Donald Trump's sprawling $10 billion lawsuit against the Internal Revenue Service could soon be resolved through a remarkable financial arrangement: his own administration would establish a $1.7 billion compensation fund for people Trump claims were wrongly targeted by the previous administration, effectively settling the case by paying out taxpayer money to his supporters and allies.
The potential deal has sparked sharp criticism from ethics watchdogs and legal experts who view it as an extraordinary abuse of executive power. Among the likely beneficiaries would be more than 1,500 people convicted or charged in connection with the January 6 Capitol riot. The payments would flow through the Treasury Department's Judgment Fund, a pool of taxpayer dollars normally reserved for legitimate court judgments and settlements.
Justice Department officials have reportedly been discussing the arrangement this week. Under the proposed terms, Trump would drop his lawsuit in exchange for the compensation fund and a public apology from the IRS, along with a waiver of any ongoing tax audits of Trump, his family, and his businesses.
The original lawsuit, filed in January, names Trump, two of his sons, and the Trump family business as plaintiffs. They seek $10 billion in damages, claiming the IRS violated their rights when a contractor leaked Trump's personal tax returns to journalists in 2019 during his first term. Charles Littlejohn, the IRS contractor responsible for the disclosure, was sentenced to five years in prison in January 2024.
The settlement negotiations have drawn fire from government accountability groups. "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. "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."
The case faces legal obstacles before any settlement could proceed. Federal Judge Kathleen Williams, overseeing the lawsuit in Miami, has raised fundamental questions about whether the suit even qualifies as a legitimate legal dispute. She appointed a panel of independent attorneys to advise the court on this critical issue, with both sides required to submit legal briefs by May 20.
The court-appointed attorneys submitted a filing on May 14 flagging serious concerns about whether Trump is effectively controlling both sides of the litigation. "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, the circumstances raise the specter that Defendants and their attorneys may instead be operating at the President's direction," the brief stated.
Andrew Warren, deputy legal director at the Democracy Defenders Fund, underscored the fundamental legal problem. "Anyone who got through their first day of law school knows you can't sue yourself," he said, referring to the structural conflict of Trump suing his own administration.
If Trump secured the full $10 billion, it would more than double his family's net worth. The sum would exceed two-thirds of the IRS's entire 2026 fiscal year budget and dwarf any prior award from the Judgment Fund. Federal data shows that from January 2020 through September 2025, the largest single payout was five times smaller than what Trump is demanding.
The lawsuit also faces separate legal weaknesses. Civil damage claims for tax return disclosures must be filed within two years of discovery. Trump's returns were shared in 2019 and became public knowledge by 2020, meaning the statute of limitations may have expired. Additionally, legal scholars have noted that Littlejohn was not a government employee, yet federal law requires that the person responsible for the disclosure be a federal officer or employee for such lawsuits to proceed.
Trump's refusal to voluntarily release his tax returns has broken decades of precedent. Every other president and major party nominee for at least the past five decades has disclosed personal tax information to the public, according to ethics organizations.
This settlement push is not Trump's first attempt to extract money from the government. He has also filed claims seeking approximately $230 million from the Justice Department for damages related to federal investigations into his handling of classified documents and potential Russian ties to his 2016 campaign. Both claims far exceed typical awards under the Federal Tort Claims Act.
Author James Rodriguez: "If the administration rubber-stamps a billion-dollar settlement because Trump controls the lawyers on both sides of the case, we've essentially legalized self-dealing at the highest level of government."
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