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 2. We are continuing our look at how tax affects tribal communities, specifically the Navajo Nation. Part 1 of the series, which you'll find linked to in the show notes, features firsthand accounts detailing some of the issues the Navajo face.

This week's episode, part 2, features a discussion with the director of a low-income taxpayer clinic who works closely with the Navajo Nation. Here to talk more about this is Tax Notes Investigations Editor Lauren Loricchio. Lauren, welcome back to the podcast.

Lauren Loricchio: Thanks for having me back.

David D. Stewart: Could you give listeners a brief recap of what you discussed in part one of the series?

Lauren Loricchio: You heard interviews with Navajo Nation President Buu Nygren, Laura Mike, executive director of the Navajo United Way, and consumer law attorney Nick Mattison. They discussed some of the issues members of the Navajo Nation faced with the tax system.

David D. Stewart: And who did you talk to and what did you get into for part 2?

Lauren Loricchio: I spoke with Leslie McLean, director of the low-income taxpayer clinic at DNA-People's Legal Services. She told me about some of the issues her clients face with filing their taxes and accessing tax credits, like the earned income tax credit.

David D. Stewart: All right, let's go to that interview.

Lauren Loricchio: Welcome to the podcast.

Leslie McLean: Thank you for having me and welcoming me.

Lauren Loricchio: So Tax Analysts recently awarded you a fellowship to serve as low-income taxpayer clinic director at DNA-People's Legal Services. Can you tell us about DNA, the work you're doing there, the clients you serve, and how you got involved?

Leslie McLean: Yeah, I'm the LITC director for DNA-People's Legal Services in northern Arizona. DNA has six offices, three on Navajo Nation, one on Hopi Nation, and one in Flagstaff, Arizona, and Farmington, New Mexico, which are typically known as border towns to the Navajo, Hopi and Jicarilla Apache reservations. DNA serves three counties in Arizona. That includes the Navajo and Hopi Nations as well as San Juan County in New Mexico and San Juan County in Utah.

I began working with DNA-People's Legal Services when I lived in Chinle, Arizona, which is pretty much the middle of the Navajo reservation, in 1994. And I was there for nine years and during that time I was not an attorney, I was an accountant, so I helped DNA administer their LITC grant that they received in 2000. DNA was one of the first recipients of that grant. Then when I left the reservation, I went to law school and as much as I planned to go back and work for Legal Services, life didn't have that plan for me.

So I practiced in private practice for 16 years in Flagstaff, Arizona, and decided to leave private practice in 2022 and found my way back to DNA-People's Legal Services. And with the help of the IRS LITC grant and with the added bonus of the Tax Analysts fellowship, we've been able to restart their low-income taxpayer clinic program. They hadn't had one since 2016. And so that's what I'm doing there with them now. We have restarted it and it is up and going and doing very well.

Lauren Loricchio: Leslie, can you tell us why the clinic closed and why you thought it was important to restart it?

Leslie McLean: Sure. The clinic closed because there wasn't an attorney to be the clinic director or the qualified tax expert, and that's a requirement of the LITC grant. There had been some effort by one of the state-licensed attorneys to have the IRS allow Navajo-licensed attorneys to represent before the IRS and that didn't work out. And so the state-licensed attorney who was working for DNA at the time decided that he couldn't alone support the program and I thought it was important to come back.

I knew when I left private practice that I wanted to go back to Legal Services and I knew exactly what I wanted to do. I loved the low-income taxpayer clinic program when I had previously worked for it. So I knew it was just important to get that going again. The region, northern Arizona, and the reservation had been identified by the IRS as an underserved population as far as the low-income taxpayer clinics went because they no longer had one and the IRS knew that there was a need for it.

Lauren Loricchio: So what are some of the challenges your clients face with tax filing and the IRS?

Leslie McLean: You know, in order to receive the earned income tax credit and the child tax credit, taxpayers have to file a tax return, right? So these are needs-based government supports and in order to get them, you have to file a tax return. So I first want to say that I believe strongly that taxpayers should not have to pay money to receive their needs-based benefits.

For example, a taxpayer with three children can qualify for about $7,500 in the earned income tax credit. That's the highest, depending on their income, and another $4,800 with three children in refundable child tax credits. Now that's an important benefit to someone supporting a family of four or five on $30,000 a year.

So the barriers they face in filing these returns are, if I needed to rank them, I would say there's a lack of access to Volunteer Income Tax Assistance sites on the reservation. For the past filing season, there were two sites on the Navajo Nation, and that's to cover an area about the size of the state of West Virginia. Both sites reported having to stop taking new clients in March this year. So tax preparation on the reservation is scarce and in border towns like Gallup and Farmington, New Mexico, tax preparation is often predatory with high costs, scams, products being sold, and unqualified preparers are incorrectly preparing these returns.

The number one barrier is the lack of VITA sites, the lack of free qualified tax preparation. Unqualified preparers are happy to charge large fees to taxpayers to have their tax returns incorrectly done. And then what we see in the clinic is filing status was incorrect on these returns, preparers do not account for Navajo common-law marriage, which we'll probably talk more about later, head of household filing status is being used by two taxpayers in the same household. And the earned income tax credit is often being claimed with a child that doesn't qualify the taxpayer.

So even when taxpayers can get their returns prepared, they are more often than not being prepared incorrectly. And then once the earned income tax credit is disallowed, taxpayers often don't realize they have to file a special form in future years to claim the credit. And if they don't do that, then it gets disallowed. So we often see years of disallowed earned income tax credits — again, that very large credit. And one piggybacks off the other.

If your earned income tax credit's disallowed, so is your child credit. So we have folks coming into the clinic with years of disallowed credits and them not really understanding why they were disallowed. And then often by the time they get to us, the statute of limitation has run for either filing an amended return to fix the problem or filing the original return. And taxpayers just give up. We've seen a lot, especially during the pandemic years, taxpayers just gave up.

Lauren Loricchio: And a lot of these issues that you raised, they affect low-income taxpayers overall. But what are some of the challenges, particularly on the reservation and in other tribal communities?

Leslie McLean: So some of the challenges, once folks are examined, are being able to provide the proof that typically the IRS asks from other low-income taxpayers. So for example, you're often required to prove that you supported your children when you're filing head of household. And in order to do that, the IRS often asks for documentation of rent payments or documentation of utility payments. And that's just not how our population of taxpayer lives. There's very seldom units to rent on the reservation. There is a Navajo Housing Authority, but those homes are far and few between. So the IRS doesn't take into account that Native American taxpayers are living on federal trust land. And so they don't buy homes, there are no mortgages. They live on homesite leases and often many families have different dwellings on homesite leases.

And often in audits, I'll see folks being asked for utility bills, but that taxpayer might not pay the utility bill. Their relative might have the utilities in their name and then they just extend, unfortunately, often in a dangerous way, their utilities — their electricity we're talking about. And then water gets hauled in 50 percent of households, there's no running water, so we're not going to have water bills. Folks haul their water and they don't pay for it. It's provided by the Nation.

So I think that these are some of the very distinct difficulties that folks deal with once they find themselves audited by the IRS. Then we also have a very large unbanked population, which might be true for other low-income taxpayers, but that also makes their taxpayers susceptible to products being sold by tax preparers in order that they can receive their refund more quickly or not have to get it in the form of a check.

Lauren Loricchio: Do people there have access to the internet and to computers to do their returns that way?

Leslie McLean: No, no, not at all. And especially, I mean, that's changing a little bit, but there are no public libraries. Here, in Flagstaff, folks can go to the public library and use the computers there. That doesn't exist on the reservation. So cell phones are the greatest access to the internet, but you really can't prepare your tax return on a cell phone. That's not practical.

When I'm talking often to my clients on their cell phones, there's not very good coverage. We get cut off, they have to go stand in a certain place in the yard in order to get service. So no, the reservation is absolutely not technologically up to date and they don't have these resources.

So often clients are told, "Well, you're going to have to go visit a taxpayer assistance center." From Chinle where I lived on the reservation to the nearest taxpayer assistance center, that would be in Phoenix or Albuquerque, is at least four hours one way, if not longer. And we're talking about folks who don't have access to reliable transportation often or they don't have the funds to pay to get to the taxpayer assistance center.

Those are also some of the hurdles. But absolutely, technology, the lack of being able to go online and use a product to file your tax return — even direct file, which I think is something great that's happening with the IRS is direct file, but that's not going to work for our clients. That's not going to be helpful for our clients.

Lauren Loricchio: How do the barriers to filing impact taxpayers living on the reservation and their ability to claim tax credits like the EITC and the CTC?

Leslie McLean: I'll say that I believe that the IRS and other folks, other organizations, have done a great job with getting the word out that you need to file a tax return to get these credits. I just think that the barriers are finding good tax preparation and, again, often they'll get the return file to claim these credits, they won't get the credit. Because whereas the IRS used to process those returns with those credits and give people their refund, for better or worse, they don't do that anymore.

Probably for better. But they immediately look at some of these head of household, especially we're finding of Native men filing head of household, they're immediately looking at these and not allowing the credits. And so that stops them. And then they just get in this cycle year after year after year of not being able to get the credits. I've had taxpayers come in and they've come in with two or three years' worth of exams and disallowance of the credits that they have not been able to work through with the IRS.

Lauren Loricchio: You mentioned previously that the filing status of Navajo taxpayers might get misclassified because their return preparer is unfamiliar with Navajo law or the culture, and some of this stems from Navajo common-law marriage. Can you tell us about that issue?

Leslie McLean: Back in 2000 when Congress first appropriated funds for the LITC grants, we were allowed to prepare tax returns with those funds and we did, DNA-People's Legal Services. At least three of our offices prepared free tax returns. And we got trained, everyone was trained, and we used the VITA training information, but we also used LITC funds to prepare those.

And what we started seeing in our tax clinic, I remember hearing one taxpayer sitting in with one preparer say, "Well, my husband's over there with the other preparer having his return prepared." And what we came to realize is that folks, they were married couples under Navajo Nation law, Title IX of the Navajo Nation Code. They believed, they had learned, they had been taught from paid tax preparers that they couldn't file married filing jointly, that they had to file separately.

And the way they were being told to file was for each of them to file head of household, which we know is not right. We know that's incorrect, but still that's what they had been doing. And they were splitting the children up. One of them was taking a child, one of them was taking the other two children. Some way they were splitting the children up. So when we heard this, of course, we sat with them and told them, "No, you can't do it like that. One of you can file head of household, one of you can file single, but it has to be the one who qualifies for head of household." And often they would walk out of the tax clinic because often their returns weren't going to be as high as they would have if they had both filed head of household.

And so we started talking, I started talking with the tribal advocates about common-law marriage and recognizing that neither Arizona nor New Mexico recognized this common-law marriage. But we started talking about, "Well, why can't someone who's common-law married file married filing joint?" We eventually asked the IRS for their opinion on that. And they did.

In March of 2003, they issued a memorandum stating that they believe that -- I mean, it's really, I have a love-hate relationship with that memorandum because the end result was yes, Navajo Nation folks who are married under Navajo Nation common law can file married filing joint returns.

But the reasoning behind it was because Arizona law allows it. Arizona law will recognize their common-law marriage. So we've lived with that and we've now tried to educate folks about filing married, filing joint, their option to do that. We educate folks that they cannot both file head of household, they're living in the same household, and split the children. The children are qualifying children for one or the other, but not for both. And so that's changed some.

But the problem with that letter is, what if Arizona law changes? What if Arizona no longer recognizes Navajo common-law marriage? I wanted the letter to recognize common-law marriage and allow folks to file married filing joint because the Navajo Code says that they can do that, but you take what you can get.

Lauren Loricchio: And one issue I think that was brought up, is that letter wasn't really disseminated widely. Right?

Leslie McLean: That's correct. I mean, I think we found out even that the clinic director at New Mexico Legal Services had not gotten a copy of that letter. And of course it didn't apply to New Mexico — and New Mexico, it's a different result. So it would be better if the IRS wasn't relying on states, if they were just relying on the sovereignty of the Navajo Nation and the fact that they have law that recognizes common-law marriage.

Lauren Loricchio: There's another issue, that's Navajo taxpayers getting representation before the IRS. Can you explain that for us?

Leslie McLean: Sure. I mean, some of the challenges representing Native Americans before the IRS, a lot of the challenge is connected to the fact that we just don't have enough attorneys who can represent our clients before the IRS. There's a lack of legal services attorneys in general, and then there's certainly a lack of legal services attorneys willing to practice tax. I strongly believe that we need attorneys who live in the Native American communities that are representing Native American taxpayers, and there are many difficulties associated with that.

But we do have Navajo-licensed attorneys who take a bar exam and have ethics and continuing legal education requirements under the Navajo Nation Bar who are not allowed to represent clients before the IRS. They're not authorized. And we have brought this up with the IRS, and the IRS, and rightfully so, and I know other folks are, maybe the Center for Taxpayer Rights, maybe other folks are working on looking at the legislative changes that would be needed. So this is not something that the IRS can just say, "OK, Navajo-licensed attorneys can represent before the IRS." There has to be changes made in the legislation about who can represent folks before the IRS.

And so the IRS has offered us — and this is where I think DNA parted ways with the LITC program years ago, and that's not going to happen again — but the IRS has offered to work with us on this. So right now we are working with them and the first step will be to get special authorization for Navajo-licensed attorneys to represent clients before the IRS. The problem with that is that special authorization requires that a state- licensed attorney supervise that advocate.

So we're spread pretty thin already just trying to represent our clients that we have since we've started the program again, but we're working on it. There are good things happening and I do believe that we will be able to get more folks to represent taxpayers before the IRS. The interesting thing, Lauren, is that our Navajo-licensed attorneys really like tax law and they always have and they like working these cases. So it would be great to be able to have them, and it's right, it's appropriate. These are the folks who should be representing tribal community members.

Lauren Loricchio: Regarding the other issues with IRS resources, what do you think can be done?

Leslie McLean: I think a few things can be done. I think that we should have accessible taxpayer assistance centers closer for our clients. It would be great if the IRS could open an office on the reservation. Social Security does, other federal agencies do. And I don't know why that can't happen here. Also, I think there should be a specially trained unit to work with taxpayers living on reservation and make it a priority to hire Native Americans and train them for these positions. And we already talked about finding ways to allow Native American-licensed attorneys to practice before the IRS.

So I think that those are some of the things — I think in order when these exams are being done of Native American families and the tax credits, I know from talking to IRS representatives that there's no understanding at all of the lifestyle and I really don't think you can understand it unless you see it. You have to at least see it. It'd be better if you lived in it, but you have to at least see it. And to date, I have not had an IRS employee come to the reservation offices when they need to meet with me. And I think that's important. I think it's important that folks come there and see how people live and see the differences.

Lauren Loricchio: I wonder too, after we published a series of stories on this topic, I wonder if you've heard from anyone with the IRS or anyone with the Navajo Nation and if you're working with them on anything.

Leslie McLean: Well, let me start with the IRS. I think that the LITC office of the IRS and the Taxpayer Advocate Services very much want to work with us on this. So I will say yes, the IRS has reached out over and over again and there is a real effort by the American Bar Association to look at Native American tax inequities. And I certainly appreciate that, and I do believe the IRS will continue working with us.

The Navajo Nation, no. We have not heard from the Navajo Nation, but I have hope. I never give up hope. Beginning in September of this year, DNA will have a Christine Brunswick Fellow working with me on this. And Chelsea was raised on the Navajo Nation in Fort Defiance, Window Rock area, and she just graduated from the Indian Law Program at the Sandra Day O'Connor School of Law. And I have too much planned for her to do, of course. But a big part of what I want Chelsea to do is work with me on getting the Navajo Nation more involved in this because I do believe that that has to happen to solve some of these problems. It can only make us better if we have the Navajo Nation involved working with us on this.

Lauren Loricchio: Do you have any final thoughts?

Leslie McLean: We keep talking about this, we keep trying to increase the awareness of others about this and the awareness, also, education and outreach is such an important component of this program. So not only are we helping folks, representing folks who have controversies with the IRS, we're also trying to get out there in the community and making folks aware of the credits, of the help that's available to them.

Tomorrow I'll drive to Montezuma Creek, Utah, 3.5 hours each way, and we'll do an outreach there to folks where we don't have a DNA office. So we're doing as much as we can and we will do more as we can and as we get continued support from folks like Tax Analysts and Christine Brunswick fellowships, the American Bar Association. I'm hopeful. I'm happy. This is exactly what I want to be doing. And the plan is working well so far.

Lauren Loricchio: Thank you for talking with me today about this topic and for joining us on the podcast.

Leslie McLean: You're welcome. And thank you for having me.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions & Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, David Flanagan argues that Treasury's new approach to the FDII deduction thwarts the policy of encouraging innovation in the U.S. Ross Sharkey and Matthew Paolillo criticize a recent analysis of qualified appraisal standards. In Tax Notes State, advisory board members discussed the U.S. Supreme Court's recent decision in Loper Bright to overturn Chevron. James Wetzler discusses the issues involved in the debate over the deductibility of state and local taxes. In Tax Notes International, Jack Sheehan and Jidapa Tiamsuttikarn explain recent developments in the Thai international taxation and transfer pricing regimes. Alan Granwell and Briahnna Skinner take an in-depth look at the Corporate Transparency Act. And finally, in Featured Analysis, Carrie Brandon Elliot reviews new proposed tax regulations that provide exceptions to treating U.S. transferors as owners of foreign trusts that have U.S. beneficiaries.

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 a review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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