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.

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Comments on “IRS Targeted Open Source Groups Seeking Non-Profit Status”

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31 Comments
Anonymous Coward says:

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.

Anonymous Coward says:

Re: 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.

Anonymous Coward says:

Re: 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.’

Davey says:

Re: 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.

Anonymous Coward says:

Re: 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.

Anonymous Coward says:

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.

Anonymous Coward says:

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.

madasahatter (profile) says:

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.

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