Small Business Tax Simplification and Taxpayer Protection Act of 1985

Small Business Tax Simplification and Taxpayer Protection Act of 1985 - Amends the Internal Revenue Code to increase the threshold amount for purposes of permitting employers to make monthly (rather than more frequent) deposits of payroll taxes from $3,000 to $5,000. Provides for an inflation adjustment to the threshold amount for any month after calendar year 1986.

Makes the provisions of the Regulatory Flexibility Act applicable to all rules and regulations prescribed by the Secretary of the Treasury.

Removes the maximum dollar amount (now $25,000) which may be awarded to the prevailing party in a civil tax proceeding. Provides that the awarding of court costs and certain fees will be denied if the United States proves its position was substantially justified or special circumstances exist which would make such a judgment unjust, or if the prevailing party has unreasonably protracted such proceedings.

Imposes limits on fees for expert witnesses and attorneys in civil tax litigation proceedings.

Provides that the position of the United States includes the position taken by the United States in the civil proceeding and the administrative action or inaction by the United States upon which such proceeding is based.