S. 1386 — Small Business Taxpayer Bill of Rights Act of 2025

This section establishes the short title of the Act as the "Small Business Taxpayer Bill of Rights Act of 2025" and sets forth the table of contents.

This section modifies the eligibility standards for awards of litigation costs in tax proceedings under section 7430(c)(4) of the Internal Revenue Code by exempting eligible small businesses from the net worth limitation. (As background, section 7430 allows eligible taxpayers—including individuals, sole proprietorships, partnerships, and corporations—who substantially prevail against the IRS in court or certain administrative proceedings to recover reasonable litigation costs, subject to requirements including net worth caps of $7 million for individuals, sole proprietorships, and partnerships and $7 million in employees for corporations.) It defines an eligible small business as a non-publicly traded corporation, partnership, or sole proprietorship with average annual gross receipts not exceeding $50 million for the three taxable years preceding the proceeding (inflation-adjusted after 2025 using the cost-of-living adjustment under IRC section 1(f)(3) with calendar year 2024 as the base year, rounded down to the nearest $500). The amendments apply to proceedings commenced after the date of enactment.

This section increases the maximum civil damages available against the United States under IRC §7433 for reckless or intentional disregard of internal revenue laws by IRS employees to $5 million (from $1 million) and, in cases of negligence, to $500,000 (from $100,000); adds an inflation adjustment to those amounts for calendar years after 2025 based on the cost-of-living adjustment under IRC §1(f)(3) using calendar year 2023 as the base year (rounded to the next lowest multiple of $500); and extends the statute of limitations for such actions to five years (from two years). (As background, IRC §7433 authorizes taxpayers to recover damages, costs, and fees if IRS employees recklessly, intentionally, or negligently violate tax laws or regulations during tax collection.) The changes apply to IRS employee actions after enactment.

This section modifies penalties under Section 7214 of the Internal Revenue Code for offenses by IRS officers and employees by (1) increasing the maximum fine in subsection (a) to $25,000 (from $10,000) and (2) increasing the maximum fine in subsection (b) to $10,000 (from $5,000). It further requires those amounts to be adjusted for inflation in calendar years after 2025 using the cost-of-living adjustment under IRC §1(f)(3) (with calendar year 2024 substituted as the base year), rounded to the next lowest multiple of $100. The changes take effect on the date of enactment.

This section modifies civil damages provisions under IRC §7431 for unauthorized inspection or disclosure of tax returns and return information by (1) increasing the amount of damages per act from $1,000 to $10,000; (2) requiring an annual inflation adjustment to the $10,000 amount for calendar years after 2025, based on the cost-of-living adjustment under IRC §1(f)(3) using calendar year 2024 as the base year and rounded to the next lowest multiple of $100; and (3) extending the period for bringing a civil action from 2 years to 5 years. The changes apply to inspections and disclosures occurring on or after the date of enactment.

This section prohibits ex parte communications between officers in the Internal Revenue Service (IRS) Independent Office of Appeals (which provides taxpayers an independent forum to resolve tax disputes prior to litigation) and other IRS employees regarding any matter pending before such officers, notwithstanding existing law. (a) It requires the IRS Commissioner to terminate any employee found, through a final administrative or judicial determination, to have engaged in such prohibited communications, treating the action as removal for cause due to misconduct; (b) it authorizes the Commissioner, at sole non-delegable discretion, to impose a lesser personnel action instead, with no right of administrative or judicial appeal; and (c) it requires the Treasury Inspector General for Tax Administration (TIGTA) to report on any such terminations or mitigations.

This section establishes a taxpayer's right, under the IRS organization plan, to a conference with the IRS Independent Office of Appeals excluding personnel from the Office of Chief Counsel or IRS compliance functions unless the taxpayer consents to their participation. (Thus, appeals conferences remain independent from enforcement and legal personnel absent taxpayer agreement.)

This section amends IRC §7123 to require that IRS Independent Office of Appeals (IRS Appeals) mediation and arbitration procedures under subsection (b)(1)—and the related pilot program under subsection (b)(2)—be available in any case unless the Secretary publicly excludes the issue type or case class within 5 working days with an explanation. It further (1) allows taxpayers to elect an independent mediator not employed by IRS Appeals, with costs shared equally (except for individuals or small businesses—defined per IRC §41(b)(3)(D)(iii)—with adjusted gross income not exceeding 250% of the poverty level in the prior year), selected from a roster of recognized national or local neutrals; and (2) permits election of mediation or arbitration upon filing the case with IRS Appeals or before deliberations commence. (IRS Appeals resolves tax disputes administratively to avoid litigation.) The changes apply to cases as of enactment.

This section doubles the civil penalty for unauthorized disclosures of taxpayer return information by IRS personnel and others—to $10,000 (from $5,000)—in paragraphs (1) through (4) of IRC §7213(a). It also requires those penalty amounts to be adjusted annually for inflation after 2025 using the cost-of-living adjustment under IRC §1(f)(3) (substituting calendar year 2023 for 2016 as the base year and rounding down to the nearest $100). The changes apply to disclosures made after enactment.

This section establishes in new IRC §7531 a prohibition on the Internal Revenue Service Independent Office of Appeals (IRS Appeals) considering or deciding, during review of an appeal, any issue outside the scope of the initial IRS determination (e.g., audit). Matters deemed outside that scope include (1) any issue not raised in a notice of deficiency or examiner's report that is the subject of the appeal, (2) any tax deficiency not included in the initial determination, and (3) any theory or justification for a tax deficiency not considered in the initial determination. (Thus, IRS Appeals is limited to the original issues, while taxpayers retain existing rights to raise new issues.) The prohibition applies to matters filed or pending with IRS Appeals on or after enactment.

This section limits IRS enforcement of tax liens against a taxpayer's principal residence (as defined in IRC §121 for capital gains exclusion purposes) by prohibiting such actions unless the Secretary of the Treasury determines in writing that the taxpayer's other property, if sold, is insufficient to pay the tax liability and the action will not create economic hardship for the taxpayer. The Secretary may delegate this authority only to the Commissioner of Internal Revenue or an IRS district or assistant district director, with the limitation applying to actions filed after enactment.

This section amends Section 1203 of the Internal Revenue Service Restructuring and Reform Act of 1998 (i.e., provisions generally requiring termination of IRS employees for specified acts or omissions of misconduct, including taxpayer abuses and improper reviews of tax-exempt organization applications) as follows: (1) adds as a new mandatory termination offense developing or using any methodology that applies disproportionate scrutiny to a section 501(c) tax-exempt applicant based on the ideology expressed in the organization's name or purpose; (2) requires the Commissioner to place any employee on unpaid administrative leave for at least 90 days if taking a personnel action other than termination for an act or omission described in subsection (b); and (3) limits the Commissioner's authority to impose punishments other than termination to acts or omissions described in subsection (b)(3)(A).

This section directs the Treasury Inspector General for Tax Administration (TIGTA)—which conducts independent oversight of Internal Revenue Service (IRS) operations—to review IRS criteria for selecting tax returns (including tax-exempt status applications) for audit, examination, deficiency assessment or collection, criminal investigation or referral, refunds, or heightened scrutiny to determine whether the criteria discriminate based on race, religion, or political ideology and to consult with the IRS on recommended amendments to eliminate any identified discrimination. The section further requires TIGTA semiannual reports to include (1) a statement affirming completion of the review and consultation and (2) a description and explanation of any discriminatory criteria identified.

This section establishes an above-the-line deduction under new IRC §224 for individuals of up to $5,000 in qualified expenses paid or incurred in connection with an audit under the IRS National Research Program (NRP)—a program that selects taxpayer returns for audit primarily to measure compliance and gather data—provided the audit results in no increase in the taxpayer's tax liability. (Qualified expenses are amounts that would otherwise be deductible under IRC §162 (trade or business expenses) or §212(3) (tax determination expenses), with no double benefit allowed under other provisions.) The deduction applies to taxable years beginning after enactment.

This section establishes a 10-year term for the National Taxpayer Advocate, with the initial term commencing 18 months after enactment of the Small Business Taxpayer Bill of Rights Act of 2025 and each subsequent term beginning the day after the previous term expires (allowing reappointment to multiple terms). (As background, the National Taxpayer Advocate heads an independent office within the IRS that assists taxpayers in resolving problems with the agency, identifies tax administration issues, and makes recommendations to reduce taxpayer burden.) The term of the individual serving in the position as of enactment ends the day before the initial term commences, unless reappointed to a subsequent term.

This section revises the criteria for IRS release of a levy due to economic hardship under IRC §6343(a)(1)(D) to expressly include the financial condition of a taxpayer's viable trade or business. It further requires the Secretary, in determining economic hardship for a business taxpayer, to consider (1) the economic viability of the business, (2) the nature and extent of the hardship created by the levy (including whether the taxpayer exercised ordinary business care and prudence), and (3) the potential harm to individuals if the business is liquidated. The changes apply to levies made after enactment.

This section repeals the partial payment requirement for offers-in-compromise (OICs) under IRC §7122(c) for submissions after enactment. (As background, OICs allow the IRS to settle a taxpayer's tax liability for less than the full amount owed based on doubt as to collectibility, doubt as to liability, or effective tax administration; prior law generally required a 20% partial payment of the offered amount for OICs not based solely on doubt as to collectibility.) It further (1) makes conforming amendments to the suspension of collection activity during OIC consideration, (2) provides that any user fee for an OIC reduces the assessed tax or other amounts subject to the OIC, and (3) updates a cross-reference in IRC §6159(g).