Thanks for your posting. Pretty-printing the XML on TestRail’s side would be possible but this is currently not planned to be honest. One reason for this is performance as this would require a post-processing step on TestRail’s side and this would definitely impact the export performance (e.g., when exporting a large milestone). If this is important for you, it should actually be possible to post-process the XML and run it through a pretty-printer yourself.
Another alternative would be to look into an XML editor which should display the XML in a much useful way when compared to Notepad and should also have good support for search & replace (XPath etc.). If you are just looking for a good way to take a look at the XML, you can also Internet Explorer as viewer which works quite well.
I hope this helps and please let me know in case you have any further questions.