Kentucky Back Taxes: Relief Options and Consequences
The Kentucky DOR administers and collects personal and business taxes in this state. If you can't afford to pay your tax liability, the DOR offers several programs to help you get caught up. However, if you simply don't pay, the state can enforce collection actions against you, including garnishing your wages, seizing your bank accounts, or closing down your business.
Want help dealing with your Kentucky tax bill? Wondering what's going to happen if you don't pay? Here is an overview of what you need to know.
How to Pay Taxes in Kentucky
You can pay taxes online through your bank account or a credit card. Visit the KY DOR website and select the tax you owe to get links to online payment options. Most business taxes must be paid electronically, but you can mail income taxes and some other taxes to the following address:
KY Department of Revenue
Frankfort, KY 40619-0008
What If You Can't Pay Your KY Taxes in Full?
If you cannot afford to pay your Kentucky taxes in full, you can request to make monthly payments. Qualifying taxpayers may be able to reduce their tax bills through a settlement offer. The state also offers a hardship program to help people who can't afford to pay. Here are the options.
If you can't pay off your full tax liability within 60 days, the DOR suggests that you apply for a payment plan. Start by submitting an online application. If you don't qualify to set up your payments online, the application will let you know what steps you need to take.
Generally, most people who have been compliant with tax filing and payment options can set up a payment plan online as long as they can pay off their debt within a reasonable time frame. However, if you have a history of non-compliance or owe a significant amount of money, you may need to work with the department directly to set up payments. The DOR accepts payment plans on a case-by-case basis.
Note that even if you set up a payment plan, the DOR will add a 25% fee to your account once you are 60 days late. If you can't afford to pay your taxes upfront, you may want to take out a loan or use a credit card to avoid this fee. The state can also issue a lien until you finish making payments.
KY Offer in Settlement
Kentucky Revised Statute 131.030(3) allows the DOR to settle tax liabilities for less than owed. In plain English, this means that you may be able to pay off your tax debt for less than you owe. In Kentucky, this is called an offer in settlement, and the DOR will usually only accept these arrangements if you pay as much as you can afford.
To apply, you must share detailed information about your finances. You also must fill out a lengthy application and submit copies of bank statements, proof of income, your credit report, and documents about inheritances and lawsuits. Finally, you need to send in a $500 downpayment. The DOR will not stop collection actions against you while it reviews your offer in settlement.
If you are experiencing financial hardship, reach out to the DOR and ask if they will stop collection actions against you. The DOR has a fairly strict idea of financial hardship. It won't offer you relief if you're just financially inconvenienced by the tax bill.
What If You Disagree With Your Tax Bill in Kentucky?
If you believe that the DOR used incorrect information or didn't apply the tax laws correctly, you have the right to appeal the tax assessment. This generally happens after an audit or if the state adjusts your tax return for any reason. If you believe that you shouldn't owe a tax liability because it was due exclusively to your spouse or ex-spouse, you can apply for relief under the state's innocent spouse provisions.
Here are details about both options.
Appealing a Tax Assessment
If you want to protest a tax assessment due to an audit, you have 60 days from the date the DOR issues the bill. The Division of Protest Resolution will review your protest and issue a final ruling. If you still disagree, you can appeal to the Kentucky Claims Commission, and if you disagree with their decision, you can appeal to the circuit court.
You can also appeal property tax assessments in Kentucky. Note, however, that if you're appealing for a corporate entity, you must be represented by an attorney.
Requesting Innocent Spouse Relief
You may qualify for innocent spouse relief if the tax liability is due to actions your spouse took without your knowledge. If this applies to both your federal and state tax bill, apply for IRS innocent spouse relief — the day this becomes final, you will also receive relief from the state. If you don't have an IRS tax bill, then contact the DOR to apply for innocent spouse relief just on the state level.
What If You Don't Pay Taxes in Kentucky?
If you owe taxes to the state, the DOR will add penalties and interest to your account. The agency will also seize your tax refunds and vendor payments you receive from the state if applicable. The KY DOR also takes the following actions against people with unpaid taxes.
Penalties for Unpaid KY Taxes
There are severe financial penalties if you don't file or pay taxes in Kentucky. Failure to file a return leads to a penalty of 5% of the estimated tax per month, and this penalty can get up to 50% of the assessed tax. If you file but don't pay, the penalty is 2% of the tax due per month, but after 60 days, the DOR adds a 25% fee for collection costs.
There are a variety of different penalties for not withholding taxes, underpaying estimated taxes, and negligence. Tax fraud leads to a 50% penalty. On top of the penalties, unpaid taxes accrue interest. As of 2023, the interest rate is 8% annually.
Kentucky State Tax Lien
If you don't pay your taxes, the state can issue a tax lien against you. To avoid the lien, pay the tax bill or contact the DOR to set up payments as soon as you receive the Notice of State Tax Lien. Once issued, the lien attaches to all of your real and personal property. It also attaches to property that you receive in the future.
The DOR can levy (seize) your assets for unpaid taxes. Usually, creditors have to take someone to court to seize their assets, but this isn't the case with state tax debt. The DOR doesn't need to obtain a judgment. It simply needs to attempt to contact you by certified mail.
The DOR can seize the funds in your bank account and garnish your wages. The agency can also take third-party payments. These are payments owed to you by someone else such as cash values of life insurance policies or rental payments from tenants. A limited amount of property is exempt from levies, including alimony, child support, pensions, public assistance, worker's comp, and $5,000 worth of residential property.
Property Seizure and Sale
In Kentucky, the DOR can seize your property for unpaid state taxes. Once the state has your assets, it can sell them 30 days after posting notices in at least three public places. To stop the sale from going forward, you must pay the entire tax bill plus interest, penalties, fees, and costs related to the seizure. Alternatively, you can put up a bond or set up a payment plan with the DOR (subject to approval).
If the state sells real estate and the proceeds are more than your full bill, you can request a refund of the excess amount. However, if there were loans on the property, the lenders will be repaid first. Additionally, you have 120 days to get the real estate back. You must pay the bidder the full amount of their bid plus 20% annual interest.
The DOR can suspend your driver's license if you don't pay taxes in Kentucky. It can also revoke motor vehicle registrations. This prevents you from being able to drive legally — to get your license and registration back, you need to contact the DOR to make payment arrangements. Then, you need to pay a reinstatement fee at the country clerk's office.
The DOR can also take away professional licenses, liquor licenses, and mine licenses if you don't pay your taxes. In other words, failing to pay your taxes can cost you your business.
The state can close down your business if you don't respond to the DOR's collection attempts or if you have a history of non-compliance. The DOR can file a suit in the Franklin Circuit Court requesting a permanent injunction. This creates an Order to Enforce, which allows the sheriff of your county to take any actions necessary to close the business.
The KY DOR can hold corporate officers and LLC managers liable for unpaid business taxes. This includes employee withholding and sales tax as well as cigarette, telecommunication, coal severance, marijuana, bank franchise, health care provider, gasoline, and transient room taxes.
You can appeal and protest these tax assessments if you don't think you should be liable. But you must do so within 60 days. Otherwise, the assessment becomes final, and the DOR can enforce collection actions against you as detailed above.
If you work for the Commonwealth of Kentucky or have business contracts with the state, the DOR can claim 100% of your payments for unpaid taxes. The DOR can also seize payments from Kentucky National Guard employees, state University and community college employees, and sheriffs and county attorneys in several counties. If you're a medical professional who receives payments from Medicaid or Medicare, the DOR can also seize those payments.
FAQs About Kentucky Tax Issues
Dealing with back taxes can be complicated and stressful. To help you out, here are answers to commonly asked questions about tax issues in Kentucky. If your concern isn't addressed here or in the above sections, reach out to a KY tax pro directly for help.
Can the Kentucky DOR seize my portion of the tax refund for a debt due to my spouse?
Yes, if you file a tax return jointly with your spouse, the DOR can seize the refund and apply it to your spouse's debt. You can avoid this on the federal level by filing an injured spouse relief form, but the KY DOR does not recognize this form. If you want to keep your portion of your KY tax refund, you must file a separate return from your spouse.
Does the KY DOR offer penalty waivers?
Yes, the DOR may waive penalties if you have reasonable cause. This means that something out of your control (death, illness, disaster, etc.) prevented you from meeting your tax obligation. The KY DOR charges some of the highest penalties of any state revenue agency. The penalties can very quickly increase your tax bill. You should always apply for relief if possible.
What happens during a KY tax audit?
During an audit, the KY DOR contacts taxpayers and asks them to verify the information on their tax returns. Desk audits are primarily handled through the mail or email, and they focus on individual and corporate income tax. Field audits take place at a taxpayer's location, and they typically focus on sales or property taxes.
How does the KY DOR select returns to audit?
The DOR looks for red flags on tax returns. It also selects returns to audit based on information from other tax agencies. The DOR tends to audit taxpayers that have failed previous audits.
Get Help With KY Tax Issues
To get help with KY tax issues, use TaxCure to search for a tax pro who has experience dealing with the KY DOR. You can search based on the problem you're having or the solution you want — this ensures you find a tax pro with the experience you need. Once you find a few options, call for a consultation and find the best fit for your needs.
Every state has its own processes for tax collection and relief, and if you hire a tax resolution firm that doesn't have experience in this state, you will not get the best resolution for your situation.
Unfortunately, the big names that are often considered to be the "best tax resolution firms" are generally the worst when you dig into their practices. These companies are notorious for over-promising and under-delivering, and they typically lack state-specific experience.
In contrast, if you work with an Enrolled Agent, CPA, or tax attorney who has experience with the KY DOR, they will be able to answer your questions. They will also personalize their approach based on your unique situation and what you can afford to pay. Don't let state taxes pull you under — use TaxCure to find an experienced tax pro today.