001 that allows the tribal entities to pay State unemployment taxes rather than Federal unemployment tax.

Excise taxes reported

Tribal entities reported more than $12.7 million in excise taxes during TYs 2000 through 2004. Excise taxes are reported on the Occupational Tax and Registration Return for Wagering (Form 11-C), the Quarterly Federal Excise Tax Return (Form 720), the Monthly Tax Return for Wagers (Form 730), and the Heavy Highway Vehicle Use Tax Return (Form 2290). Figure 15 shows the percentage of excise taxes reported by Form.

 

Figure 15: Percentage of Excise Taxes Reported by

 

Form Type (TYs 2000 - 2004)

 

 

 

Figure 15 shows Forms 720 and 730 accounted for more than 98 percent of the excise taxes reported: $6.5 million and $6.0 million, respectively. Tribal entities reported more than $144,000 in excise on Forms 2290 and almost $42,000 on Forms 11-C.

Tax withheld for foreign persons

Tribal entities are required to file Annual Withholding Tax Returns for U.S. Source Income of Foreign Persons (Form 1042) to show the gross income paid and the income tax withheld from foreign individuals, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts. During TYs 2000 to 2004, tribal entities in the Gaming market segment reported more than $318 million in gross income paid to foreign individuals and withheld more than $71 million in taxes.

Figure 16 compares the tax withheld and the gross income reported by the Gaming market segment.

 

Figure 16: Tax Withheld and Gross Income (in millions) Reported

 

by the Gaming Market Segment Entities on Forms 1042

 

(TYs 2000 - 2004)

 

 

 

Although the amount of tax withheld showed a slight increase, it was not proportional to the marked increase in the amount of gross income reported. Gross income reported increased 83 percent from TY 2000 to TY 2004; however, the tax withheld over the same period increased only 23 percent, from $13.3 million to $16.4 million. Additionally, the percentage of tax withheld decreased from 27 percent of gross income reported in TY 2000 to more than 18 percent of gross income reported in TY 2004.

The Non-Gaming market segment reported almost $444,000 in gross income paid on Forms 1042 and withheld more than $68,000 in taxes. For the 5 tax years we reviewed, the Alaska market segment reported more than $11,000 in gross income paid on Forms 1042 and withheld less than $40 in tax.

² Consultation and Coordination With Indian Tribal Governments, Exec. Order No. 13175, 3 C.F.R. 304 (2001), reprinted in 25 U.S.C. Section ( § ) 450 (2001).

³ There are three classes of gaming. Class I consists of social games for prizes of nominal value, Class II consists of games such as bingo or lotto, and Class III consists of card games, dog and horse racing, and all other types of casino gaming.

⁴ The ITG office treats some subdivisions of tribal governments as separate tribes because they are decentralized and do their own tax filings. Therefore, the total number of tribes presented (691) is greater than the total number of Federally recognized tribes (564). Additionally, the total number of tribal entities presented for the market segments (1,882) consists of the entities that are currently used by the tribal government or are pending use in the near future. The number of tribal entities related to the Federally recognized tribes (approximately 2,100) includes all tribal entities regardless of whether they have any current filing requirements or past filing history.

⁵ "Tax reported" is the amount shown as due on a tax return, and "tax paid" is the amount submitted by the taxpayer. Generally, the tribal entities paid the amount reported on their tax returns.

⁶ Tax data from the IRS Statistics of Income Division were not available for TYs 2003 and 2004.

⁷ The ITG office developed the ITG Database over the past several years. The ITG Database is made up in part by the Inventory Database, the Outreach Assignment Database, and the Tribal Compliance Database and contains data from the IRS' main database (Master File), the Bureau of Indian Affairs, and other sources on Indian tribal governments and their related enterprises. The ITG Database records contain more than 200 data fields and include information such as tribal entity data, filing requirements, and line-item information from filed returns such as wages paid. The Master File is the IRS database that stores various types of taxpayer account information, including individual, business, and employee plans and exempt organizations data.

⁸ For the purpose of this analysis, we did not take into consideration when payment was received on the account. An account that was fully paid at the time of our analysis (data were obtained through the end of Tax Year 2005) was treated as if the account had been fully paid when the return was filed.

⁹ The numbers in Figure 4 do not add up to the totals presented due to rounding.

¹⁰ The number of tax returns filed for TYs 2000 and 2004 are understated because data were not available on the IRS Master File for a specific Master File Tax code for a return typically filed by tribal entities. The Master File Tax code is a 2-digit code used to identify the type of a tax return.

¹¹ A partnership does not pay tax on its income but "passes through" any profits or losses to its partners. Form 1065 is an information return used to report the income, deductions, gains, losses, etc., from the operation of a partnership. Partners must include partnership items (e.g., income, deductions, and credits) on their individual tax returns.

¹² Corporate entities file Form 1120 to report, in part, the corporate income, gains, or losses and to calculate the income tax liability of a corporation. A domestic corporation or other entity may file the U.S. Income Tax Return for an S Corporation (Form 1120S) for any tax year covered by an election to be an S corporation. Corporations filing Forms 1 120 pay the income taxes, whereas corporations filing Forms 1120s generally pass the income through to the shareholders, who then pay the tax.

¹³ Employers report the amount of wages, tips, and other compensation on either the Employer's Annual Federal Unemployment (FUTA) Tax Return (Form 940) or Employer's Quarterly Federal Tax Return (Form 941).

¹⁴ From our review of IRS Master File data, we noted that many of the entities reported zero employees even though they reported employment taxes on a Form 941. Additionally, we identified instances in which the number of employees on the IRS Master File was apparently incorrect. We estimated the correct number of employees for the obvious errors.

¹⁵ Taxes reported by the tribal entities include, but are not limited to, corporate, employment, Federal unemployment, and excise taxes and taxes withheld on nonpayroll payments and payments to foreign individuals and businesses.

¹⁶ These payments include, but are not limited to, pensions, annuities, and Individual Retirement Arrangement distributions; gambling winnings; and Indian gaming profits. Generally, these taxes are reported on the Form 1099 series of information documents (see Appendix IV for a list of documents in the Form 1099 series) or Certain Gambling Winnings (Form W-2G). Federal income tax withheld from wages is not reported on Form 945.

¹⁷ 26 U.S.C. §§ 3301-3312 (2003).

¹⁸ The Federal unemployment tax is part of the Federal and State program under the FUTA that pays unemployment compensation to workers who lose their jobs. Federal unemployment tax is reported and paid separately from Social Security and Medicare taxes and from withheld income tax. It is reported on Form 940.

¹⁹ Consolidated Appropriations Act of 2001, Pub. L. No. 106-554, Sec. 1(a)(7) [title I, Sec. 166(b), (c)], Dec. 21, 2000, 114 Stat. 2763, 2763A-627.

I. Identified and obtained data relating to the ITG office customer base.

²The Process for Assigning Cases Should Be Strengthened to Provide Better Coverage to Indian Tribal Governments Most in Need of Compliance Checks (Reference Number 2004-10-191, dated September 2004), The Indian Tribal Governments Office Can Improve the Effectiveness, Consistency, and Efficiency of Compliance Checks (Reference Number 2005-10-158, dated September 2005), and Statistical Portrayal of the Indian Tribal Government Office's Enforcement Activities From Fiscal Year 2002 Through Fiscal Year 2005 (Reference Number 2006-10-121, dated August 23, 2006).