Local authorities are being notified that their budgets may be cut for a number of reasons, including the level of compliance achieved with the Household Charge to date.
The Department of the Environment said letters have been sent to all county managers stating that funding may be restricted in the third quarter.
It also said consideration would be given to the financial position of individual local authorities as well as grants for a reasonable provision of services in communities.
In a statement, the department said that the final quarter payment will be revisited in light of the Household Charge compliance level at that time.
Fianna Fáil Senator Paschal Mooney has said it is shameful that the Government is penalising local government because people are not paying the Household Charge.
He said he is astonished that the department is imposing more cuts on councils.
Yesterday, hundreds of people attended a demonstration outside Leinster House against the charge.
The protest, organised by the Campaign Against Household and Water Taxes, was timed to take place ahead of the start of the Dáil summer recess.
Socialist Party TD Joe Higgins was among those who addressed the demonstration.
