IRS Misconduct Payouts Jump to $5M, Ending Upfront Payment for Tax Debt Settlement

The “Small Business Taxpayer Bill of Rights Act of 2025” is essentially a policy-level reset button aimed at making the IRS play fair and be accountable. If you’re a small business owner, an individual taxpayer dealing with an audit, or anyone who’s ever worried about the IRS overstepping, this bill is packed with changes that matter for your wallet and your peace of mind.

Bigger Payouts for IRS Mistakes

One of the biggest shifts is in how much you can sue the government for if an IRS employee intentionally or recklessly disregards tax laws. Currently, the maximum payout is $1 million. This bill (Sec. 3) cranks that limit up to $5 million, plus it extends the statute of limitations for filing that lawsuit from two years to five years. For the average person, this means if an IRS agent messes up your life—say, through an unauthorized disclosure or wrongful levy—the financial consequences for the government just got five times higher, and you have more time to seek justice.

This bill also significantly increases the minimum penalty the IRS must pay if they improperly look at or share your private tax information (Sec. 5). That minimum payout goes from $1,000 to $10,000, and both this amount and the $5 million maximum will be adjusted annually for inflation starting in 2026. On the flip side, the penalties for IRS employees caught committing misconduct are also going up, with fines increasing from $10,000 to $25,000 (Sec. 4).

Leveling the Playing Field for Small Business Audits

If you run a business, this bill makes it easier and cheaper to fight the IRS when you’re right. Currently, if you win a tax dispute against the IRS, you can get your legal fees reimbursed, but only if your business meets a net worth limit. This bill (Sec. 2) removes that net worth limit entirely for “eligible small businesses”—defined as those with average annual gross receipts under $50 million over the previous three years. This is a massive change, allowing mid-sized businesses to fight back without worrying about the legal costs bankrupting them first.

Furthermore, if you are a business facing a levy (seizure of assets) that could shut you down, the IRS now has to consider the “financial condition of the taxpayer’s viable trade or business” when deciding whether to release the levy due to economic hardship (Sec. 16). They can’t just look at your personal bank account; they have to consider the impact on your employees and the business itself.

Making Deals Without Upfront Cash

For anyone struggling with tax debt, the “Offer-in-Compromise” (OIC) process just got less burdensome. An OIC allows you to settle your tax liability for less than the full amount. Currently, when you submit an OIC, you have to include a partial payment upfront. This bill (Sec. 17) repeals that partial payment requirement entirely. This removes a significant financial hurdle for individuals and small businesses trying to get their finances back on track.

New Rules for IRS Appeals

The bill introduces several key procedural safeguards intended to make the IRS Appeals process genuinely independent and fair. First, it bans “ex parte communications” (secret, one-sided talks) between the Independent Office of Appeals and any other IRS enforcement staff about a pending case (Sec. 6). If an employee is found to have violated this, the Commissioner must fire them, though the Commissioner retains the limited, unappealable power to choose a lesser penalty.

Second, the bill gives you the right to an independent conference where IRS Chief Counsel or compliance staff are excluded, unless you invite them (Sec. 7). Crucially, the Appeals Office is now barred from raising new issues, new deficiencies, or new legal arguments that weren't part of the original determination you appealed (Sec. 10). This means the IRS can’t spring a new tax liability on you halfway through the appeal process.

Protecting Your Home and Your Rights

Finally, the bill adds significant protection for your principal residence against tax liens (Sec. 11). The IRS cannot place a lien on your main home unless they determine in writing that two conditions are met: all your other assets are insufficient to cover the debt, and taking action against your home won’t cause you severe economic hardship. This decision must be made by a high-ranking official, like the Commissioner, ensuring this power isn't delegated to lower-level staff.

Plus, the bill mandates that the Treasury Inspector General for Tax Administration (TIGTA) review all IRS return selection criteria to ensure they don't unfairly target taxpayers based on race, religion, or political beliefs (Sec. 13). This aims to build public trust by actively weeding out any potential bias in the audit selection process.