IRS’s Trump Data Leak Suit Resolution Must Reinforce Neutrality

As the IRS and President Donald Trump look at settling their tax data leak litigation, the real risk isn’t legal error, but perception that the agency is cutting a special deal. The IRS should anchor any resolution explicitly to outcomes available under the tax code for similarly situated taxpayers.

On paper, it may look routine—the IRS and a litigant have agreed to pause litigation for 90 days while both parties explore a settlement over the leak of the litigant’s tax information. But the agency isn’t just negotiating with another plaintiff; it’s negotiating with the head of the executive branch that ultimately oversees it, plus members of his family.

Getting the optics wrong may undermine the legitimacy the IRS relies on to function. The tax system runs less on active enforcement than on voluntary compliance—which depends on the premise that the rules apply equally to everyone. In high-profile cases, especially those involving political power, the appearance of special treatment or insider advantage can be just as damaging as actual impropriety.

Consider the Teapot Dome scandal in the 1920s, for example. Before Watergate, it was viewed as the low point of propriety in US politics.

This corruption case over oil reserves led to a collapse in public confidence that government decisions were being made in the public interest and not for private gain—and it eroded trust in Warren Harding’s administration. The scandal showed that the mere perception that insiders are operating under a different set of rules can inflict damage.

Notably, that loss of trust extended beyond the individuals directly implicated and tainted the institutions around them—despite that the Harding administration itself was never directly accused.

Former US Secretary of the Interior Albert Fall shakes hands with American oil magnate, Edward Doheny, flanked by their lawyers, during a corruption investigation by the Senate Committee on Public Lands into the Teapot Dome scandal.

Photographer: Hulton Archive/Getty Images

The underlying conduct at issue here—the unauthorized disclosure of tax information by an IRS contractor—isn’t limited to one taxpayer. Others were affected by the same leak, operating under the same statutory framework: Section 7431 of the Internal Revenue Code.

That raises an implicit question of whether all the claims will be treated in the same way as the president’s likely forthcoming settlement. If not, the IRS will risk creating a de facto two-tier system in which the rules apply uniformly in text and theory, but selectively in practice.

Once that perception takes hold, the damage won’t be confined to a single case. It will cut directly at the agency’s core claim to neutrality—and voluntary public compliance follows perceived fairness.

It appears the government’s position is that this is just another damages case, to be handled through ordinary Justice Department representation and via standard settlement avenues. And yet, nothing about one of the plaintiffs is ordinary. DOJ lawyers may operate independently in practice, but the public may perceive it as the administration negotiating with itself.

Layered on top of that are the complaint’s allegations that the underlying leak was politically motivated, aimed at influencing public perception and electoral outcomes. That raises the stakes and will likely heighten public sensitivity to how the government responds now.

If the same actors remain in control of both sides of the litigation (functionally, if not literally), the proceeding will look biased regardless of whether the DOJ takes the proper statutory steps. Safeguards such as DOJ recusal or the appointment of an independent arbiter aren’t overreactions in a case like this—they’re bare minimum credibility preservation measures.

Notably, there is already a template for how the government has handled claims arising from this same type of breach. In at least one high-profile case involving the leaking of a billionaire’s tax records by the same IRS contractor, the agency resolved litigation with a public acknowledgment of its policy shortcomings, a formal apology, and commitments to enhanced data security rather than a billion-dollar damages award. The emphasis wasn’t on maximizing compensation but on restoring trust in the system.

That case provides a benchmark for what similarly situated treatment can look like under Section 7431. Not every case has to resolve identically, but when one claimant receives institutional reform and another seems poised to negotiate for a multibillion-dollar payout, the disparity at least requires an explanation.

This is where the IRS faces a credibility constraint. Departing from the existing baseline, whether in scale or process, would need an explanation why to preserve legitimacy.

Even if the IRS can pin a resolution in the Trump data leak to outcomes available under Section 7431—with clearly articulated methodologies for how damages are calculated—the process will still matter. Either the DOJ steps aside, or an independent arbiter steps in, because the current structure asks the public to accept process neutrality without any visible structural proof.

Finally, the IRS should formalize its tacit claim that identity doesn’t drive outcomes. A written commitment that materially identical claims will be treated the same, paired with meaningful judicial oversight of both process and substance, would signal that the agency understands the stakes.

The agency must reach a legally sound outcome in a way that reinforces the idea that rules apply evenly and uniformly—especially to those at the top. If the IRS gets this wrong, the greatest cost might not be measured in billions paid out to the Trump family, but in hundreds of billions of dollars uncollected from a public that no longer believes in the system.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

Read More Technically Speaking