Episode 109 of Concrete Numbers · 5 min watch
If your construction business owes the IRS, the problem grows while you wait: interest and penalties keep adding up, a lien can follow the first unpaid bill, and unpaid payroll taxes can become your personal debt. The IRS offers payment plans and other relief, and acting early keeps the most options open.
It usually starts with cash flow: retainage sits, a general contractor pays late, and the payroll deposit slides to next month. The cash gaps behind underbilling and the busy-but-broke margin squeeze are common root causes.
What happens when you owe the IRS
An unpaid balance first brings a bill: a CP14 for individuals or a CP161 for businesses. Reminder notices (CP501, CP503, CP504) generally follow every few months. Interest compounds daily, and a monthly late-payment penalty applies until the balance is paid.
Two notices carry hard deadlines. Letter 3172 says a Notice of Federal Tax Lien was filed; an LT11 or Letter 1058 is the final notice of intent to levy. Each gives you 30 days to request a Collection Due Process hearing on Form 12153.
The IRS generally has 10 years from assessment to collect, and pending payment plan requests, offers, bankruptcy and hearings suspend that clock. Waiting it out rarely works.
Payment plans and the online limits
Under current IRS rules, individuals can apply online for:
- A short-term plan of 180 days or less if they owe less than $100,000 in combined tax, penalties and interest, with no setup fee.
- A long-term installment agreement if they owe $50,000 or less combined and have filed all required returns.
Sole proprietors apply as individuals. Business accounts cannot apply online and must call. Under the IRS’s internal manual, an operating business owing $25,000 or less, with all returns filed and deposits current, can qualify for a simple payment plan.
Individuals who owe $10,000 or less in income tax (excluding penalties and interest), have a clean five-year record and can pay within three years are entitled to a guaranteed installment agreement under IRC §6159(c). Interest and some penalties keep running on every plan, so pay what you can up front and get on quarterly estimated taxes so a new balance does not stack on the old one.
Offer in Compromise and Currently Not Collectible
An Offer in Compromise settles a debt for less than the full amount, but the IRS generally will not accept one if you can pay through a payment plan or asset equity. It weighs income, expenses and equity, so many applicants do not qualify. Run the IRS Pre-Qualifier tool before filing Form 656. Offers need an application fee and an initial payment, and employers must have made deposits for the current quarter and the two before it.
Currently Not Collectible status pauses most collection when paying would cause hardship. The debt remains, penalties and interest continue, the IRS may file a lien, and it will want a financial statement (Form 433-F, 433-A or 433-B) first.
Payroll taxes and the Trust Fund Recovery Penalty
Income tax withheld from paychecks and the employees’ share of Social Security and Medicare are held in trust. If they are not paid over, IRC §6672 lets the IRS assess the Trust Fund Recovery Penalty, equal to the unpaid trust fund tax, against any responsible person who acted willfully.
A responsible person can be an owner, officer, partner or anyone with authority over which bills get paid. Willful does not require bad intent: the IRS treats paying other creditors while employment taxes go unpaid as evidence of willfulness, and paying a supplier while the 941 deposit waits is that pattern. Once assessed, the IRS can pursue your personal assets; an S corporation or LLC does not shield you. You generally get a letter and 60 days to appeal first. Our payroll and worker classification episodes cover keeping deposits on schedule.
Liens, levies and your credit
A federal tax lien arises automatically once the first demand goes unpaid. A filed Notice of Federal Tax Lien is public, reaches business property including receivables, and may restrict your ability to borrow; for a contractor, that record can surface when a lender or surety reviews your file. A levy takes bank funds or other property. Full payment gets the lien released within 30 days.
California: FTB and EDD collect separately
The Franchise Tax Board handles income and franchise tax; its online plans require $25,000 or less, paid within 12 months for businesses or 60 months for individuals.
The EDD collects payroll taxes. Its online plan requires owing $50,000 or less with no delinquent returns or wage reports. The EDD warns that responsible persons who willfully fail to pay can be held personally liable, and that new unpaid liability can end an agreement. Both agencies may file state tax liens.
What to do first
Take these steps in order, or work through them with our tax and accounting services for contractors:
- File every return, even if you cannot pay. The failure-to-file penalty is much steeper than the failure-to-pay penalty, and plans and offers require filed returns.
- Make current payroll deposits first. They stop the trust fund balance growing and are a condition of business plans, offers and EDD agreements.
- Pull your transcripts. Account transcripts show deposits, payments, penalties and interest; clean bookkeeping records make them easy to reconcile.
- Open every notice. The 30-day lien and levy windows matter most.
- Separate payroll tax money. Move withholding and the employer share into a dedicated account each payroll, the same logic as Profit First. A contractor payroll health check can confirm deposits are on schedule.
Frequently asked questions
Can a contractor’s business set up an IRS payment plan online?
Sole proprietors can, because they apply as individuals, within the $50,000 long-term and $100,000 short-term limits. Other business accounts must call. See our episode on quarterly estimated taxes to avoid the next balance.
Can I be personally liable for my company’s unpaid payroll taxes?
Yes. Under IRC §6672, a responsible person who willfully fails to pay over withheld taxes can owe the Trust Fund Recovery Penalty personally, even through a corporation or LLC. Our episode on payroll mistakes in construction covers how deposits get missed.
Will an Offer in Compromise settle my IRS debt?
Only if the IRS concludes you cannot pay through a payment plan or asset equity. Run the Pre-Qualifier tool before filing Form 656, and keep payroll deposits current.
Does an IRS payment plan stop California collections?
No. The FTB and the EDD run separate payment plans with their own limits.
Behind on IRS or EDD payroll taxes?
We help contractors sort out notices, get current on payroll deposits and choose the right IRS, FTB or EDD payment option. Bring your latest notices and transcripts to a call.
Verified against IRS.gov payment plan, Offer in Compromise, collection, lien and Trust Fund Recovery Penalty guidance, the Internal Revenue Manual, the Taxpayer Advocate Service, FTB payment plan pages and EDD payroll tax payment plan materials, as of October 2026. General information, not advice for your situation.