Kentucky Sales Tax Penalties & Interest Checklist
Kentucky sales tax penalties and interest are charges added to unpaid sales tax obligations or errors in sales tax reporting and payment. These charges accumulate when sales tax is not filed or paid on time, or when the amount reported to the Kentucky
Department of Revenue does not match the actual tax owed. Understanding how penalties and interest work is essential because they can significantly increase the amount owed to the state beyond the original tax liability.
Ignoring penalties and interest notices can result in additional enforcement actions, wage garnishments, business license suspensions, or liens against property. This checklist explains what penalties and interest are, why the state applies them, and the procedural steps typically involved in addressing them.
What This Issue Means
Kentucky sales tax penalties and interest are additional monetary charges imposed by the state for late payment, non-filing, underpayment, or misreporting of sales tax.
Penalties under Kentucky law include specific rates: late filing penalties are 2 percent of the total tax due for every 30 days or fraction thereof (maximum 20 percent, minimum
$10), and late payment penalties follow the same structure. Negligence penalties are 10 percent of the tax assessed, while fraud penalties are 50 percent of the tax assessed.
Additionally, a 25 percent Cost of Collection Fee may be added to unpaid tax 60 days after the original notice date.
Interest accrues on unpaid tax amounts from the due date until the balance is paid in full. For calendar year 2026, Kentucky's interest rate is 9 percent per year. This rate is set annually by the Commissioner of the Department of Revenue and is computed daily on the unpaid balance. Together, penalties and interest can substantially increase the original tax owed if left unaddressed for an extended period.
Why the State Issued This or Requires This
Kentucky applies penalties and interest as part of its standard tax administration process. The state uses these charges to encourage timely filing and payment compliance and to offset the administrative costs of collection efforts. Penalties typically apply when a return is filed late, a return is not filed at all, payment is made after the deadline, or the reported tax amount is inaccurate.
Interest accrues automatically on any unpaid tax balance, beginning on the due date and continuing daily until paid. According to Kentucky Department of Revenue guidance, these charges are applied systematically to all noncompliant accounts unless specific legal or administrative exceptions apply.
What Happens If This Is Ignored
If penalties and interest notices are not addressed, the total amount owed to Kentucky will continue to grow. The state typically escalates collection efforts by issuing additional notices, garnishing wages, levying bank accounts, or filing liens against real property. In some cases, the Department of Revenue may suspend a business license or deny renewal of professional licenses.
The longer penalties and interest remain unpaid, the more difficult the resolution becomes and the greater the financial impact to the taxpayer or business. Ignoring official state notices does not stop the accrual of interest or prevent enforcement action.
What This Does NOT Mean
Receiving a penalty and interest notice does not automatically mean criminal charges will be filed or that immediate wage garnishment is happening. Penalties and interest are civil tax administration tools, not criminal penalties. A notice of penalties and interest is not a final judgment or lien: it is a statement of what the state believes is owed.
Receiving this notice does not mean the taxpayer has no options to respond, request a review, or work with the state to resolve the issue. The state has not yet taken enforcement action, such as garnishment or levy, but simply issued a penalty and interest notice.
Checklist: What to Do After Receiving This or Identifying
This Issue
Step 1: Locate and Review the Official Notice
Find the notice letter or statement from the Kentucky Department of Revenue. Read the entire document carefully, including the notice date, the tax period covered, the penalty
amount, the interest amount, the Cost of Collection Fee (if applicable), and the total
balance due. Make note of any deadline for response or payment listed on the notice.
Keep the original notice and any supporting documentation that arrived with it.
Step 2: Gather Your Sales Tax Filing and Payment Records
Collect copies of all sales tax returns filed for the periods listed in the penalty and interest notice. Locate proof of payment (bank statements, cancelled checks, payment confirmations) for those same periods. If you have documentation showing that a return was filed or a payment was made, organize it by date. If records are missing, note which periods or documents cannot be located.
Step 3: Verify the Tax Period and Amount Listed
Compare the tax periods shown on the state's notice with your own filing records.
Confirm whether the amount of tax reported on your return matches the amount the state says you owe. Check your calculations or have a qualified tax professional review them. If there is a discrepancy between what you reported and what the state claims, document it clearly.
Step 4: Determine If the Return Was Filed and When
Review your records to establish the actual filing date of the return in question. If you filed electronically, you may have a confirmation email or online receipt. If you mailed a paper return, check for a postmark date or certified mail receipt. If you did not file a return for the period listed, acknowledge this clearly in your documentation. If the return was filed late, note the late filing date.
Step 5: Determine If Payment Was Made and When
Review your records to establish when payment was made, if at all. If you paid electronically through the state's system, locate the transaction confirmation or receipt.
If you mailed a check, find the cancelled check or bank statement showing the payment date. If you did not pay or paid late, document this clearly. Match the payment date to the tax due date to determine if the payment was late.
Step 6: Contact the Kentucky Department of Revenue
Call the Department of Revenue's Division of Sales and Use Tax to request a detailed account statement or explanation of how the penalties and interest were calculated.
Provide the notice number or account identifier from your letter. Ask specifically about the calculation method used, the penalty rate or amount applied, the interest rate used, and whether a Cost of Collection Fee has been added—request written confirmation of the information provided over the phone.
Contact information for Sales and Use Tax inquiries: Phone: (502) 564-5170 Email:
KRC.WebResponseSalesTax@ky.gov Mailing Address: PO Box 181, Station 67,
Frankfort, KY 40602-0181
Step 7: Request a Detailed Penalty and Interest Calculation Breakdown
Ask the Department of Revenue for a written statement showing how the penalty was calculated and how interest was accrued. This should show the original tax amount, the penalty applied, the interest calculation method, dates involved, any Cost of Collection
Fee, and the total current balance. If the state cannot provide this in writing, request the name and contact information of the person who can.
Step 8: Determine Whether You Can Pay the Full Amount
Review your financial situation to determine whether you can pay the full balance (tax, penalty, interest, and any Cost of Collection Fee). If paying in full is not feasible, contact the Collections Division at (502) 564-4921 to discuss payment plan options. Document the amount you could pay if given a payment plan or extension. Payment arrangements are available but must be established with the Department before enforcement actions proceed.
Step 9: Research Penalty Abatement or Relief Options
Kentucky may waive penalties (but not interest) for reasonable cause. The taxpayer must demonstrate that the tax liability resulted from circumstances beyond their control, that they acted reasonably to pay timely, or that strict enforcement would cause undue financial hardship. Examples of reasonable cause include human error on first occurrence, reliance on written Department of Revenue advice, serious illness, natural disaster, or death of the responsible person. Interest is statutory and cannot be waived.
Prepare written documentation to support any penalty waiver request.
Step 10: Submit a Written Response or Request
If you believe the penalties and interest are incorrect or if you qualify for penalty relief, prepare a written response. Include your account number or the notice number from the state's letter. Clearly explain the issue (late notice receipt, payment made but not recorded, return filed but not received, calculation error, or reasonable cause for penalty waiver). Include copies of supporting documentation. Send this response to the address listed on the state's notice or as directed by the Department of Revenue.
Step 11: Keep Records of All Communication
Maintain a log of all communication with the Kentucky Department of Revenue, including dates, names of people spoken with, topics discussed, and any commitments or promises made. If you talk by phone, ask for confirmation in writing. Save all written responses from the state, payment confirmations, and related correspondence. Do not discard any documentation related to this matter.
- State enforcement notices and responses
- Sales tax audits, assessments, and collections
- Payroll & trust fund tax enforcement issues
- Penalty and interest reduction options
- Payment plans and state tax relief eligibility
- Representation before state tax agencies
Step 12: Monitor for Follow-Up Notices or Requests
Watch for additional correspondence from the Kentucky Department of Revenue. The state may send follow-up notices requesting further information, confirming receipt of your response, or providing a determination on any request you submitted. Open and review all mail from the state promptly. If a deadline is stated in any follow-up notice, mark it clearly and respond before that date.
What Happens After This Is Completed
After you submit documentation or respond to the state, the Kentucky Department of
Revenue will typically review your submission and determine the next steps. This may involve updating your account, adjusting the balance owed, issuing a revised notice, denying your request, or scheduling further communication. If penalties and interest remain unresolved, the state may continue collection efforts or issue additional enforcement notices. You will receive written notification of the state's decision or determination.
Common Mistakes to Avoid
Ignoring the notice allows interest to continue accruing and makes resolution more difficult. Missing response deadlines can limit options for resolution or review.
Discarding documentation such as cancelled checks, payment confirmations, or filed returns makes it impossible to prove timely filing or payment later.
Not requesting a detailed calculation can lead to overpayment or missed opportunities for correction.
Failing to follow up after submitting a response may result in your request being overlooked.
Sending incomplete information without supporting documentation makes it difficult for the state to verify your position.
Confusing filing with payment is common; filing a return on time does not mean the tax was paid on time, and penalties may apply even if the return was filed timely.
Frequently Asked Questions
How is the interest rate on unpaid Kentucky sales tax determined?
Kentucky's interest rate is mandated by state law and adjusted annually by the
Commissioner. For calendar year 2026, the interest rate is 9 percent per year. Interest is
computed daily on the unpaid tax due from the due date until payment. Interest cannot be waived.
Can penalties be removed or reduced?
The Kentucky Department of Revenue may waive penalties (but not interest) for reasonable cause. The taxpayer must provide written documentation demonstrating that the circumstances were beyond their control, that they acted reasonably to pay on time, or that strict enforcement would cause undue financial hardship. Examples include human error on the first occurrence, serious illness, a natural disaster, or the death of the responsible person.
What is the Cost of the Collection Fee?
A 25 percent Cost of Collection Fee may be added to unpaid tax 60 days after the original notice date. This fee is imposed in addition to penalties and counteracts the cost of collecting the liability. A 50 percent Cost of Collection Fee may be added for failure to file a return for previous tax periods for which amnesty was available.
Can I set up a payment plan if I cannot pay in full?
Yes. Contact the Collections Division at (502) 564-4921 to discuss payment plan options. Payment arrangements must be established with the Department before enforcement actions proceed.
Will paying the penalties and interest keep the state from taking enforcement action?
Payment of the full balance owed typically stops further collection action. If you cannot pay in full, contact the Collections Division immediately to discuss payment plans or other options before enforcement action is taken.
Facing State Tax Enforcement Action?
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