Businesses operating in Kentucky, or selling into the state remotely, may unknowingly create tax obligations. If those obligations go unreported, liabilities can accumulate for years, with penalties and interest quickly inflating the balance.
The Kentucky Voluntary Disclosure Program (VDP) also known as a Voluntary Disclosure Agreement (VDA), provides businesses with a structured way to resolve unreported state tax liabilities. By coming forward before the Kentucky Department of Revenue (KDOR) contacts you, companies can reduce penalties, limit how far back they need to file, and avoid the uncertainty of a full audit.
Why the Kentucky Voluntary Disclosure Program Matters
Kentucky’s economy is diverse, with logistics hubs, manufacturing, and retail activity driving significant tax enforcement. In recent years, KDOR has invested in data analytics and interstate information sharing, making it easier to identify noncompliant companies.
If your business has established nexus, the legal link obligating you to collect or pay Kentucky taxes, but has not registered, you may owe:
- Sales and Use Tax – On taxable goods and services delivered into Kentucky.
- Corporate Income Tax – For companies earning Kentucky-sourced income.
- Withholding Tax – For employers with employees in the state.
Once KDOR initiates contact, the VDP is no longer an option. Voluntary disclosure provides a “clean slate” with reduced liability.
Taxes Covered by the Kentucky VDP
The Kentucky Voluntary Disclosure Program applies to most state-administered business taxes:
- Sales and Use Tax – Retail, e-commerce, and marketplace sellers.
- Corporate Income Tax – For corporations and pass-throughs with Kentucky-sourced income.
- Withholding Tax – For employers with Kentucky payroll.
- Other Taxes – Franchise or excise taxes may be included depending on facts.
Multiple tax types can be disclosed together, simplifying compliance.
Kentucky Voluntary Disclosure Program at a Glance
| Feature | Kentucky VDP |
| Administered by | Kentucky Department of Revenue (KDOR) |
| Eligible Taxes | Sales & Use, Corporate Income, Withholding |
| Look-back Period | Typically 3–4 years |
| Penalty Relief | Full abatement of late-file and late-pay penalties |
| Interest Relief | Rarely waived |
| Anonymity | Allowed through representative |
| Deadline After Agreement | 60–90 days to file and pay |
Eligibility Requirements
To qualify for Kentucky’s Voluntary Disclosure Program, a business must:
- Not have been contacted by KDOR regarding the liability.
- Not be registered for the tax type being disclosed.
- Voluntarily disclose the liabilities in good faith.
- Commit to filing and paying all agreed taxes and interest within the timeline.
If you were previously registered but became noncompliant, you may need to negotiate outside the VDP framework.
Common Nexus Triggers in Kentucky
Economic Nexus – Sales and Use Tax
After Wayfair v. South Dakota, Kentucky adopted economic nexus standards:
- $100,000 in annual sales into Kentucky, or
- 200 or more separate transactions delivered into the state.
Marketplace facilitators must also collect and remit Kentucky sales tax.
Physical Presence Nexus
You may create nexus by:
- Operating offices or warehouses in Kentucky
- Storing inventory in a Kentucky fulfillment or 3PL center
- Employing salespeople, contractors, or other staff in the state
Corporate Income Tax Nexus
Nexus for income tax may arise from:
- Generating revenue from Kentucky customers
- Having payroll or property in the state
- Soliciting business through representatives in Kentucky
Benefits of the Kentucky Voluntary Disclosure Program
The Kentucky VDP offers key advantages:
- Reduced Look-Back Period – Limited to 3–4 years, versus 7+ for an audit.
- Penalty Relief – Waiver of late filing and failure-to-register penalties.
- No Criminal Prosecution – For good-faith voluntary disclosures.
- Anonymity – Applications can be submitted anonymously via representative.
- Predictability – Clear terms set upfront, avoiding audit risk.
- Business Readiness – Clean compliance history improves valuation during M&A or funding rounds.
Kentucky VDP Process: Step-by-Step
| Step | Action | Timeline | Responsible Party |
| 1. Initial Review | Assess nexus and estimate liabilities | Days 1–5 | Internal / SALT advisor |
| 2. Anonymous Application | Submit via representative | Days 6–10 | SALT counsel |
| 3. KDOR Review | State confirms eligibility, issues terms | Days 11–25 | KDOR |
| 4. Registration | Obtain Kentucky tax account(s) | Days 26–30 | Business |
| 5. Filing & Payment | File required returns, pay tax + interest | Days 31–60 | Business / Commenda |
| 6. Closing | Receive clearance letter | Days 61–90 | KDOR |
Kentucky vs. Other States’ VDPs
| State | Sales Tax Look-Back | Income Tax Look-Back | Penalty Relief | Anonymity Allowed |
| Kentucky | 3–4 years | 3–4 years | Yes | Yes |
| Tennessee | 3 years | 3 years | Yes | Yes |
| Indiana | 3 years | 3 years | Yes | Yes |
| Illinois | 4 years | 4 years | Yes | Yes |
Kentucky’s program is competitive regionally, particularly compared to Illinois with its longer look-back.
Practical Considerations Before Applying
- Bundle liabilities – Disclose sales, income, and withholding together.
- Prepare data – Collect 3–4 years of sales, payroll, and property records.
- Work with a representative – SALT counsel can keep your identity anonymous until eligibility is confirmed.
- Use automation – Platforms like Commenda aggregate data from ERP, e-commerce, and payroll systems to accelerate filing.
Long-Term Compliance After VDP
Once you complete the Kentucky VDP, ongoing compliance is essential:
- Monitor nexus thresholds each year.
- Register for new obligations promptly if business expands.
- Automate sales and use tax collection across channels.
- Retain records for at least 7 years.
Failure to remain compliant could expose you to penalties again.
Decision-Making Framework
You should strongly consider Kentucky’s VDP if:
- You’ve exceeded sales thresholds without registration.
- You discovered property, inventory, or employees in Kentucky.
- You’re preparing for financing or acquisition, and need clean compliance.
- You want to avoid 7+ years of liability in an audit.
How Commenda Helps with Kentucky Voluntary Disclosure
Commenda is the all-in-one compliance platform trusted by U.S. and global businesses. For Kentucky and other state VDAs, Commenda provides:
- Nexus analysis – Identify exposure across all 50 states.
- Anonymous applications – Filed through legal partners to protect identity.
- Automated data aggregation – From ERP, e-commerce, and payroll systems.
- Kentucky-compliant returns – Prepare and file sales, income, and withholding tax returns.
- Deadline tracking – Compliance calendar ensures no missed filings.
With Commenda, businesses can resolve Kentucky liabilities in weeks, not months, while setting up scalable compliance for the future.
Book a demo with Commenda today to resolve your Kentucky exposure and secure penalty relief.
FAQs
1. What taxes are covered under Kentucky’s VDP?
Sales and use tax, corporate income tax, and withholding tax.
2. How far back does Kentucky look?
Typically 3–4 years, compared to 7+ years in an audit.
3. Can penalties be waived?
Yes, penalties for late filing, failure to register, and late payment are waived.
4. Is interest waived?
No, interest is generally still due on unpaid taxes.
5. Can I apply anonymously?
Yes, through a tax advisor or representative until eligibility is confirmed.
6. What if KDOR has already contacted me?
You are no longer eligible for the VDP, but may negotiate a settlement directly.
7. Can out-of-state companies apply?
Yes, remote sellers and service providers frequently use Kentucky’s VDP.
8. How long does the process take?
Typically 60–90 days from application to clearance.
9. Can multiple tax types be disclosed at once?
Yes, bundling sales, income, and withholding liabilities is encouraged.
10. How does Kentucky compare to other states?
Kentucky’s 3–4 year look-back and penalty relief make it favorable compared to Illinois.
