IRS Targeted Open Source Groups Seeking Non-Profit Status

from the don't-they-have-better-things-to-do-with-their-time dept

The latest revelations into the IRS improperly targeting certain types of groups seeking non-profit status revealed a bit of a surprise: open source software operations were apparently a trigger for extra scrutiny. The "be on the lookout" list the IRS used in 2010 included the following entry:
Open Source Software

These organizations are requesting either 501(c)(3) or 501(c)(6) exemption in order to collaboratively develop new software. The members of these organizations are usually the for-profit business or for-profit support technicians of the software.

There is no specific guidance at this point. If you see a case, elevate it to your manager.
Kevin Drum wondered why that would happen, and a reader of his sent in an explanation, suggesting that the IRS suspected that many open source projects were really commercial projects in disguise, and the attempt to get non-profit status was to hide a commercial endeavor:
In short, the IRS is concerned that some of these organizations exist simply to market companies' software, and perhaps the associated services sold alongside them. The IRS suspects that such organizations would be a better fit for 501(c)6 classification, if anything.

I worked in the field for several years, and while it'd be pretty easy to convince me that some of these organizations deserve closer scrutiny, the IRS' "screening" has been wildly disproportionate. Groups that are unquestionably above board have been in limbo for years, unable to start fundraising in earnest, because the IRS refuses to finally approve or reject their application for 501(c)3 status.
Honestly, this raises questions about the whole concept of what qualifies as a "non-profit" in the first place, but targeting open source software operations, considering how important open source software has been to the growth of technology and innovation over the past two decades, is fairly crazy when you think about it.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 12:39pm

    correction: title: tareted? targeted?

     

    reply to this | link to this | view in thread ]

  2.  
    icon
    Mike Masnick (profile), Jun 25th, 2013 @ 12:47pm

    Re:

    Fixed. Sorry.

     

    reply to this | link to this | view in thread ]

  3.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 12:53pm

    I don't see the story here, the IRS was trying to do their job, stop people from effectively stealing money from the US tax payer by claiming to be a non-profit when they don't deserve the status. It's written into Federal Law that the IRS HAS to investigate EVERYONE who applies for non-profit status.

    As for why groups are in limbo for so many years, budget cuts have consequences. The US's population keeps on growing, but the last 10 years the IRS has had it's budget cut by 18%, all while tax laws got longer and more complicated. IRS budget cuts are short sighted, as the CBO has shown that every dollar given to the IRS brings in $10 from them catching tax cheats.

    Also, despite the initial reports on the IRS targeting conservative groups, the IRS ALSO gave the same tougher looks at non-profit groups with 'Progressive' and 'Occupy' in their names, and that the only group the IRS officially rejected for tax exempt status was a liberal group.

     

    reply to this | link to this | view in thread ]

  4.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 1:05pm

    Re:

    all while tax laws got longer and more complicated.

    Therein lies a major problem, complex laws ensure that everybody breaks them, unless they can afford the tax specialists to ensure that they stay on the right side of the law. This benefits large corporations at the expense of small companies.

     

    reply to this | link to this | view in thread ]

  5.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 1:07pm

    Persecution of "hackers"? The new witch hunt.

     

    reply to this | link to this | view in thread ]

  6.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 1:12pm

    Re: Re:

    Also benefits the IRS, since they can keep claiming they need more money to line their pock-, er, properly enforce the tax code.

     

    reply to this | link to this | view in thread ]

  7.  
    icon
    jameshogg (profile), Jun 25th, 2013 @ 1:19pm

    Just rename the movement "the Church of Jesus Christ's Open Source Software" and all your IRS non-profit checkups will go away.

     

    reply to this | link to this | view in thread ]

  8.  
    icon
    PlagueSD (profile), Jun 25th, 2013 @ 1:20pm

    Re: Re: Re:

    Also benefits the IRS, since they can keep claiming they need more money to line their pock-, er, take more lavish vacations and lose the reciepts.


    Fixed that for you.

     

    reply to this | link to this | view in thread ]

  9.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 1:24pm

    Kevin Drum wondered why that would happen, and a reader of his sent in an explanation, suggesting that the IRS suspected that many open source projects were really commercial projects in disguise, and the attempt to get non-profit status was to hide a commercial endeavor

    If they had evidence of this sort of activity and had a few other corroborating factors other than just "OMG, an open-source non-profit!" it would be a fair enough policy.

    If.

     

    reply to this | link to this | view in thread ]

  10.  
    identicon
    Spaceman Spiff, Jun 25th, 2013 @ 1:33pm

    Just another indicator

    This is just another indicator of the fundamental corruption of our government, from top to bottom! The rule of law seem to apply to all but those in the "organization" - it makes the Mafia look like a bunch of school kid toughs on the playground!

     

    reply to this | link to this | view in thread ]

  11.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 1:44pm

    Hmm... don't remember this being an issue

    As someone who helped obtain 501(c)(3) status for an open source software project, I don't recall any such delay or scrutiny. If anything, the real delay is getting enough people who care about the project to volunteer for the "grunt work" of dealing with the paperwork to obtain such a status.

    In the end, it was just a matter of filing paperwork after a probationary period (which in itself wasn't a big deal) - of which we were the bigger roadblock, not the IRS.

    In any case, maybe this was all easier 4-5 years back and it's only become more difficult recently.

     

    reply to this | link to this | view in thread ]

  12.  
    icon
    Rob (profile), Jun 25th, 2013 @ 1:52pm

    More evidence the tax code needs an overhaul

    Surely this is just yet another example that the tax code in the US is far too complicated and convoluted. It benefits middle-men (i.e. lawyers) and those with enough money to pay them.

     

    reply to this | link to this | view in thread ]

  13.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 2:23pm

    Re: Re:

    It is not as much of a news-story to me. Non-profit is used as shelter companies in a lot of circumstances and the whole concept is based on some assumptions of fair compensation of its employees, which among other things are abusable beyond belief.

     

    reply to this | link to this | view in thread ]

  14.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 2:43pm

    Re:

    The story here is yet another chapter in the IRS's sordid history of being abused by both sides of the aisle (see: Nixon). What's amazing is that there are still people around who, after a long history of abuse, would still defend leaving broad discretionary powers in their hands even to the point of suggesting we give them more money. Did you miss the receipts story or was it also 'not news.'

     

    reply to this | link to this | view in thread ]

  15.  
    identicon
    Anon, Jun 25th, 2013 @ 3:08pm

    Easy Fix

    No Tax Exempt status. Not for churches, not for charities, and definitely not for PACs. While the concept of a non-profit is noble, it's really just a company that spends all it's profits rather than paying investors.

     

    reply to this | link to this | view in thread ]

  16.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 3:17pm

    this is just an example of how those working in the IRS are so convinced that everyone is trying to not pay tax, that they end up doing as much harm to innovation as all the over-protective and permanently stuck-in-the-mud copyright industries.

     

    reply to this | link to this | view in thread ]

  17.  
    icon
    madasahatter (profile), Jun 25th, 2013 @ 3:20pm

    Income Taxes

    With the IRS fiascos may be the solution is to scrap all income taxes replacing them with sales/excise taxes. Then who cares about the non-profit/profit status because income is not taxed. There would still need to be proper accounting records kept to document the expenditures were appropriate for the group's mission and goals. Some major details would need to be worked out.

    There are a couple of proposals floating around to do this.

     

    reply to this | link to this | view in thread ]

  18.  
    identicon
    taxpayer, Jun 25th, 2013 @ 5:05pm

    Re: Easy Fix

    "No Tax Exempt status"
    How about "No income tax," do away with the whole problem. Use a land value tax and other taxes on privilege.

     

    reply to this | link to this | view in thread ]

  19.  
    identicon
    Davey, Jun 25th, 2013 @ 5:08pm

    Re:

    Exactly. This entire IRS "bias" hysteria is absolutely yet another instance of throwing some mud to see if it sticks. The IRS was stuck with a stupid law REQUIRING them to search for and follow up on any applications that raised a flag about the organization's total focus on "social service". That's exactly what they did in the political cases, where they required more info from outfits with "conservative" "socialist", "tea party", "progressive", and so on in their name. And rightly so. Such names raise the likelyhood that their aim is more political than social service. They probably shouldn't have been given this power, but that's what the law did, without any set guidelines.

    But of course the teabagger whinybabies saw another big chance to throw a hissy fit over being "persecuted", and an inept press helped them blow this nothing into a "scandal".

    As to open-source software, it (including its social structure) has a good case that it's the most important cog in the Internet/tech revolution. But that has nothing to do with the IRS, especially given that pretty much no pols and few bureaucrats grasp anything about networks and its tech -- look at he patent/copyright courts, for example.

    Bottom line is, the whole 501(c) law needs drastic revision or, maybe better, a quick demise. Either you're a traditional charity or you pay the tax. Simple enough.

     

    reply to this | link to this | view in thread ]

  20.  
    identicon
    d, Jun 25th, 2013 @ 5:12pm

    Re:

    Their job is to, without guidance from the law, make a judgement on which applicants jump out as more "other" than "social service". I can understand why something like Red Hat/Fedora, for example, would jump out. The idea is to ask for more information, that's all. Is that really such a burden?

     

    reply to this | link to this | view in thread ]

  21.  
    identicon
    Davey, Jun 25th, 2013 @ 5:16pm

    Re: Just another indicator

    The IRS in this case was exactly following the rule of law, namely the one that created the 301c exceptions. And I didn't realize that the Mafia tortured their victims by asking for more information.

     

    reply to this | link to this | view in thread ]

  22.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 5:17pm

    Re:

    "I don't see the story here,"

    Just another in many of examples showing Darryl Isa and friends to be a liars and asshats.

     

    reply to this | link to this | view in thread ]

  23.  
    identicon
    The Real Michael, Jun 25th, 2013 @ 6:01pm

    Re: Re: Easy Fix

    Even better, tax only the money you spend, not what you earn.

     

    reply to this | link to this | view in thread ]

  24.  
    identicon
    Rekrul, Jun 25th, 2013 @ 6:06pm

    And yet they give a free pass to scientology (it doesn't deserve to be capitalized), which is obviously a business.

     

    reply to this | link to this | view in thread ]

  25.  
    identicon
    Anonymous Coward, Jun 25th, 2013 @ 6:32pm

    I started an Open Sourced based Non-Profit

    Took almost a year to get approved. VS Obama's 1/2 brother who was approved in under 2 months.

    The IRS wanted me to call the local 'similar' businesses to ask for pricing.

    200 called. 10 responded.

     

    reply to this | link to this | view in thread ]

  26.  
    identicon
    Anonymous Coward, Jun 26th, 2013 @ 1:16am

    Re: Re: Easy Fix

    Only taxing property of any sort is a bad idea, as it can end up forcing the sick and elderly to sell their property. Owning property is not the same as having an income.

     

    reply to this | link to this | view in thread ]

  27.  
    identicon
    Anonymous Coward, Jun 26th, 2013 @ 6:20am

    Re: Re: Re: Easy Fix

    Because that will make it so much easier on folks who have little choice but to live paycheck to paycheck. i.e. Spend almost all their money just to obtain necessities.

     

    reply to this | link to this | view in thread ]

  28.  
    identicon
    Anonymous Coward, Jun 26th, 2013 @ 7:33am

    Re: Re: Re: Re: Easy Fix

    Consumption taxes do not preclude the possibility of deductions or paying net zero/negative taxes.

     

    reply to this | link to this | view in thread ]

  29.  
    identicon
    Anonymous Coward, Jun 26th, 2013 @ 7:35am

    Re: Re: Re: Easy Fix

    This shifts the burden of tax collection off the IRS and employers in general and onto businesses with public facing sales. Not exactly fair for them but it would probably be more efficient than the IRS which adds a pretty large cost to every dollar collected.

     

    reply to this | link to this | view in thread ]

  30.  
    identicon
    Anonymous Coward, Jun 26th, 2013 @ 7:42am

    Re: Re:

    What a load of apologist shit. The IRS is caught red-handed making judgements based on political alignments AGAIN (it's happened many many times before) and you want to give them yet another pass. The the law requires their discretion is a flaw in the law to be sure but that they exercised this discretion in a biased manner doesn't even seem to phase you anyway. It's like you think any exercise of discretion, no matter how biased, comports with the law. This isn't a question of red vs. blue. It's yet another instance in a long history of instances where whichever side is in power abuses their discretionary authority. Both sides do it. It's always wrong. You can't just give them a pass this time because their current biases align with yours. Can't you see the long term danger in that line of thinking? It's so myopic it's ludicrous.

     

    reply to this | link to this | view in thread ]

  31.  
    icon
    John Fenderson (profile), Jun 26th, 2013 @ 10:55am

    Re: Re: Re: Easy Fix

    Even better, tax only the money you spend, not what you earn.


    In other words, give the ultra-wealthy an even greater advantage and encourage them to accelerate even further the wealthy disparity in the US?

     

    reply to this | link to this | view in thread ]


Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here
Get Techdirt’s Daily Email
Save me a cookie
  • Note: A CRLF will be replaced by a break tag (<br>), all other allowable HTML will remain intact
  • Allowed HTML Tags: <b> <i> <a> <em> <br> <strong> <blockquote> <hr> <tt>
Follow Techdirt
A word from our sponsors...
Essential Reading
Techdirt Reading List
Techdirt Insider Chat
A word from our sponsors...
Recent Stories
A word from our sponsors...

Close

Email This