You do not need to notify the IRS regarding your state tax withholdings.
Here is how you will need to file your state tax returns.
You will not have to pay taxes in both states but you
will need to file tax returns in both states (KY nonresident tax return
to claim your refund and IL resident tax return to pay state taxes on all your income include your KY
wages).
KY and
IL have what is called a state reciprocal agreement. This allows nonresidents
to not have state withholding taxes taken out for wages earned in
the state.
In order to get the full refund of your KY
withholding, you will need to file a nonresident KY return but report zero
"0" income from KY (even though you do have KY wage income). You
need to file your KY return this way because KY does not allow a credit for tax
paid to a reciprocal state on wages, salaries and commissions. If tax
was withheld by a reciprocal state (KY), you must file directly with the state
for a refund of those taxes.
You
will need to claim the full amount of your KY wages on your IL resident state tax return.
To
avoid this issue in the future, you need to file an exemption form with your KY
employer. Workers exempt under a reciprocal agreement must complete Form 42A809, Certificate of Nonresidence, which
must be kept on file by the employer.
