Picture a paving contractor who finishes a job on a federal facility, submits the invoice and waits. The payment comes through. Except it does not come to him. Every dollar went to the IRS for old payroll taxes, and the notice telling him about his hearing rights shows up after the money is gone.
That is not an IRS mistake. That is how the law treats federal contractors. If you sell property, goods or services to the federal government and owe the IRS, you need to understand this before you bid the next job.
The 100 percent continuous levy
IRC 6331(h) lets the IRS impose a continuous levy on "specified payments," which include federal payments. For most federal payments the levy attaches to up to 15 percent of each payment. But section 6331(h)(3) substitutes "100 percent" for "15 percent" for any specified payment due to a vendor of property, goods or services sold or leased to the federal government.
Continuous means the levy does not stop after one payment. It stays in place, payment after payment, until it is released.
The IRS runs this mostly through automation. Under IRM 5.11.7, the Federal Payment Levy Program, or FPLP, works with the Treasury's Bureau of the Fiscal Service to levy federal payments as they are disbursed. The IRM lists Treasury-disbursed civilian agency contractor and vendor payments, Department of Defense contractor and vendor payments paid through the Defense Finance and Accounting Service, and Army Corps of Engineers and Postal Service vendor payments as levied at 100 percent.
How the IRS knows you are a federal contractor
Federal agencies tell it. IRM 5.7.9, Federal Contractors (revised January 13, 2025), explains that agencies file Form 8596, Information Return for Federal Contracts, quarterly to report contractors with contracts totaling $25,000 or more. The IRS matches those filings to its records and posts a federal contractor indicator, transaction code 971 with action code 647, on the contractor's account, whether or not the contractor owes anything.
Revenue officers are also told to ask. The IRM notes that Form 433-A asks whether the business is a federal contractor, and Form 433-B asks the same question. Revenue officers are directed to document in every assigned case whether the taxpayer is a federal contractor, and field managers are told to prioritize certain delinquent return cases with the indicator.
The hearing comes after the levy
Normally, IRC 6330 requires the IRS to give you notice of your right to a Collection Due Process hearing at least 30 days before the first levy. Not for federal contractors. Section 6330(f)(4) says that if the IRS has served a "Federal contractor levy," the pre-levy hearing rules do not apply, and you get the opportunity for a hearing within a reasonable period after the levy.
Read the definition carefully. Under section 6330(h)(2), a federal contractor levy is any levy if the person whose property is levied, or any predecessor, is a federal contractor. It is not limited to levies on your federal payments.
IRM 5.7.9 describes the mechanics. The post-levy notice is Letter 1058-F, included with the taxpayer's copy of the levy. If you timely request a hearing, the collection statute is suspended for the periods involved even if the federal contractor levy continues. The IRM also says these levies may be served during a pending pre-levy or post-levy CDP hearing.
The IRS still has to give the separate 30-day notice of intent to levy under IRC 6331(d). The IRM says a CP 504 notice satisfies it, and if no CP 504 went out, a Letter 1058 serves both purposes and the levy can be issued 30 days later.
Paper levies on contracts
Revenue officers can also send a paper Form 668-A notice of levy directly to the contracting agency. IRM 5.7.9 says a Form 668-A has no continuing effect: it attaches only to payments owed when the levy is received. Before issuing one, the revenue officer is to block the account from the FPLP so the two do not hit the same payment. A paper levy is a third-party contact, so the IRM requires advance notice of third-party contacts. For levies on payments you are owed by private customers, see our guide to levies on receivables and retainage.
What if you are a subcontractor?
The federal contractor rules follow the contract with the government. IRM 5.7.9 cautions revenue officers to make sure the taxpayer is not an employee or a subcontractor of a federal contractor before posting the federal contractor indicator, and says not to request the indicator if the taxpayer is the employee or subcontractor. If you are a sub on a federal job and your payments come from the prime contractor, you are generally dealing with ordinary levy rules on a private customer, not the 100 percent federal payment levy. Those rules are explained in our receivables guide. The prime, on the other hand, is squarely inside the program.
The tax check before you win the bid
A levy is not the only consequence. IRM 5.7.9 describes a tax check on prospective IRS contractors and states that, as of October 19, 2016, all potential IRS contractors and vendors are subject to one, that taxpayers with an unresolved tax delinquency are not eligible for an IRS contract award, and that there is no dollar tolerance. An account counts as compliant for that purpose if it is in an installment agreement or a pending offer in compromise status, among other listed conditions. The IRM gives the taxpayer up to 5 days to resolve the account after contact.
That section governs IRS procurement. Other agencies run their own responsibility checks. The lesson is the same: an open balance can cost you contracts as well as payments.
How to stop the levy
The FPLP excludes accounts in certain statuses. IRM 5.11.7 lists accounts generally excluded from the program, including those reported unable to pay, pending installment agreements posted before the levy, approved installment agreements, pending or approved offers in compromise, open bankruptcies and certain other conditions. If a module in the program moves into an excluded status, it systemically reverses out of the FPLP.
The statute backs that up. Under IRC 6331(k), no levy may be made while an offer in compromise is pending, while an installment agreement request is pending, while an installment agreement is in effect, and for 30 days after rejection or termination (longer if an appeal is filed).
Timing is everything. FPLP levies on contractor payments are processed daily, and the IRM notes payments may be processed up to 30 days before the payment date depending on invoice terms. A release entered today may not stop a payment already in the pipeline. The IRM describes emergency release procedures through FPLP coordinators for those situations.
The practical path for most contractors:
- Get current on filing and deposits. IRM 5.14.5 (revised July 21, 2026) says business taxpayers with employees must file all required returns and be current on federal tax deposits before an installment agreement is granted.
- Pull the account transcripts to see every balance and whether the federal contractor indicator is posted.
- Prepare financial statements on Form 433-B (and 433-A for owners if needed) before you call.
- Propose an installment agreement or other alternative that gets the account into an excluded status.
- Request the post-levy CDP hearing on time if you received Letter 1058-F, to preserve Appeals review.
The options for a business that is still operating are covered in our guide to IRS debt options for operating businesses. Medical providers face the same 100 percent rule on Medicare payments; see our guide to Medicare payment levies. For background on levies generally, see the firm's explanation of what an IRS levy is.
If the government is your customer and the IRS is your creditor, they are going to talk to each other. Get the account resolved before the next invoice.