Kentucky Department of Revenue Income Tax Protest

The situation

Bluegrass Manufacturing LLC is a small industrial equipment repair company in Louisville, KY, an S-Corp with 3 shareholders and $2.1M in annual revenue. In March 2026 KDOR issued a deficiency notice for $16,800 + $1,680 penalty after auditing the 2022 KY S-Corp return. KDOR's finding: one shareholder (a 40% owner) was a part-year Kentucky resident who moved to Tennessee mid-year; KDOR assessed KY income tax on the shareholder's full-year S-Corp distributive share, not just the KY-period portion.

What the company doesn't know: Kentucky's part-year resident income tax computation apportions S-Corp income based on the proportion of days spent in KY during the year, not on a gross basis for the full distributive share. The 40% shareholder lived in KY for only 6.5 months (198 days) before relocating to Tennessee. KDOR should have applied the flat rate only to 198/365 (54.2%) of the shareholder's S-Corp income. The assessment overstates the KY tax by approximately $7,700. KDOR's grounds-statement protest requirement means the 45-day letter must clearly articulate the part-year residency apportionment calculation, not just say "we disagree."

Who receives this

Kentucky S-Corp shareholders, part-year residents, and businesses receiving KDOR income tax deficiency notices. Primary segment: S-Corp and partnership pass-through businesses with nonresident or part-year resident owners where KDOR has incorrectly applied full-year KY income tax to income earned outside Kentucky.

Why the agency will not advise you

KDOR cannot advise on contesting its own assessments. The 45-day grounds-statement requirement (must state specific legal and factual basis per KRS § 131.110) creates drafting complexity that drives users to attorneys or CPAs. No self-serve KY protest navigator found.

Key facts, with sources

• Kentucky imposes individual income tax at a flat rate of 4.0% for 2025 (reduced to 3.5% for 2026 under HB 1 passed in the 2024 General Assembly, effective for tax year 2026) and corporate income tax at 5% under KRS § 141.040. The Kentucky Department of Revenue (KDOR) audits income tax returns; when KDOR issues a deficiency notice, the taxpayer has 45 days to file a written protest to KDOR stating specific grounds for disagreement under KRS § 131.110. If KDOR sustains the assessment after reviewing the protest, the taxpayer has 30 days to appeal to the Kentucky Board of Tax Appeals (KBTA), an independent administrative body under KRS § 131.340. KBTA decisions are appealable to the appropriate Kentucky Circuit Court. KDOR's online portal provides tax filing and payment services but no protest guidance or legal framework for contesting assessments. Dentons publishes an article on protesting Kentucky tax audits that is one of the few publicly available resources on KY DOR audit defense strategy. No self-serve Kentucky income tax audit protest navigator was found. Source: Protest Procedures — Kentucky Department of Revenue · Protesting a Kentucky Tax Audit — Dentons · Kentucky Taxpayer Protections' Role in Audits and Appeals — Dentons

When to bring in a professional

Self-serve responses fit routine cases: clear facts, amounts a business can absorb, and a deadline still ahead of you. Bring in a licensed professional when the amount at stake is large relative to their fee, the facts are genuinely disputed, criminal exposure is possible, or the deadline has already passed. A short paid consultation to sanity-check your plan is often worth it even when you handle the filing yourself.

All sources for this guide

1. Protest Procedures — Kentucky Department of Revenue
2. Protesting a Kentucky Tax Audit — Dentons
3. Kentucky Taxpayer Protections' Role in Audits and Appeals — Dentons