IRS Levied My Subcontractor – How to Respond as a California GC or Prime

If the IRS Sends You a Levy Notice for a Subcontractor, It’s Not a Mistake

As a general contractor or construction manager in California, it can be jarring to receive a letter from the IRS demanding that you redirect payments to one of your subcontractors directly to the IRS.

But this is a real and enforceable collection tool.

If the subcontractor owes back taxes, the IRS may levy accounts receivable, and that includes payments from you—their GC or prime contractor.

This post explains what to do if you receive an IRS levy notice for a subcontractor, how to stay compliant, and how to protect your project timeline, contract liability, and vendor relationships.

Why Did You Receive a Levy Notice?

The IRS likely sent you Form 668–A(c)(DO) because:

• Your subcontractor or vendor owes back taxes
• The IRS determined that you owe money to the taxpayer (i.e., progress payments)
• You are considered a third-party payer under federal law

This often happens when the subcontractor is:

• A sole proprietor (Schedule C)
• A pass-through entity (e.g., S-Corp, partnership)
• Receiving large payments without withholding

Related: IRS Levy vs IRS Lien – What’s the Difference?

Are You Required to Comply?

Yes. If the IRS sends you a valid levy notice, you are legally obligated to redirect payment to the IRS instead of your subcontractor.

Failure to comply may result in:

• You being held personally liable for the amount the IRS was trying to collect
• Penalties under IRC §6332(d)
• Interest or enforcement against your business

What Happens If You Already Paid the Subcontractor?

If you made the payment before receiving the levy notice:

• Document the payment date, method, and invoice clearly
• Send a written response to the IRS stating that no funds are currently owed
• Provide cleared checks, ACH confirmations, or pay app records

If you paid after receiving the notice, you may be liable and should seek legal or CPA guidance immediately.

Can You Keep Working with That Subcontractor?

Maybe—but proceed with caution.

Once the IRS identifies a vendor as a levy target:

• Future payments may be subject to additional levies
• You may be dragged into future IRS enforcement
• Progress payments and lien releases may get delayed
• Your payment reporting responsibilities increase

Related: IRS Levied a Customer of Mine – What Business Owners Need to Know

Step-by-Step: What to Do If You Receive a Subcontractor Levy

Step 1: Review the Notice Immediately

Confirm:

• The taxpayer's name and TIN
• The amount owed
• Your payment obligation
• The IRS office and contact info

Step 2: Withhold Payment

• Freeze all pending payments to the subcontractor
• Do not release retention or lien waivers while the levy is unresolved
• Inform your subcontractor professionally and carefully

Step 3: Remit Payment to the IRS (If Owed)

If you owe funds, you must:

• Complete and return Form 668-W or similar documents
• Issue payment to the IRS as directed (usually to the Advisory Office or collection officer)

Step 4: Protect Your Records

• Maintain documentation of all actions taken
• Log dates and responses in your job files
• Keep copies of all correspondence with the IRS and the subcontractor

We Help California Contractors Respond to IRS Levies

At Boulanger CPA and Consulting PC, we help general contractors, developers, and business owners:

• Respond to subcontractor levy notices
• Protect against third-party liability
• Resolve confusion about tax responsibility
• Help subs resolve their IRS debts and avoid future levies

📞 Call (657) 218-5700 or request support at www.orangecounty.cpa

FAQ: IRS Subcontractor Levies for GCs and Primes

📣 About the Author

Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.

He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.

With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.

Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.

Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.

📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.