A judge has ruled that the Trump administration must resume collecting donor information from nonprofit groups and give states and the public the chance to weigh in if it tries to halt the practice again.
U.S. District Judge Brian Morris said in Tuesday's decision that the IRS didn't give proper public notice last year before it stopped requiring tax-exempt groups such as social-welfare organizations, labor unions and business associations, to identify on tax forms their donors contributing more than $5,000.
Last year, the IRS changed the Nixon-era rule meant to prevent fraud and abuse by tax-exempt groups with nonprofit status. Montana Gov. Steve Bullock and New Jersey Attorney General Gurbir Grewal, both Democrats, sued over the change, saying it would harm states' ability to verify whether tax-exempt groups are following the law and make it easier for anonymous and foreign money to influence U.S. elections.
Morris said the IRS should have given public notice and allowed the public to comment on the rule change before finalizing it. Instead, the tax agency unilaterally changed the policy in what appears to be an attempt to "evade the time-consuming procedures" of the public process that is required by federal law, he wrote.
The judge emphasized that he wasn't ruling on the substance of the rule change, but he blocked it until the proper procedure is followed.
Rafe Graybill, Bullock's chief legal counsel, said a public comment period could result in the IRS reconsidering its decision to stop collecting donor information or come up with a new proposal.
"When you make big changes to disclosure requirements, states have a real stake in that," Graybill said.
Officials at the IRS and the Department of Justice declined to comment Wednesday or say whether they planned to appeal the ruling to the 9th U.S. Circuit Court of Appeals.
Bullock is running for the Democratic presidential nomination and has made fighting so-called "dark money" in elections one of his signature campaign issues. Montana revenue officials rely on the IRS' informed assessment of nonprofit organizations - including donor information - when deciding on their own state tax exemptions, attorneys for Bullock argued in court.
Grewal said that New Jersey uses the donor information the IRS collects to safeguard against charitable organizations that collect money in his state from defrauding or deceiving the public.
U.S. Department of Justice attorneys representing the IRS said the states didn't have the right to sue over what amounts to a change in federal tax policy. Further, they argued, nonprofit organizations would still have to collect donor information and turn it over if the agency requests it.