July 5, 2014


IRS policy that targeted political groups also aimed at open source projects (Ryan Paul, July 2 2014, Ars Technica)

The IRS was at the center of a major controversy last year following the release of internal memos revealing that the agency systematically applied a disproportionately aggressive standard of review to organizations that matched certain keywords. Targeted organizations faced greater difficulty obtaining 501(c)(3) status. Interest in the scandal has largely centered on the question of whether prominent political groups were unfairly treated, but the same internal IRS memos that defined the policy also oddly singled out open source software.

IRS personnel responsible for reviewing 501(c)(3) applications were instructed to elevate cases involving open source software to their supervisors, resulting in extensive delays in the review process and frequent rejections. In the wake of the controversy, a New York Times report highlighted how nonprofit organizations that develop open source software may, in fact, receive harsher treatment than many of the other targeted categories.

Luis Villa, a lawyer and well-known open source community member who currently serves as deputy general counsel at the Wikimedia Foundation, told the Times about two nonprofit open source software organizations that were denied tax-exempt status because their use of a targeted keyword triggered a harsh response from the agency.

"As soon as you say the words 'open source,' like other organizations that use 'Tea Party' or 'Occupy,' it gets you red-flagged," he told the Times. "None of the groups have been able to find the magic words to get over the hurdle."

In theory, it might make sense for the IRS to closely review applications from organizations that develop open source software in order to make sure that they aren't actually for-profit companies that sell commercial support or monetize their software with other services. If that were the standard of review, there would be no cause for concern. Unfortunately, it looks like the IRS is applying a much more dubious standard.

As with the political organizations, there's nothing wrong with flagging them so long as you grant the exemptions to the ones that meet the legal standard.
Posted by at July 5, 2014 7:01 AM

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