WASHINGTON -- Taxes cannot be levied on honoraria to a shaman or spiritual leader for religious services, but could be assessed on per-capita payments from gambling revenues to tribal members, under a proposal for taxing Native Americans by the Internal Revenue Service.

The thorny issue of taxing Native Americans and Alaska Natives had the potential to cause a rift in the good relations the Obama administration built with tribes during the president's first term. Tribal members chafed at IRS audits on their finances and at demands for tax payments on some benefits for and payments to them.

At a Senate Indian Affairs Committee hearing in June, tribes complained that the IRS was enforcing tax laws without taking into account unique aspects of their sovereign governments. In one case detailed in written testimony, an IRS agent ruled tribal members who benefited from government programs should be taxed on the part of the benefit paid for by gambling revenue.

Amid the complaints, the IRS and Treasury Department met with tribal representatives to hammer out some proposed "guidance" on what is taxable and what is excluded under existing laws.

"The ability of tribes to provide for the general welfare of their citizens is truly critical to the self-determination of tribal governments," Hawaii Democratic Sen. Daniel Akaka, the committee's chairman, said at the June hearing he convened on the matter. "This is especially important given one out of every four Native people in the U.S. live in poverty."

The Treasury Department unveiled the proposal Dec. 5, when more than 500 tribal leaders were in Washington for the fourth White House Tribal Nations Summit.

Neal Wolin, deputy Treasury secretary, said the proposal was drafted with tribal input.

"A key challenge for tribal nations is economic development. Many of your communities face poverty, high unemployment and lack of good paying jobs," Wolin told leaders at the summit. "Effective immediately, tribes can rely on this guidance and have comfort that programs that meet these guidelines will be respected by IRS."

The guidance is not yet final, and comments can be submitted in writing through June 3, 2013.

The proposed guidance generally exempts from taxation assistance from a government program that is not compensation for services. Benefit payments cannot be lavish or extravagant or discriminate to benefit government leaders.

The Treasury Department said some examples of exclusions from taxation are housing payments to help individuals and families acquire modest homes or apartments, aid for disaster victims, medical or dental assistance and services of a shaman or medicine men or women for health and spiritual and cultural reasons.

General welfare programs funded by casino revenues are exempt, but per-capita payments from gambling revenue are taxable income.

Dante Desiderio, executive director of the Native American Finance Officers Association, said the proposed guidance has generated a lot of interest from tribes. A webinar held by his organization on the proposal drew some 150 people, he said.

Reaction has been largely positive, particularly to recognition by IRS of the "unique governing responsibility of tribal governments," Desiderio said.

The proposal allows tribes to define financial need, Desiderio said. It recognizes tribes may spend money to feed entire communities as part of a ceremony, feast day or cultural event and would exclude that benefit from taxation.

"The idea is that we as tribes don't base our benefits and services on financial need," he said. "It's the need of the community."

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