Small Business Taxpayer Bill of Rights Act Proposes Major IRS Reforms: Easier Cost Recovery, Stronger Appeal Rights, and Tougher Penalties for Agency Missteps

The Small Business Taxpayer Bill of Rights Act of 2025 introduces a slate of changes aimed at recalibrating the relationship between taxpayers, particularly small businesses, and the IRS. It seeks to bolster taxpayer rights during disputes, increase IRS accountability for errors and misconduct, and provide more avenues for resolving tax issues without undue hardship. Key provisions modify how legal costs are awarded, raise damage caps for IRS negligence, restrict certain internal IRS communications during appeals, and ease requirements for offers-in-compromise.

Leveling the Field in Disputes

Several sections aim to make challenging the IRS more feasible for taxpayers. Section 2 removes the net worth limitation for small businesses (defined as having average annual gross receipts under $50 million, adjusted for inflation after 2025) seeking to recover administrative and litigation costs from the IRS. This means a successful small tech firm or local restaurant chain could potentially recoup legal fees if the IRS's position wasn't substantially justified, regardless of their balance sheet. Further strengthening the appeals process, Section 10 prohibits the IRS Independent Office of Appeals from raising new issues that weren't part of the initial examination report or notice of deficiency – preventing unpleasant surprises late in the game. Taxpayers, however, retain their right to raise new points.

Complementing this, Section 7 guarantees taxpayers a conference with Appeals without IRS counsel or compliance staff present, unless the taxpayer agrees to their participation. Section 6 goes further by banning ex parte communications (private, one-sided discussions) between Appeals officers and other IRS employees about a specific case. Think of it as ensuring the referee isn't getting private coaching from one team's manager during halftime. Violations can lead to employee termination (Sec 6). Finally, Section 8 enhances access to Alternative Dispute Resolution (ADR), allowing taxpayers to request mediation or arbitration and even elect an independent, non-IRS mediator, with costs shared unless the taxpayer meets low-income thresholds.

Holding the IRS Accountable

The Act significantly increases the stakes for IRS errors and misconduct. Section 3 raises the maximum civil damages taxpayers can seek for reckless or intentional disregard of tax law by IRS employees from $1 million to $5 million (adjusted for inflation after 2025) and extends the time limit to file suit from two years to five. Similarly, Section 5 increases damages for unauthorized inspection or disclosure of tax information from $1,000 to $10,000 per instance (inflation-adjusted) and also extends the lawsuit window to five years. Penalties for IRS employee offenses (Sec 4) and criminal penalties for unauthorized disclosures (Sec 9) are also increased and indexed for inflation.

Beyond financial penalties, Section 12 expands the list of actions mandating employee termination to include unfairly targeting tax-exempt applicants based on their name or purpose. It also requires a minimum 90-day unpaid leave for certain misconduct even if termination isn't pursued. Oversight is bolstered by Section 13, which directs the Treasury Inspector General for Tax Administration (TIGTA) to specifically review IRS audit and investigation selection criteria for discrimination based on race, religion, or political ideology. To ensure fresh leadership in taxpayer advocacy, Section 15 imposes a 10-year term limit on the National Taxpayer Advocate.

Easing the Burden on Taxpayers

Recognizing the financial strain tax issues can cause, the bill includes several relief measures. Section 11 adds hurdles for the IRS before it can force the sale of a taxpayer's principal residence to satisfy a tax debt. The IRS must determine in writing that selling all other assets wouldn't cover the liability and that selling the home won't cause economic hardship. For businesses, Section 16 allows the IRS to release a levy (asset seizure) if it determines the levy creates an economic hardship for a viable business, considering the impact on the business and individuals if it were forced to liquidate.

For taxpayers undergoing intensive National Research Program (NRP) audits, Section 14 introduces a potential deduction of up to $5,000 for related expenses (like accountant fees) if the audit ultimately results in no change to their tax liability. Lastly, Section 17 removes a significant barrier for taxpayers seeking an Offer in Compromise (OIC) – a settlement for less than the full amount owed. It repeals the requirement under current law (Section 7122(c)) that taxpayers submit a partial payment (either 20% lump sum or initial periodic payments) with their OIC application, making it easier for cash-strapped individuals and businesses to initiate settlement negotiations.