This transcript has been edited for clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Navajo tax issues, part 1.

We've often talked about how tax affects marginalized communities, such as Black Americans or the LGBTQ community. Recently, two of our Tax Notes reporters had the chance to visit the Navajo reservation in Arizona and hear firsthand how taxes and the IRS affect the Navajo Nation. Here to talk more about this is investigations editor Lauren Loricchio. Lauren, welcome back to the podcast.

Lauren Loricchio: Thanks for having me.

David D. Stewart: Could you briefly tell us about your trip?

Lauren Loricchio: I traveled to the Navajo Nation from Washington, D.C. with my colleague and reporting partner, Caitlin Mullaney. We flew into Albuquerque, New Mexico, and then drove for about two and a half hours to Window Rock, Arizona, the Navajo Nation's capital. There we met with employees at DNA-People's Legal Services who told us about the issues Navajo taxpayers face with the tax system.

David D. Stewart: Now, today's episode is a bit different from our usual ones. Could you tell listeners what they're about to hear?

Lauren Loricchio: Sure. While I was reporting on this series, I was fortunate to talk with two members of the Navajo Nation: Laura Mike, executive director of the Navajo United Way, and Buu Nygren, president of the Navajo Nation. I also spoke with Nick Mattison, a partner at Feferman, Warren & Mattison, who specializes in consumer law. They were able to provide insights into some of the tax issues facing people on the Navajo reservation, so you'll be hearing in their words about many of the issues faced by Navajo taxpayers.

David D. Stewart: All right, let's go to those interviews.

Lauren Loricchio: Like other taxpayers across the nation, Native American taxpayers file their income taxes every April, and like many Americans, they're faced with a challenge of understanding and navigating the complexities of the U.S. tax system. But I found Native American communities encounter even more obstacles when it comes to filing and paying taxes. Here's Laura Mike, executive director of the Navajo United Way, talking about what she's seen.

Laura Mike: There's just a lack of internet and broadband services throughout the Navajo Nation. And because we're so rural, it's just a challenge for so many of our community members to gain access and then understand the complexities of navigating the internet and the software that's needed for tax filing. And a lot of people just don't understand how to use computers and computer hardware, software, and they have a lot of questions about taxes itself, so that poses another question. So if they were to access the software or go onto the IRS website, they wouldn't really know where to begin. I think they would feel overwhelmed.

Lauren Loricchio: Navajo Nation President Buu Nygren recalls these experiences from relatives.

Buu Nygren: I guess one of the things I could express is I know that growing up, my mom, my late mom, and my relatives, they would get their taxes done at something similar in Farmington, New Mexico, because I grew up on the Four Corners area on the Utah side. And I remember that every year as a kid, as a family, my mom did some handcraft stuff, some jewelry or whatever that they could do. But every once in a while, I remember that we'd show up at the tax place. And I remember one time, one of the things I know is that they charge a lot, I think, because if you compare it to TurboTax, it's maybe a $100, $150, right? Sometimes $50 depending on how complicated the taxes are, but that takes a lot. Most people on Navajo are not as fluent with internet and technology and let alone taxes. So maybe that's what steers them away from filing it online.

Lauren Loricchio: Laura shared another issue Navajo residents face: mail delivery. The IRS often initiates contact with taxpayers through notices and letters, but oftentimes that mail never reaches Navajo residents in time. Laura described how some residents have become creative to get around that issue.

Laura Mike: Some of them do use general delivery, and then others, they rely on their employer or maybe a relative that might have a mailing address. So they do have to, I guess they get familiar with their postmaster and then just let them know that this is where my residence is, this is where I need mail to be delivered. And I think there are some FedEx and UPS drivers who know some of the more rural people who don't have mailing addresses and they know them on a first-name basis. So it is a challenge, but I'm not sure what rural addressing is doing to circumvent that. But I think for some people it's just they don't like going to the post office and having to pay a fee and producing all sorts of documentation for a mailing address.

Lauren Loricchio: So not only are Navajo Nation members faced with a lack of internet and reliable mail service, but they're also dealing with the high cost of filing taxes through a third-party provider. And the issues don't stop once the return has been filed. The Navajo have their own culture and way of handling things, and the IRS and the Navajo don't always see eye to eye.

One of the biggest differences centers around the definition of family. The IRS requires certain criteria to be met for a taxpayer to claim a dependent or file for certain credits like the child tax credit, but the Navajo's view of family is broader, encompassing cousins, nieces and nephews, friends and more. This can affect how the Navajo file their taxes, potentially leading to issues with head of household filings and tax credits. I asked Laura if she thought the IRS understood these differences in culture.

Laura Mike: I really don't think so because we do have, I guess, a diverse household when it comes to the Navajo Nation because we have brothers raising siblings. You have in-laws taking in their daughter's ex-boyfriends. So the household isn't just a nuclear household; it's very complex sometimes. And then sometimes we even have people taking care of each other because maybe they grew up as friends or they're related by clan or we're technically cousins, but there's just really no way that you can just turn away your family so you do the best you can to try to help one another.

And sometimes that's not always on paper, it's not always something that's been through the legal process. So you don't always have that guardianship paper, you don't have that adoption decree or anything like that. So you really have to understand that some of these people, they never thought of having to go through that process just to say that so-and-so is my dependent or my spouse or my relative.

Lauren Loricchio: Navajo Nation President Nygren described his family dynamic and whether the IRS might change to reflect more diverse definitions.

Buu Nygren: I consider my sister's kids very close to me. I have a younger sister who's probably 22 years old, and she's got two daughters. To me, I consider them almost like my kids because they're my sister. I call them ["my little moms" in Navajo] because they have the same clan as my sister, and my sister's clan is my mom's clan, and I got my mom's clan. So these little girls, they're my little moms because technically they're still carrying my mom's clan. So they're very close to me, and that can happen.

Let's say I got a cousin, I've got cousins that have the same clan as me as well. Their kids probably have the same clan as me, so they could technically be my little moms too, even though it might've been my mom's cousin's kids. So it gets very complicated.

And you're right, there's probably, again, I think if changes were to happen at that level, it would take a lot to fix because you're talking about the IRS, and that's a big heavy machine to try to really work with. But there might be opportunities. But then there's 573 recognized tribes across the country, and every tribe is different. So it wouldn't necessarily work for probably the other 570 tribes. I think that's where it gets tricky.

Lauren Loricchio: Kids aren't the only area where Navajo taxpayers can run into issues. Spouses often have to file taxes separately due to common-law marriage constraints. Here's Laura again.

Laura Mike: I would say most of the clients that have come through are single head of household, and they do say that we are common law or we're no longer common law, and we were never married. And so it kind of makes it easier on us. But we do have some couples who come in, they were married, or they have their certificates and marriage licenses. So we don't really get a lot of those cases, but when we do, that's just how we explain it to them, that this is the process that we're following, and you just need to understand that we're not doing any married filing separately or any special circumstances. So you're either married or you're not. And so I think they take that well, they understand, and they make their decision there whether they're going to use our services or not.

Lauren Loricchio: To cover the cost of tax filing services, some Navajo residents take out tax refund anticipation loans. Navajo Nation President Nygren recounted his experience with these during his childhood.

Buu Nygren: With my family, obviously I grew up in a low-income, poverty family, and they would get loans on while they waited for their taxes. And I remember it was like, I don't remember [exactly how much], but I knew it was to me, even as a kid, I was like, "Man, that's a lot of money."

Just let's say your tax return was $2,000. And so you could actually, right at the moment, you could get cash up front for $1,200 and then the tax person would collect $800 because they're fronting the money. So that was the interest charge. So I think that, again, those are just numbers I'm coming up with, but I don't remember the exact percentages, but I'm pretty sure that's still happening because people, when they file their taxes, some of them need money right away, and when they get a loan on their taxes, it's like 25 percent, 30 percent, something ridiculous.

Because I remember, I used to go with my mom, my late mom, would go get her taxes done, and she'd borrow some money and I'd be like, "So how much you get for return?" And then she goes, "Yeah, I got the loan. I got a loan on the whole thing, so this is all we're getting." But it was, I would say it's $2,000 a return and they only get $1,200 because she decided to get it up front. And then on top of that, tax preparation was a couple hundred dollars on top of taking a tremendous amount of money out of it.

Lauren Loricchio: Nick Mattison, a lawyer who has experience with these types of loans and has handled settlement cases, said some lenders target the Navajo community.

Nick Mattison: In years past, we've seen much more of this type of lending taking place around the Navajo Nation and border towns. And to the extent that I can remember conversations at conferences where people were saying these refund anticipation loans have mostly died out around the country. And we were thinking, well, no, we're seeing a ton of this kind of lending still happening in towns around the Navajo Nation.

Lauren Loricchio: Nick explained how the refund anticipation loans work.

Nick Mattison: So out in that area, there were two different types of loans. There were what were commonly referred to as holiday loans, and then there were refund anticipation loans. Now they're both essentially what we think of as tax refund anticipation loans in the sense that they're loans that are secured by repayment from a tax refund, but they're a little bit different.

So holiday loans were loans that were given out in the year or the end of the year before W-2s came out and before a tax return could actually be prepared, just using last year and this year as an example. Holiday loans might be starting in the last few months of 2023, and they call them holiday loans because they're around the time of the holidays when people need money to go buy Christmas presents or whatever else. And so it would be secured by the 2023 tax refund, but obviously you can't actually do your taxes based on the 2023 tax refund if you're trying to get that loan in the last couple of months of 2023.

So what they would do is people would come in with documentation, which would allow the lender, sometimes with an affiliated tax preparation service, to estimate what the likely refund would be once the W-2 came out next year, and then they would make a loan based on that estimate. And there would be various fees and interest that were charged for those loans. And in some cases, we were seeing abusive practices like lenders demanding that borrowers turn over vital documents, Social Security cards, things like that, as an additional form of security for repayment. So that's the holiday loan that takes place before the W-2s come out in the previous year.

Then once the W-2s come out, they tend to call those refund anticipation loans, and those would be the loan where, again, you're getting some amount of money, it's going to be secured by your tax refund, but they can actually do your taxes at that point, and in many cases direct the IRS to deposit the refund directly into the account of the lender, or accounts that were controlled by the lender. So they were absolutely assured of repayment at that point.

Lauren Loricchio: I asked Nick who typically takes out these anticipatory loans.

Nick Mattison: A lot of these folks are lower income, and here's the way they can get some money right away, because plenty of people are in a situation where they really do need money badly, and here's a lender who's willing to give it to them. And one of the troubling things about these loans is that they take advantage of some of the key anti-poverty programs that function through the tax code. So that includes the earned income tax credit. This is supposed to be a major source of money for the working poor. But what we were seeing when we were bringing these cases is that there were these lenders that were taking advantage of that and siphoning off a lot of that money for themselves instead of getting it to the consumers.

And it was especially frustrating when you realize as the technology of doing taxes has improved and the speed of getting refunds has improved, getting a tax refund loan really doesn't save people much time over just doing your taxes and getting that money direct-deposited into your account from the IRS. But I think in many cases, people aren't aware of that, and so they were willing to go ahead and get an expensive loan without realizing that if they just waited, it could have been a matter of days before they had the money without paying any interest whatsoever.

Lauren Loricchio: These loans allow borrowers to get the money they need quickly, but at what cost? And is it worth it? In Nick's experience, the answer is no. He's worked on behalf of Navajo residents to recoup their money from some of these loans.

Nick Mattison: Is there a solution other than litigation? Maybe, but actually I am pretty proud of the class actions that we've brought. And I think in this case, while the numbers are not enormous, it was because the damages to class members were not enormous, but those damages are not nothing. And to somebody who's out there who may have gotten their pocket picked for a couple of hundred dollars, to get $100 back and to have done that potentially, I can't remember the number of class members, but quite a few, is both a real recovery for those class members, and it's also a serious deterrent for the defendant. Because when those numbers are added up, it really means something to them and hopefully had an impact on the practices. And while there are government agencies out there that enforce some of these laws, in many cases they're just not able to get out there and enforce them in a comprehensive way.

So from time to time, you'll see CFPB or FTC jumping in and getting relief for folks who've been taken advantage of in similar ways, and that's great. But I think it's also really important that we've got the availability of class actions for people out there who've been taken advantage of. It's not to defend every single class action out there. I've seen some class actions that I personally think are bogus, where there are not significant real benefits going to class members. So that's an issue.

But I think with a lot of the classes that we've brought as a private firm, these are people who would receive absolutely no relief in the absence of a class, and I'm pretty proud of being able to send out a lot of money to a lot of people. And one of my biggest concerns is that businesses, especially through the use of forced arbitration clauses — and now we're getting down to a different subject, but it's pretty important actually — are increasingly insulating themselves from liability and class action.

So just as a tiny bit of background, these arbitration clauses that businesses can place in their agreements, which every single one of us have signed many times, they're in credit card agreements, they're in small loans, they're in phone contracts, they're in nursing home agreements, they're in employment contracts. What they say is, "If we rip you off, or if we do something much worse than that, if we kill your grandma in a nursing home, instead of being able to go to court, you're going to have to go to arbitration." And arbitration is, in most cases individual; you can't bring a class action.

What that means is for people out there who, as I said before, had their pocket picked for a couple of hundred bucks a head, the odds are no government agency is going to come in there and do anything about it. And if they come to me and say, "Look, I found this scam that's going on, but there's an arbitration clause," I may be forced to say, "Well, look, we can't do it as a class, and are you really interested in doing an individual case and what that entails for a couple of hundred bucks and no relief to anybody else?" And the answer may be no.

And what the effect of that is, is that these businesses can do this stuff and never be held responsible. So hopefully that can be a part of getting the word out there that we need regulatory legislative change at the federal level to change the Federal Arbitration Act so businesses can't get away with this stuff anymore.

Lauren Loricchio: Despite the Navajo's challenges with the IRS, President Nygren is hopeful that progress can be made through outreach.

Buu Nygren: One of the things I think, now that you bring it up, I think that I could ask probably IRS and maybe they can partner with my office and DNA and just do an education, do some outreach, do some dos and don'ts. Because on Navajo, one of the best ways of communication is the radio, AM radio, a lot of our adults still listen to AM radio. And there could be a series on taxes, dos and don'ts and this is what gets people on the wrong side of the IRS. But then in that seminar, we could also talk about we want the IRS to consider these alternatives as well, Navajo Nation law on relatives, and how we're related to them and things like that. I think that's probably how I feel like IRS could really come to the table and really just take the matter with us and do some outreach.

Definitely, I want to try to reach out to the IRS and figure out what we can do together so that we can help individuals like the ones that, some of these individuals are probably really scared, you know what I mean? Because they probably are afraid. They probably don't know where to go. And then DNA telling them that they can't represent them because they don't have certain licenses, they can't afford their own attorneys. So these are probably families that are in big distress.

And then on top of that, they go home, and they don't have running water or electricity. So that's what I think about is you got people in distress that are probably trying to figure out how do they get in the wrong with taxes, and then they go home, they've got their grandkids, or their kids' kids that they're taking care of, or they got to haul water 10 miles off the dirt road back to the house, use propane to heat some of the water, and then use a generator to light the — I'm just saying, there's probably some of those clans that are with DNA that are in those types of scenarios. And I think that that would actually open the eyes of the IRS. OK, let's chat.

Lauren Loricchio: The Navajo community faces challenges beyond that of tax, as Laura has mentioned. The Navajo United Way provides tax services, but that's just one aspect of the organization.

Laura Mike: The Navajo United Way has been in operation since 1982, and unfortunately not a lot of people know about what we do here, a lot of the times they'll refer to us as the tax program. And so when we get a chance, we try to tell them that our mission is to empower and support human care organizations that serve to improve the lives of the Navajo Nation and neighboring communities.

And how we do that is through fundraising and generating revenue to allocate grants for organizations and other nonprofits that have services that align with ours. So in the realm of education, health, income stability, and other social services. We also provide some direct services. When we do have grants or other funding and resources, it's very complex because our service area is the size of West Virginia. We have over 27,000 square miles and our service population, we have about, I want to say 150,000 enrolled members of the Navajo Nation that we serve who are living on the reservation.

Obviously, our population is higher than that, but a lot of our people are moving down south to Phoenix or other urban areas. But our work here is very challenging, and we don't even have a Walmart on the Navajo Nation. We don't have these big-name stores because of our status as a trust land. And so it's very hard to get employers to give and so we have to rely on our own people, especially the Navajo Nation, because I understand they're the largest employer on the reservation. It's really hard to get our own people to help each other, and that's a challenge. But we're still here, we've been here for over 40 years, and we will do what we can to continue our services to the people.

David D. Stewart: For listeners who would like to learn more about Navajo taxpayers and the issues they face, you can find Lauren's series linked in the show notes. Keep an eye out for our second episode in this series featuring Leslie McLean, a low-income taxpayer clinic director who works closely with the Navajo Nation.

And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will we have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Kennedy Richardson argues that restructuring the charitable deduction regime could encourage billionaires to contribute their surplus wealth toward governmental causes. Kevin and Jake Sigler examine a strategy for wealthy individuals to avoid estate tax. In Tax Notes State, three Eversheds Sutherland practitioners discuss the changes by FASB to the SALT deduction disclosure rules. Steve Wlodychak discusses the limitations on the multistate taxation of personal income. In Tax Notes International, Vincent Ooi and Kerrie Sadiq examine the Australian Taxation Office's reasoning for adopting a broad interpretation of royalties. Leslie Samuels examines the potentially troublesome aftermath of the recent Moore decision. And finally, in Featured Analysis, Joe Thorndike examines the released personal tax returns of Vice President Kamala Harris.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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