A Senate IRS Bill Has a Title Called 'Small Businesses.' Here's What's In It

Buried on page 101 of a 110-page committee document is a sentence that sums up a lot of small-business tax life. Treasury has had the power to let independent contractors ask their clients to withhold income tax, the Joint Committee on Taxation’s staff wrote this week, but “the Secretary has not issued such guidance” ^[3]. The bill the Senate Finance Committee approved on July 30 would push that along, and it gathers it with a few other fixes under a title labeled, plainly, “Small Businesses” ^{[3, 5]}.

What the Finance Committee approved on July 30

The bill is the Taxpayer Assistance and Service Act, S. 3931, which Chairman Mike Crapo (R-Idaho) and Ranking Member Ron Wyden (D-Ore.) introduced on February 26 ^{[1, 2]}. The committee approved it 26-1, with Sen. Elizabeth Warren (D-Mass.) as the lone no vote ^[6]. It now goes to the full Senate ^[5].

Most of it is about the IRS as a service operation. As introduced, it would require the IRS to process electronically filed returns electronically, transcribe paper returns and letters with optical character recognition, post call wait times and backlogs online in real time, and build online accounts where taxpayers can see and answer IRS notices ^[1]. “The process of filing your tax return and receiving your refund should be simple and fast,” Crapo said when he introduced it ^[2].

The AICPA’s Melanie Lauridsen called the committee vote “an important step,” and National Taxpayer Advocate Erin Collins said the bill would go “a long way” toward protecting taxpayer rights and reducing burdens ^[5].

The version the committee voted on was not exactly the February text. JCT staff described the chairman’s mark on July 28, and Crapo released a further modification on July 29 that changed some provisions and added others, according to EY Tax News ^{[3, 6]}.

The three provisions filed under “Small Businesses”

Here’s the short version:

• Voluntary withholding for contractors. If a payer and a contractor agree, payments for the contractor’s services would be treated as wages for income tax withholding purposes ^{[1, 3]}. Today, contractors aren’t subject to withholding and make estimated tax payments instead ^[3]. Treasury would have 18 months after enactment to issue rules on how much to withhold and which payments qualify ^[3].
• A mailbox rule for electronic payments. The mailbox rule is the familiar idea that a return postmarked by the due date counts as on time. JCT staff note it generally doesn’t cover electronic payments ^[3]. Under the bill, if you authorize an electronic payment or filing by the due date and it arrives within three business days after, the authorization date counts ^[3]. It wouldn’t protect a system designed mainly to delay sending money to the Treasury ^[3]. The House approved a separate bill on March 31, H.R. 1152, that would also extend the mailbox rule to electronic returns and payments ^[5].
• More notice before the IRS calls your customers. Before contacting third parties about your taxes, the IRS would have to say which specific item it plans to ask for, when you could reasonably provide it yourself, and give you at least 45 days to respond ^{[1, 3]}. There are exceptions where the IRS has reason to believe records would be destroyed or someone would flee ^[3].

The parts filed elsewhere that matter to you

Refund claims would get a clock. Current law sets no deadline for the IRS to respond to a claim for refund ^[3]. The chairman’s mark would require a determination within 12 months, with a detailed explanation and appeal instructions for any denial ^[3]. If the IRS misses the deadline, the interest rate on your overpayment would rise by one percentage point, capped at $500 and indexed for inflation ^[3]. That applies to claims received 12 months or more after enactment ^[3].

Small Tax Court cases would double. You can choose the Tax Court’s informal small-case procedure when the disputed amount is $50,000 or less, a ceiling set in 1998 that has never been indexed ^[3]. That includes disputes over whether workers were misclassified as contractors, measured at $50,000 per calendar quarter ^[3]. The mark would raise those limits to $100,000, indexed for inflation for petitions filed after 2026 ^[3].

Preparers would need credentials, of a sort. The bill would set rules for who can get a preparer tax identification number: CPAs, attorneys and enrolled agents in good standing, people with a comparable state license, or people who pass a background check, including a review of their own tax compliance, and complete required education ^{[1, 3]}. The IRS could not require an exam ^[1]. Wyden said in February that there are “zero minimum standards” for paid preparers today ^[2].

Larger partnerships would e-file. Partnerships with more than 50 partners, or with assets of $1,000,000 or more, would have to file electronically, down from today’s trigger of more than 100 partners ^[3].

Two pieces of the February bill don’t appear in the JCT description of the chairman’s mark. One was a safe harbor from the failure-to-pay penalty for individuals who paid 125 percent of the prior year’s tax on time ^[1]. The other waived installment agreement fees for anyone who set one up online and paid by direct debit; the mark keeps only the waiver for taxpayers with income at or below 250 percent of the poverty level ^{[1, 3]}.

Does this apply to you?

Hypothetical one: a freelance graphic designer. Say a hypothetical designer works for three regular clients and pays quarterly estimated taxes. If the bill becomes law and Treasury writes its rules, she could ask a client to withhold from her invoices, the same way an employer withholds from a paycheck ^{[1, 3]}. That’s an option, not a requirement. The client would have to agree ^[1].

Hypothetical two: a small HVAC contractor that pays rent and subcontractors. Say a hypothetical heating and cooling company files information returns each year for its subcontractors and its landlord. The committee version reportedly folds in S. 5133, a bill Sens. Maggie Hassan (D-N.H.) and Chuck Grassley (R-Iowa) introduced on July 27 ^{[4, 6]}. As introduced, S. 5133 would make e-filed returns under section 6041, the general rule behind payments like rent, due January 31, but it carves out nonemployee compensation ^[4]. It also reaches returns under section 6050W, which covers payment card and third-party network transactions ^[4]. EY describes the change as aligning the IRS filing date with the date recipients get their copies ^[6]. As introduced, it would start with returns for calendar years after 2027 ^[4].

If you’re a sole owner who pays everything by mail on the due date, the bill changes little for you right away. Every one of these effective dates counts from enactment, and there isn’t one yet ^{[1, 3]}.

What to do now

Nothing is due. This is a committee vote, not a law ^[5]. The useful move is to keep your habits conservative: pay electronically with a few days to spare, keep proof of when you filed a refund claim, and let whoever handles your 1099s know there’s a January 31 proposal moving ^{[3, 4]}.

What I’m keeping an eye on

A Senate floor vote. The bill goes to the full Senate next ^[5]. No date has been announced.

The final text. Crapo’s July 29 modification changed provisions and added others ^[6]. Once the reported text is public, I’ll check whether the 125 percent safe harbor and the online installment-agreement waiver are still out ^{[1, 3]}.

— Sally