DOJ settles Z Street lawsuit over IRS treatment

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The Justice Department said Thursday it has entered into a settlement with Z Street, a nonprofit that educates the public about Israel and Middle East issues, after the group sued the Internal Revenue Service for holding up its application for tax-exempt status and subjecting it to extra scrutiny.

The settlement is still pending approval from the U.S. District Court for the District of Columbia. Z Street accused the IRS of giving higher scrutiny to applications for tax-exempt status from organizations connected in any way to Israel, and applied the policy to Z Street’s application, leading to a years-long delay. The settlement agreement includes an apology from the IRS to Z Street for the delayed processing of its application for tax-exempt status.

Z Street, like a number of conservative and liberal groups, had their applications for tax-exempt status delayed because the IRS was using terms such as “Tea Party,” “Patriot” and “Progressive” to filter out applications and give them extra scrutiny. Revelations of the so-called “targeting” scandal prompted the IRS to abandon the use of “BOLO lists,” short for “Be on the Lookout” after former IRS Exempt Organizations director Lois Lerner revealed the practice in 2013. The scandal led to the ouster of her and other top IRS officials, and the IRS changed its practices, providing a streamlined process under which groups could self-certify themselves for tax-exempt status.

The settlement comes after a series of cases brought by groups alleging that their tax-exempt status was delayed by the IRS based on inappropriate criteria, including names and policy positions. Last October, the Justice Department settled several lawsuits with Tea Party and conservative groups, and Attorney General Jeff Sessions called on the IRS to apologize to them (see Sessions calls for IRS apology as Justice settles Tea Party lawsuits).

The U.S. District Court for the District of Columbia approved settlement agreements in the cases of Linchpins of Liberty v. United States and True the Vote v. IRS. In Norcal Tea Patriots v. IRS, the federal government agreed to a settlement in a class-action lawsuit that’s still pending approval in the U.S. District Court for the Southern District of Ohio. In Freedom Path v. IRS, the government entered into a settlement resolving a wrongful disclosure claim and dismissing other claims, including allegations of improper IRS targeting. There’s still a single regulatory challenge remaining, though, following the settlement. Freedom Path lost the challenge at the District Court and the issue is currently on appeal to the Fifth Circuit.

The Z Street case represents the final settlement. Z Street originally applied for tax-exempt status in December 2009 and learned from an IRS agent that its application was being held up, allegedly because the IRS had special concerns that Israel-related organizations might engage in improper advocacy activities. The IRS did not immediately comment on the settlement.

“Tax exemption eligibility should be based on whether an organization’s activities fulfill requirements of the law, not a group’s policy positions or the name chosen to reflect those views,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman in a statement. “The attorneys at the Department of Justice work hard to ensure that all Americans receive equal treatment under the law. Today’s settlement further illustrates this commitment.”

Z Street posted a statement on its website praising the settlement. “It happened! The seven-year odyssey with the IRS has concluded with a real victory through the legal system. The joint Consent Decree, laying out the relevant facts, will be posted today, and soon we’ll bring you up-to-date on what’s been happening lo these many years. And more importantly, we can again focus on what’s happening out there on the planet, especially regarding Israel, the Middle East, and the Jewish people.”

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Tax exemptions Tax-related court cases IRS DoJ