IRS Audits Mozilla

The Internal Revenue Service is auditing the Mozilla Foundation, the nonprofit arm of the organization that develops the Firefox Web browser and Thunderbird e-mail software.

The organization revealed the IRS inquiry into its tax-exempt status and other accounting issues in its newly released 2007 auditor's report and consolidated financial statements. Mozilla relies on an open source approach to development, using a team of programmers around the world who cooperate on improving the software, which is distributed for free. The organization says on its Web site that it's a "public benefits organization dedicated not to making money but to improving the way people everywhere experience the Internet." However, the organization earned $75 million from its advertising partnership with Google. It classified the money as royalties rather than revenues. The foundation also has a wholly owned subsidiary known as the Mozilla Corp.

The statement in the foundation's report did not provide extensive details about the IRS inquiry. "On the audit of the foundation there has not been any formal notification of issues," said the report. "There has been an inquiry regarding its tax exemption. Management believes that it is conducting its operations in accordance with its original application for exemption and for which it received the advance ruling as a public benefit corporation."

The advance ruling period ended Dec. 31, 2007. The foundation submitted the public support test documentation required by the advance ruling. If the IRS reclassifies the nonprofit organization as a private foundation, it could be forced to pay higher taxes.

"While the foundation did not automatically qualify as a public charity with public support at 33 percent of total support, it believes that it qualifies as a public charity under the facts and circumstances test with public support over 10 percent," said the report. "If it does not pass the public support test, the foundation would be ruled to be a private foundation subject to excise tax at 2 percent on its net investment income, which is estimated to be approximately $100,000 as of Dec. 31, 2007."

The IRS is also conducting an audit of both the foundation and the corporation of the unrecognized tax benefits from the Google search engine revenue under FIN 48. Mozilla said its management believes that it has substantial authority for its position and that it is more likely than not that it will prevail in its positions.