Paranoia?

Tell me I’m not paranoid. Please.

The IRS seems to have some real problems with 501(c)(3) applications*.

* For those of you not in the know (hello readers in Montreal!), charities with 501(c)(3) status can accept tax-deductible contributions (very important in getting donors to cough up sizable sums of money) and the charities are also exempt from paying taxes (which is, as you can imagine, useful in making those sizable sums of money go as far as possible).

Last year, the IRS was involved in a controversy around their handling of applications from conservative political groups. Now, the New York Times is reporting that similar special review procedures were also applied to–among many other groups–any open source software project.

You heard that right. According to the IRS, open source projects “are usually the for-profit business or for-profit support technicians of the software.” According to the Times and Ars Technica can tell, while many of the political groups flagged for special review eventually get their applications approved, none of the open source groups have been approved. None.

As Ars notes, it’s perfectly reasonable for the IRS to ensure that applicants aren’t actually for-profit companies. However, the language used in rejecting applications suggests that they’re actually going a step further and rejecting applications on the grounds that the open source license allows for-profit companies to use their software. That’s like denying 501(c)(3) status to the Salvation Army because a for-profit company could hire someone who has gone through the Salvation Army’s job-training program. (For the record, the Salvation Army does have 501(c)(3) status.)

Note that some of these rejections have been sitting in IRS limbo for years: Ars’ article focuses on the Yorba project, whose application was denied after four years. That’s a hell of a long time to wait to have your face slapped with a dead fish.

Consider this: last month the IRS formally ended the use of keyword lists in processing applications. Or at least their use in selecting applications for special review; whether they’ll also stop using them in blanket denials remains to be seen.

This week, the IRS rolled out a simplified version of the 1023 form used to apply for 501(c)(3) status–and there are already charges that the simplified form is too simple. Critics, including state charity regulators and the National Council of Non-profits, say that the form doesn’t require enough information to provide proper oversight and will encourage abuse.

So, paranoia: How long will it be before IRS workers decide the new form is encouraging for-profit software companies to try to sneak in as charitable organizations, and resume denying 501(c)(3) status to open source groups on the grounds that any software creation is by definition a commercial activity?

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