Trump may settle IRS lawsuit with $1.7bn fund for allies

Concerns are growing that President Donald Trump’s $10 billion lawsuit against the Internal Revenue Service may soon be settled by his own administration, an unprecedented self-dealing maneuver that could transfer billions in taxpayer dollars to the president or his allies.

Trump may agree to drop the lawsuit in exchange for creating a $1.7 billion fund to compensate individuals he claims were wrongfully targeted by the Biden administration, according to reports by ABC News and The New York Times.

More than 1,500 people charged in the January 6, 2021, Capitol riot would be eligible for compensation from the fund, ABC reported. The Treasury Department’s Judgment Fund, a pool of taxpayer money for court judgments and settlements, would allegedly be used for Trump’s victim compensation fund.

The cash grab for Trump allies, reportedly under discussion by Justice Department officials this week, would settle the president’s January lawsuit. In that suit, Trump, two of his sons, and the Trump family business sued the IRS for $10 billion in damages over the leak of his personal tax returns to The New York Times and ProPublica during his first term.

The White House did not immediately respond to a request for comment.

Charles Littlejohn, an IRS contractor, was sentenced in January 2024 to five years in prison for leaking Trump’s tax returns and those of other wealthy individuals to news outlets.

Under settlement terms first reported by The New York Times, Trump is also asking the IRS to issue a public apology for disclosing his financial records and to waive an audit of Trump, his family, and his businesses. A New York Times investigation found Trump could owe more than $100 million in back taxes on a single Chicago property if the IRS revises its contested tax bill.

“This president continues to demonstrate that he is the most stunningly corrupt chief executive this country has ever had,” said Donald Sherman, president and CEO of Citizens for Responsibility and Ethics in Washington (Crew). “When he’s not reaching into the pockets of the American people to enrich himself, he’s trying to create a slush fund for his political allies.”

U.S. District Judge Kathleen Williams, who oversees the case in Miami, has questioned whether there is a genuine legal controversy, a requirement for any lawsuit. She appointed a group of lawyers to advise the court on the matter, and both sides must submit briefs by May 20.

“Anyone who got through their first day of law school knows you can’t sue yourself,” said Andrew Warren, deputy legal director at the Democracy Defenders Fund.

The court-appointed attorneys filed a brief on May 14 stating “reason to believe that the President is, in fact, exercising his control over the Defendants in this litigation.” They noted numerous possible defenses the Justice Department could raise but has not. They suggested Williams could investigate whether Trump interfered with Justice Department decision-making and whether agency lawyers exercised independent judgment.

“Although Defendants’ failure to assert these defenses would be appropriate if, in the exercise of independent litigation judgment, Defendants and their attorneys determined that an early settlement was in the government’s best interest, and if they were engaging in arm’s-length negotiations to achieve that outcome, the circumstances raise the specter that Defendants and their attorneys may instead be operating at the President’s direction,” the court-appointed attorneys wrote.

The case is the latest example of Trump taking over the Justice Department, which normally operates independently from the White House, and using it for his own purposes. He has used the agency to prosecute political rivals, and Acting Attorney General Todd Blanche has shown a willingness to carry out Trump’s wishes.

If settled for the full $10 billion, the payment would more than double the Trump family’s net worth. The sum equals about two-thirds of the IRS’s total budget for fiscal year 2026 and would be five times larger than any other Judgment Fund payout from January 2020 to September 2025, according to federal data cited in a February 5 amicus brief by former federal officials and watchdog groups.

Given Trump’s influence over the Justice Department, legal advocates warn of a risk of a collusive settlement with the president, even though similar lawsuits have previously failed.

“There’s no difference between Trump directing the IRS to pay his family billions of dollars to settle the case, versus telling the treasury secretary that he deserves a $10bn bonus because he claims to be the smartest president ever,” Warren said.

Trump’s lawsuit against the IRS faces additional legal hurdles beyond the conflict of his role on both sides.

Trump’s suit invokes protections under the Internal Revenue Code and the Privacy Act, which allow taxpayers to seek redress for harm caused by improper government action.

Civil damage claims must be filed within two years of discovering “unauthorized inspection or disclosure,” per IRS tax code. Trump’s tax returns were first shared in 2019, and the leak was widely known by 2020, meaning his suit should be disqualified for late filing.

Trump’s personal attorney, Alina Habba, attended Littlejohn’s 2023 court hearing and stated on the record she was there “on behalf of President Trump who was a victim.”

Lawyers and advocates note that Littlejohn was not a government employee. Under U.S. tax code, to sue the IRS for damages, Littlejohn would have had to be an “officer or employee of the United States.”

Trump’s refusal to release his personal tax returns has defied decades of legal precedent.

Every other president and major party nominee has voluntarily disclosed personal tax information to the public for the past five years, according to a CREW report.

Trump’s lawsuit against the IRS is his third legal claim against his own administration. He asked the Justice Department to pay him about $230 million for damages from its investigation into his handling of classified documents at Mar-a-Lago and the probe into Russian ties to his 2016 campaign.

The administrative claims, filed under the Federal Tort Claims Act, seek compensation far exceeding typical payouts in such cases.

Two legal experts said the FTCA claims would likely be rejected if Trump were “any other American.”

Asked whether taxpayers could stop Trump from using the fund, Warren said: “Having the DoJ pay out a massive settlement is no different than having the treasury give [Trump] a billion-dollar bonus or walking into Fort Knox and taking the gold, and there’s frankly little that can be done to stop it.”