The IRS Is Coming After Federal Employees for Unpaid Taxes
In April 2025, the IRS sent out Notice LT36 to over half a million federal employees with unpaid taxes. The notice urged recipients to get back into compliance and reminded them of their legal obligations to the United States government. Although this particular IRS notice is new, the effort to get federal workers into tax compliance has been happening for decades.
If you work for the government, be aware that the IRS is paying special attention to federal employees who've fallen behind on their tax obligations. Like all other taxpayers, you may face unwanted tax assessments, involuntary collection actions (such as wage garnishment or asset seizure), but in some cases, your job may also be at risk.
Key takeaways
- Increasing enforcement of federal employees – The IRS has been concerned about the tax compliance of federal workers for decades, but is ramping out enforcement in 2025.
- LT36 notices – In April 2025, the IRS sent LT36 notices to over 500,000 federal employees or retirees with delinquent taxes.
- Close to $1.5 billion owed – About 150,000 federal employees owe back taxes, with an average liability of $10,000 each.
- Thousands of returns unfiled – Over 40,000 federal employees have unfiled returns.
- Risks for federal workers/retirees – Failure to get into compliance can lead to tax assessments or asset levies.
Why is the government focusing on federal employees?
The government is focusing on these taxpayers because employees of the federal government are held to a higher standard than other citizens. Title 5, Chapter 14, Subchapter B, Part 2635 of the US legal code outlines the ethical requirements for federal employees, including the obligation to pay taxes.
Federal employees, ideally, should lead by example – the public can quickly lose confidence in the system if federal workers, especially elected employees, don't pay their taxes. Additionally, federal employees take their pay and often retirement benefits from the federal government, so they should be particularly vigilant about contributing their own taxes to the U.S. Treasury.
How does the IRS know if federal employees aren't paying?
In 1993, the IRS created the Federal Employee/Retiree Delinquency Initiative (FERDI). FERDI collects data and generates annual reports about current and retired federal employees who are behind on their filing or payment requirements. The program is designed to increase compliance.
The IRS uses a variety of data to identify these taxpayers – For example, your W2 notes if you work for a federal agency or not. Similarly, retirement and survivor payments from federal employee annuities are also clearly marked.
Consequences of Noncompliance
Federal workers and retirees may face tax assessments or involuntary collections just like any other taxpayers who are out of compliance with the IRS. However, federal workers face additional risks. IRS employees, in particular, may be terminated for failing to comply with federal tax laws. Other workers may risk losing security clearances if they refuse to pay their taxes.
What if federal employees don't file taxes?
If you don't file your tax returns, the IRS may file a substitute for return (SFRs) on your behalf – this form uses income information the IRS has received from third parties (for example, your W2 from the federal government, plus any 1099-NECs, 1009-Bs, 1099-INTs, or other income documents you've received). Then, it gives you a standard deduction as if you're single or married filing separately, but it doesn't include any other deductions, dependents, or tax credits. By extension, most SFRs overstate your tax liability.
In most cases, the IRS waits at least three years before issuing an SFR. At that point, you're no longer eligible for tax refunds. To get refunds, you need to file your tax return within three years of the tax return deadline. This can be especially important for federal employees with relatively low incomes, as they may be eligible for the Earned Income Tax Credit, which gives qualifying taxpayers an average annual credit of $2500 and can be much higher in many situations.
What if you don't pay your taxes and you work for the feds?
If you don't pay your taxes, the IRS may take matters into its own hands and forcibly collect the debt from you. This can happen if you file and don't pay, or if the IRS generates an SFR on your behalf or makes changes to a filed return that lead to a tax liability.
To collect taxes involuntarily, the IRS may garnish wages, levy bank accounts, or seize other taxpayer assets. However, the IRS may also use the federal payment levy program (FPLP) to seize payments from federal employees, retirees, and contractors.
What is the federal payment levy program?
The FPLP is a levy program that allows the IRS to take a portion of the following payments for unpaid IRS taxes:
- Some federal salaries,
- Federal employee travel advances or reimbursements,
- Federal employee retirement annuities,
- Railroad Retirement Board benefits
- Military retirement
- Certain Social Security benefits,
- Federal payments made to contractors/vendors of the federal government (including Department of Defense contractors),
- Medicare provider and supplier payments.
The IRS cannot levy these payments if you're in the midst of bankruptcy, but note that if any of your tax debt survives the bankruptcy, the IRS may be able to levy payments at that point. The IRS will also not levy payments if you set up payment arrangements, establish hardship, or make other arrangements before the levy starts
How much can the IRS levy through the FPLP?
The IRS can seize up to 15% of most federal payments, including military retirement payments. The agency can take up to 30% of payments made to Medicare providers or suppliers. It can take up to 100% of government contractor payments.
In all cases, the levy is limited to the amount of the tax due. For example, say that a government contractor owes $10,000 in back taxes and the government is paying them $20,000. Although the IRS has the right to levy 100% of contractor payments, in this case, they can only take $10,000, as that is the amount owed.
At the time of writing, the IRS plans to expand this list to include more federal employee salaries and other types of federal payments.
Does the IRS have to notify you before using the FPLP?
In most cases, yes, the IRS must send you a Final Notice of Intent to Levy that outlines your right to request a Collection Due Process (CDP) hearing before levying your federal payments. When you receive that notice, you have 30 days to make payment arrangements or request a hearing.
However, there are a few exceptions to this rule, including:
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- If you owe payroll tax and have requested a CDP hearing on payroll tax in the last two years. This is called a disqualified employment tax levy, and it only applies to federal employees or retirees who own a business with employees.
- If you or your predecessor is a federal contractor. The IRS can levy federal contractor payments for unpaid taxes with no advance warning. Instead, they'll send a notice after the levy starts.
- If the tax collection is in jeopardy. The IRS can also bypass the notice requirements in cases where the tax collection is perceived to be in jeopardy – for example, the taxpayer might flee the country or transfer all of their assets.
What other assets can the IRS take?
The IRS isn't limited to your federal payments. If you don't pay your taxes, the agency can also seize wages from other jobs, bank accounts, investment accounts, retirement accounts, or even your car or home in rare situations. The IRS can also seize the balance in your Thrift Savings Plan if you don't pay your taxes voluntarily. If that happens, you'll lose the funds you saved, but you may also have to report the amount the IRS took out of your account as income.
How to get back in compliance – tips for federal employees
To protect your position, your reputation, and your assets, you should attempt to get back into compliance before the IRS takes involuntary collection actions. Here are the main options with links to resources with additional information:
- File back taxes – If you're behind on filing, you will need to file your old returns so that you can get back into compliance and set up payments or secure relief options.
- Installment agreements – Make monthly payments for up to 10 years or until the collection expiration date if sooner.
- Offer in compromise – Settle your debts for less than owed with a settlement based on the equity in your assets and disposable income.
- Currently non-collectible – Get the IRS to stop collection actions by proving that you cannot pay anything now; Subject to financial reviews and collections may resume if your finances improve.
You may also want to look into penalty abatement to see if you can get some or all of your penalties abated. In situations where your spouse or former spouse incurred a tax liability without your knowledge, you may qualify for innocent spouse relief. Talk with a tax professional to find the best resolution options for your unique situation.
FAQs about IRS enforcement on federal employees
Can the IRS tell my employer that I'm behind on my taxes?
Generally, no. IRC § 6103 prohibits the disclosure of taxpayer information in most scenarios. However, if the IRS garnishes your wages, your employer will find out that you owe a tax debt at that time.
The IRS can tell federal agencies which percentage of their employees are behind on filing or paying taxes, and the IRS also gives federal agencies guidance on how to approach this issue. But the IRS cannot tell other federal agencies which of their employees are delinquent.
How many federal employees are out of compliance?
Over half a million federal employees and retirees owe back taxes, and over 40,000 federal employees have unfiled returns, as of 2025.
The number of federal employees increased by 6% from 2015 to 2021, but during that time, there was a 32% increase in the number of delinquent taxpayers in the federal employee workforce. At the time of writing, there are approximately 2 million federal employees and about 2.7 million people receiving retirement benefits earned from working for the federal government.
Here are some stats on their noncompliance
- 525,000 current or retired federal employees with delinquent tax filings or payments, according to IRS notice LT36.
- 149,000 federal employees owe back taxes as of 2021 (up from 112,000 in 2015), based on a Treasury Inspector General for Tax Administration (TIGTA) 2023 report.
- $1.48 billion in back taxes owed by current federal employees (up from $1.09 billion), based on the TIGTA report.
- 42,000 civilian federal employees with unfiled returns, based on the TIGTA report.
- $10,000 average amount owed by delinquent federal employees, according to Lia Colbert, Commissioner forthe IRS Small Business/Self-Employed Division.
Of the 42,000 nonfilers, over half are just two years behind, just under a quarter are three years behind, and 10% are four years behind. But around 3000 federal employees are five or more years behind. The non-filers have incomes that range from very modest to well over $150,000 annually.
Which federal employees have the highest compliance rates?
Employees of the US Treasury Department have the highest compliance rates, followed by IRS employees – only 1% or fewer IRS employees have unfiled returns, and about 4% owe back taxes. Of contractors working for the IRS, fewer than 1% have unfiled returns, and fewer than 10% owe back taxes.
The government agencies with the highest rates of nonfilers are the United States Post Office (9056 nonfilers), the Department of Veterans Affairs (6586 nonfilers), and the Department of the Army (4459 nonfilers). The other agencies in the top 10 include the Department of the Navy, the Department of Defense, the Department of Agriculture, Homeland Security, Health and Human Services, and the Social Security Administration.
Are federal employees committing fraud by not filing?
Generally, no. Between 2016 and 202, only 10 federal employees incurred the civil fraud failure to file penalty. Considering that there are over 40,000 federal employees with unfiled returns, that is a very low number.
Failure to file can be considered a crime under § 7203, which covers willful failure to file, supply info, or pay tax. The civil failure to file penalty is 15% of the tax due, plus an additional 5%, up to 75% of the tax liability.
Does the government plan to pursue federal employees for tax fraud?
At the time of writing, that is not happening, but TIGTA has indicated that the IRS should consider flagging more federal employee files for review by the Criminal Investigation (CI) division.
Do federal workers pay taxes?
As mentioned above, federal workers pay federal income taxes. Additionally, federal employees (including elected officials) hired in 1984 or later also pay Medicare and Social Security taxes. Federal employees hired before 1984 benefited from the Civil Service Retirement System (CSRS), which provided retirement benefits at that time.
Can you work for the government if you owe back taxes?
Yes, you can work for the federal government if you owe back taxes. The IRS is the only government agency that has a legal requirement not to employ anyone who is willfully behind on their taxes, based on a 1998 law.
Are these efforts new?
No, the government has focused on federal employees with unpaid taxes for decades. As noted above, FERDI was created in 1993 to track compliance. In 2015, lawmakers proposed (but didn't pass) legislation to terminate federal employees with unpaid taxes. In 2021, the IRS instructed managers to spend one day per quarter working FERDI non-filer cases. In 2023, TIGTA made recommendations to help the IRS deal with federal nonfiler cases more effectively.
This is just a short sampling of some of the events that have happened over the last 30+ years.
Get help with unfiled or unpaid returns
As a federal employee or retiree, you may face more scrutiny than the average taxpayer if you don't pay your taxes. You also have more at risk. To protect yourself, find a tax professional today.
Using TaxCure, you can search for experienced tax resolution professionals, and you can narrow down your search results to find a pro with the precise experience you need. Don't wait – reach out for help now.
Sources
https://www.ssa.gov/slge/sect_218_agree.htm
https://www.tigta.gov/sites/default/files/reports/2023-03/202330011fr.pdf
https://www.irs.gov/businesses/small-businesses-self-employed/federal-payment-levy-program
https://www.grassley.senate.gov/imo/media/doc/grassley_to_irs_-_tax_delinquent_federal_employees.pdf
https://www.taxnotes.com/research/federal/other-documents/gao-reports/federal-workers-annuitants-owe-2.5-billion-back-taxes-gao-finds/107g3