Picture a drywall sub who owes the IRS for two quarters of payroll taxes. One morning his biggest general contractor calls. "I got a letter from the IRS. It says to send them what we owe you." Then a second GC calls. The bank account still has money in it. It does not matter. The company's cash flow just stopped.
That is a receivables levy, and in construction it is often more damaging than a bank levy. Here is the law behind it and the pressure points you can use.
A levy can reach what your customers owe you
IRC 6331(a) lets the IRS collect unpaid tax by levy on all property and rights to property belonging to the taxpayer, after notice and demand and the required waiting periods. The regulation, Treas. Reg. 301.6331-1(a)(1), says levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy, and it specifically lists receivables.
In practice, the notice is a Form 668-A sent to your customer: a general contractor, a developer, a property manager or a homeowner. Revenue officers learn who your customers are from the financial information you provide and the records they review. The IRS's own payment plan procedures in IRM 5.14.5 tell revenue officers to document banking and account receivable information even in the simplest business payment plans. Assume they know who pays you.
What the levy grabs, and what it does not
This is the critical legal point. Under IRC 6331(b), except for continuing levies on salary and wages, a levy extends only to property possessed and obligations existing at the time of the levy.
The regulation explains when an obligation "exists." Obligations exist when the liability of the obligor is fixed and determinable, even if the right to receive payment is deferred until a later date. Its example: a taxpayer sells property on the first of the month with payment due on the last day. A levy served on the buyer on the 10th reaches the amount due, but the buyer does not have to pay it over until the last day of the month.
Apply that to a construction job:
- An approved pay application that has not been paid yet is a fixed obligation. The levy reaches it.
- Work you will perform next month is not an existing obligation when the levy arrives. A one-time levy on a private customer does not reach future progress billings. The IRS has to serve a new levy to reach them, and revenue officers often do.
- Retainage needs a closer look. The IRS's own Construction Industry Audit Technique Guide (Rev. 4-2021) says that if a contract provides that withheld retainage will be paid upon completion and final acceptance, the contractor generally does not have a fixed right to it until that event occurs. Whether retainage held by your customer is reachable by a levy served before acceptance turns on the contract terms and the facts. Read your contracts before you assume either way.
Federal contracts are different. For payments due from the federal government, IRC 6331(h)(3) allows a continuous levy of up to 100 percent of each payment. See our guide to levies on federal contractor payments.
Your customer has to comply
Customers sometimes ask whether they can ignore the levy and keep paying you. The answer is no. IRC 6332(a) requires any person in possession of or obligated with respect to levied property to surrender it, or discharge the obligation, on demand. If they do not, section 6332(d)(1) makes them personally liable for the value of what they failed to surrender, up to the tax, plus costs and interest. Section 6332(d)(2) adds a penalty of 50 percent of that amount if they fail without reasonable cause.
In exchange, section 6332(e) discharges the customer from any obligation to you for amounts it pays the IRS under the levy. In other words, the GC who pays the IRS has paid you, as far as the law is concerned.
Expect your customers to comply. Also expect some of them to stop calling you for bids. A receivables levy is a credit event in the eyes of a general contractor.
Before the levy: notices and hearing rights
The IRS generally cannot levy without warning. IRC 6331(d) requires written notice of intent to levy at least 30 days before the levy. IRC 6330 requires notice of your right to a Collection Due Process hearing, also at least 30 days before the first levy for the tax period. A timely CDP request generally suspends levy action on the periods involved while the hearing and any appeal are pending.
The exceptions matter in this industry. Under section 6330(f), the pre-levy hearing does not apply to jeopardy levies, to a "disqualified employment tax levy," or to a federal contractor levy. A disqualified employment tax levy, defined in section 6330(h)(1), is a levy to collect employment taxes where the taxpayer requested a CDP hearing on employment taxes for any period in the two years before the period being collected. Contractors with recurring payroll tax problems lose the pre-levy hearing for exactly that reason. They still get a hearing, after the levy.
Getting a levy released
IRC 6343 and Treas. Reg. 301.6343-1 require the IRS to release a levy when certain conditions exist. For a contractor, the most useful ones are:
- Installment agreement. The IRS must release the levy if you enter into an installment agreement under IRC 6159, unless the agreement provides otherwise or release would jeopardize the government's secured position.
- Release will facilitate collection. The regulation gives the IRS discretion to release where doing so helps collect the tax, including when the taxpayer posts an acceptable escrow or bond, pays the value of the government's interest in the levied property or extends the collection statute.
- Value exceeds the liability. If the levied property is worth more than the tax, part of it must be released when that can be done without hindering collection.
The economic hardship release in the regulation applies to individual taxpayers who cannot meet basic living expenses. A corporation or LLC taxed as a separate entity generally cannot use it.
If the IRS seizes equipment you need to keep working, Treas. Reg. 301.6343-1(d) provides an expedited determination for "essential business property," defined as tangible personal property used in the business which, when levied, prevents you from continuing the business. The IRS must decide within 10 business days of your request or of receiving the supporting documentation, whichever is later, if at least 10 business days remain before a scheduled sale. Separately, for individuals, IRC 6334(a)(3) exempts books and tools necessary for the taxpayer's trade or business up to a value that Rev. Proc. 2025-32 sets at $5,990 for 2026.
Be aware that the IRS's revised payment plan procedures in IRM 5.14.5 (July 21, 2026) say a Simple Payment Plan for business trust fund taxes may not be granted when the request is made in conjunction with a request for levy release. In that situation a full financial analysis is required. Have your Form 433-B ready.
A sequence that works
- Call every customer that received a levy. Tell them you are resolving it and ask them to comply. Do not ask them to ignore it.
- Get current on all deposits and returns. Without that, no agreement will be approved.
- Build the Form 433-B with real job schedules, receivables aging and equipment lists.
- Propose a payment arrangement that the numbers support, and ask for levy release on that basis.
- If you received a CDP notice, request the hearing within 30 days.
The broader menu of options for a business that is still operating is in our guide to IRS debt options for operating businesses. For more on what a levy is and how it differs from a lien, see the firm's article What Is an IRS Levy? And because receivables levies often follow payroll problems found in an audit, see our guide to the construction audit technique guide.
The IRS cannot collect next month's work with this month's levy. That gap is where a resolution gets built.