Federal Contractors in DFW With Tax Debt: Certifications, Levies, and Keeping Contracts

The Metroplex has a deep bench of federal contractors: defense suppliers, IT firms, construction contractors working on federal facilities, staffing companies, and small businesses supplying all of them. Those businesses face IRS collection rules that ordinary businesses do not.

Two rules matter most. First, contractors must certify whether they have delinquent federal taxes when they compete for contracts. Second, the IRS can levy up to 100 percent of federal payments owed to a contractor. Together they can turn a manageable tax balance into a threat to the whole business.

The certification: FAR 52.209-5

The Federal Acquisition Regulation requires offerors on many contracts to certify whether they have, within the prior three years, been notified of delinquent federal taxes above a threshold and remain unpaid. The certification is FAR 52.209-5, Certification Regarding Responsibility Matters, and the equivalent representation for commercial products and services appears in FAR 52.212-3.

The dollar threshold is set in FAR 9.104-5(a)(2). As of this writing, it is $15,000. If an offeror reports a federal tax delinquency over that amount, the contracting officer must notify the agency official responsible for initiating suspension or debarment before award.

FAR rules have been undergoing a broad rewrite, so check the current clause text on acquisition.gov for the solicitation you are answering.

What "delinquent" means

The clause defines delinquency carefully, and the definition is where most contractors find room. Two things must be true: the tax liability must be finally determined, and the taxpayer must have failed to pay it when full payment was due and required.

The clause gives examples of when a taxpayer is not delinquent:

• A liability is not finally determined while there is a pending administrative or judicial challenge, such as a timely Tax Court petition or a pending Collection Due Process hearing.
• A taxpayer in an installment agreement who makes timely payments and fully complies is not delinquent, because full payment is not currently required.
• A taxpayer in bankruptcy is not delinquent while enforced collection is stayed.
• A taxpayer is not delinquent where enforced collection action is precluded.

Read that list again. An installment agreement that is in place and current changes the certification answer. For a federal contractor, getting into a compliant payment arrangement is not only about stopping levies. It can be about remaining eligible to win work.

FAR 52.209-11 adds a separate representation for corporations regarding unpaid federal tax liabilities that have been assessed, for which all judicial and administrative remedies have been exhausted or have lapsed, and that are not being paid in a timely manner under an agreement. Under FAR 9.104-5(b), an affirmative answer generally means no award unless a suspending and debarring official has considered suspension or debarment and determined it is not necessary.

Certify accurately. A false certification is a far bigger problem than the tax debt it was meant to hide.

The levy: up to 100 percent of contract payments

The Federal Payment Levy Program lets the IRS levy federal payments automatically through the Treasury's payment systems. For most federal payments, IRC 6331(h) allows a continuous levy of up to 15 percent. For payments to a vendor of property, goods, or services sold or leased to the federal government, IRC 6331(h)(3) raises that to 100 percent.

The program applies to the business that is the vendor. If the contracting entity is a corporation or LLC that owes its own taxes, its payments are exposed. If an owner personally owes and the business is a sole proprietorship, the business's federal payments are the owner's payments. Subcontractors are not paid by the federal government directly, so their exposure usually comes through ordinary levies served on the prime contractor instead.

In plain English: if you owe the IRS and the levy is in place, the government can keep every dollar it owes you under your contract and send it to the IRS. For a business that depends on federal receivables to make payroll, that is not a collection action. It is an existential event.

No pre-levy hearing for contractor levies

Most taxpayers get a Collection Due Process notice and a chance for a hearing before the IRS levies. IRC 6330(f) lists exceptions, and one of them is a federal contractor levy. The IRS can levy contract payments first and offer the hearing afterward.

You still get a CDP hearing, and you should request it on time. It is where you propose an installment agreement or other resolution and ask for the levy to be released. But the money may already be gone by the time the hearing happens. My guide to the CDP hearing explains the process and deadlines.

What federal contractors should do

If your business sells to the federal government and has any IRS balance, treat it as an urgent business risk, not a back-office issue:

• Pull IRS transcripts for the business and the owners, so you know exactly what is assessed and when.
• Stay current on payroll deposits and estimated taxes. New balances undermine every resolution.
• Get into a compliant installment agreement, or file a timely challenge if the liability is wrong, before the next proposal deadline.
• Review how you answer FAR 52.209-5, 52.212-3, and 52.209-11 with counsel, using the clause definitions.
• Watch for notices about the Federal Payment Levy Program and act before the levy starts if you can.
• If payroll taxes are part of the balance, address the trust fund recovery penalty exposure of the owners and officers.

The federal government is a great customer until it becomes the IRS's collection agent. Contractors who get ahead of their tax debt keep both the contracts and the cash flow. If you are bidding on work with an IRS balance, or a levy has already hit your receivables, let's talk: 813-229-7100. The firm's tax levy page has more on levy release.