For the past few years, trying to get tax-exempt status for your open source project has been a non-starter for many. And now we know why. Since at least 2010, the Internal Revenue Service has flagged applications by open source organizations seeking tax except status, according to internal IRS documents released by Congress this week.
According to the documents, open source projects have been flagged by the tax agency's Be On the Look Out, or BOLO, list. This means they received extra scrutiny from the IRS -- just like the Tea Party, some progressive organizations, and medical marijuana groups -- when they applied for certain types of federal nonprofit status. The fact that open source projects were being flagged by these BOLO lists was first reported by Mother Jones.
That extra scrutiny caused a major scandal for the Obama administration last month, after a Treasury Inspector General for Tax Administration audit found that the IRS's methodology for flagging Tea Party submissions was suspect. This week, we discovered that progressive groups and others -- including open source projects -- were similarly flagged on these BOLO lists.
That has provided the documentary evidence for a phenomenon that many open source project leaders know all too well: For the past four years, it's been close to impossible to get an open source project approved for 501(c)(3) classification -- a nonprofit status that allows supporters to make tax-exempt donations to the organization.
Take the Open Source Geospatial Foundation, which builds open-source mapping software called OSGeo. It first applied for 501(c)(3) status more than five years ago, according to Tyler Mitchell, the former executive director of the foundation. "It's not resolved today," he says. "You'll just keep thinking that it will be resolved in a couple of weeks. It never will be. "
In a sense, open source software is a victim of its own success. Over the past decade, there has been an avalanche of open source software development, much of it sponsored by extremely profitable technology companies such as Google, IBM, and even Microsoft.
The IRS, however, is struggling with figuring out which of these projects are true to the spirit of 501(c)(3) requirements, and which are simply there to help sell products. "They've painted a lot of different types of organizations with a broad brush, in part because I don't think they really understand how open source and free software work," says Bradley Kuhn, Executive Director of Software Freedom Conservancy.
The IRS did not respond to messages seeking comment on Wednesday. But last week, it said it would suspend the use of BOLO lists in determining a group's tax-exempt status.
But Kuhn adds that the IRS is right to scrutinize this space because there are a lot of free or open source software projects that really don't meet the requirements that come with the 501(c)(3) designation. 501(c)(3) status is reserved for organizations that contribute to the public good, such as charities, or scientific or arts organizations. In contrast, some open source projects mainly support commercial products, and that's caused confusion at the under-staffed IRS, Kuhn says. "They have trouble making the distinction," he says. "I don't blame them for that; it's complicated."
The IRS directive flags open-source projects applying for both the charitable 501(c)(3) status (that's enjoyed by projects such as Mozilla and Apache) and the more business-focused 501(c)(6) non-profit designation that you see with industry consortia and groups like the Open Stack Foundation and the Linux Foundation.
Kuhn's organization already has 501(c)(3) status, and it acts as an umbrella organization for open source projects that don't have the resources to go through the nonprofit qualification process.
The IRS may be trying to stop big companies from getting tax exempt status for their pet projects, but the IRS gridlock has hurt some smaller open source projects. Several foundation executives said that the delays had curtailed fundraising and grant applications. "This has definitely set open source software communities back," said Luis Villa, a board member with the Open Source Initiative. "Time has been spent dealing with the IRS, and money spent dealing with lawyers, that should have been going towards a pure public benefit -creating a commons of software that can be used by anyone."
The Linux desktop software project, Yorba, has been waiting on the IRS since December 2009, says Jim Nelson, the Yorba Foundation's executive director. "Why the delay? Our lawyers have said that the examining division of the IRS is stretched beyond its resources, and I'm willing to give them the benefit of the doubt here," he said via email. "But I don't feel that three-and-a-half years is a reasonable time to wait to learn our tax status, either."
