The group alleged in a lawsuit filed in August in U.S. District Court in Philadelphia that the IRS has violated the group's constitutional rights of freedom of expression by subjecting it to closer scrutiny because of its approach to Middle East politics, which is sharply at odds with the approach of the Obama administration.
In additional court documents filed on Nov. 22, the group introduced what it claimed was clear evidence that another Jewish organization -- which Z Street has so far declined to name publicly -- has faced similar treatment from the IRS. Z Street is also claiming that the IRS has set up a special unit to examine cases of Israel-related groups.
"This is called viewpoint discrimination," said Lori Lowenthal Marcus, Z Street founder and a Harvard-trained lawyer, though she's not handling the case. "You are treating Z Street differently because of its views about something."
Mark Hanson, an IRS spokesman, said the agency does not comment on pending litigation or on a particular group's application for tax-exempt status.
According to Joseph Lundy, an expert on tax-exemptions and nonprofit groups, such lawsuits against the IRS rarely gain any traction, and the Z Street case, in all likelihood, is headed for dismissal.
Nicholas Mirkay, associate professor at Widener Law School in Delaware who has blogged about the case, said that legal scholars are closely following the case because it could break new ground on a nearly 30-year-old Supreme Court ruling related to tax-exemptions.
Z Street, which claims 8,000 members worldwide, was founded in the summer of 2009 as a response to the dovish J Street, and what it described as the "gathering storm of hostility towards Israel."
In December of that year, the group filed for tax-exempt, 501(c)3 status, which is meant for an organization that is educational or religious in nature. That application is still outstanding.
Marcus said she had expected that the process could take nearly a year, but was surprised when she learned the reason it was being held up.
According to the lawsuit, filed in August in federal district court in Philadelphia, Donna Johnson Bullock, the lawyer handling Z Street's tax-exempt application, was told by IRS official Diane Gentry that the process was taking longer than usual because the group deals with Israel and has been critical of President Barack Obama's Mideast policy.
"These cases are being sent to a special unit in the D.C. office to determine whether the organization's activities contradict the administration's public policies," Gentry reportedly told Bullock, according to the suit.
Marcus, formerly the president of the Zionist Organization of America's Greater Philadelphia District, said: "I was completely shocked, the first thing I felt like was fright. How could it possibly be that the government is treating an organization that is connected to Israel differently?"
The suit is seeking a full-public disclosure of the IRS's Israel policy, a reversal of that policy, and monetary compensation for Z Street's legal costs, according to court documents.
In October, the IRS filed a motion to have the case dismissed on legal grounds, but did not provide an in-depth response to the allegations.
Hoping to bolster its case, Z Street filed a new set of documents last month. In those pages, the group's attorney, Jerome Marcus -- husband of Lori Lowenthal Marcus -- stated that Z Street was approached by another Jewish group that claimed it had encountered similar problems with the IRS.
The documents contained a letter, apparently sent by the IRS to the unnamed group, in which the government asked, "Does your organization support the existence of the land of Israel? Describe your organization's religious belief system toward the land of Israel?"
Marcus, for her part, is confident in her quest.
"Do I think we are going to win? Of course, I do. There has been a clear violation."