Free File Options for Minnesota
A Summary of Research and Recommendations
January 12, 2024
Free File Options for Minnesota - Page 2 of 18
Minnesota Department of Revenue
600 Robert St. N,
St. Paul, MN 55101
651-556-6003
[email protected]n.us
https://www.revenue.state.mn.us/
As required by Minnesota Statute 3.197: This report cost approximately $54,746 to prepare, including staff time,
printing and mailing expenses.
Upon request, this material will be made available in an alternative format such as large print, Braille, or audio
recording. Printed on recycled paper.
Free File Options for Minnesota - Page 3 of 18
January 12, 2024
The Honorable Aisha Gomez The Honorable Ann Rest
Chair, House Taxes Committee Chair, Senate Taxes Committee
453 State Office Building 328 Capitol
The Honorable Matt Norris The Honorable Matt Klein
Vice Chair, House Taxes Committee Vice Chair, Senate Taxes Committee
507 State Office Building 2105 Minnesota Senate Bldg.
The Honorable Greg Davids The Honorable Bill Weber
Minority Lead, House Taxes Committee Minority Lead, Senate Taxes Committee
283 State Office Building 2211 Minnesota Senate Bldg.
The Honorable Dave Lislegard The Honorable Liz Lee
Chair, Property Tax Division Vice Chair, Property Tax Division
451 State Office Building 539 State Office Building
The Honorable Duane Quam
Minority Lead, Property Tax Division
247 State Office Building
Dear Committee Chairs:
Minnesota Law Chapter 64, Article 15, Section 23, Subdivision 1 requires the Department of Revenue
provide a report on free electronic filing options for preparing and filing Minnesota individual income
tax returns. The report includes a review of options that other states use for state electronic filing, an
assessment of taxpayer needs for electronic filing and current filing practices, an analysis of alternative
options to provide free filing (i.e. tax credits, vendor incentives, or other benefits), and an analysis of
the Internal Revenue Service Free File Program usage.
Sincerely,
Paul Marquart
Commissioner
Minnesota Department of Revenue
Free File Options for Minnesota - Page 4 of 18
Contents
Free File Report ............................................................................................................................................ 1
Introduction .............................................................................................................................................. 5
About This Report ................................................................................................................................. 5
About Revenue...................................................................................................................................... 6
Overview ................................................................................................................................................... 6
Taxpayer Filing Practices ........................................................................................................................... 8
Electronic Filing by Preparation Method .............................................................................................. 8
IRS Free File Program ................................................................................................................................ 9
Free File in Minnesota ........................................................................................................................ 10
IRS Direct File Pilot Program ............................................................................................................... 11
Survey of Tax Software Providers ........................................................................................................... 11
Interest ................................................................................................................................................ 11
Cost to Minnesota and Services Provided .......................................................................................... 11
Security ............................................................................................................................................... 12
Quality ................................................................................................................................................. 13
Alternative Options ................................................................................................................................. 14
Other States ............................................................................................................................................ 17
Conclusions ............................................................................................................................................. 18
Free File Options for Minnesota - Page 5 of 18
Introduction
A 2023 law directed the Department of Revenue to survey tax software providers and report on free
electronic options to prepare and file Minnesota individual income tax returns. This law required
Revenue to submit its report to the Minnesota Legislature by January 15, 2024.
1
The law required Revenue’s survey to ask providers for information about:
1. System development, capability, security, and costs for consumer-based tax filing software.
2. Costs per return for the state of Minnesota to provide an electronic individual income tax return
preparation, submission, and payment remittance process.
3. Providing customer service and issue resolution to taxpayers using the software.
4. Providing and maintaining an appropriate link with the IRS Modernized Electronic Filing
Program.
5. Maintaining and protecting taxpayer return information as required by Minnesota Statutes,
chapters 13 and 270B, IRS Publication 1075, and any other requirements that apply.
6. Current availability of products for the free filing and submitting a Minnesota return offered to
customers and the income thresholds for using those products.
Revenue sent surveys to 27 software providers capable of administering a Minnesota-based electronic
filing method, using the modern electronic filing (“MeF”) method. Nine providers responded to the
survey. Four of those providers expressed interest in providing a state-based solution for taxpayers to
prepare and file Minnesota individual income tax returns.
About This Report
This report considers potential free file options for state individual income taxes and opportunities to
provide a better taxpayer experience for Minnesotans. This report includes information on:
• Tax Filing Practices
• IRS Free Filing Program
• Survey of Tax Filing Providers
• Alternative Options
2
• Other
States
• Conclusions
1
Minnesota Session Laws 2023, Chapter 64, article 15, section 23 – Department of Revenue Free Filing Report,
enacted May 23, 2023. The law appropriated $175,000 to conduct the survey and produce this report.
(https://www.revisor.mn.gov/laws/2023/0/Session+Law/Chapter/64/, viewed December 22, 2023)
2
This report also provides basic information on the IRS Direct File pilot program but does not include a full review.
Comprehensive data about this pilot program is not yet available.
Free File Options for Minnesota - Page 6 of 18
About Revenue
The Department of Revenue oversees Minnesota’s revenue system and takes responsibility for advising
the Governor and Legislature on tax policy and operations. Our mission is “Working together to fund the
future for all of Minnesota.”
This report further aligns with Revenue’s vision – “Everyone reports, pays, and receives the right
amount: no more, no less” – and our strategies that strive to provide customers with services they need
to efficiently navigate tax opportunities and obligations.
Revenue has a significant impact on the lives of Minnesotans and is responsible for collecting revenue to
support the operations of counties, schools, and cities in the state.
Our team of report writers, advisors, and approvers included communications specialists, electronic
filing subject matter experts, tax statistics researchers, legislative liaisons, and legislative policy experts.
Team members attended conferences and presentations from software providers, the IRS, other states,
and tax industry partners with the goal of improving the ease, usability, and effectiveness of
Minnesota’s tax filing process.
Overview
Filing individual taxes is generally seen as an annual paperwork burden for taxpayers across the country.
The IRS estimates an average non-business filer spends about 8 hours and $140 preparing their taxes
each year. For business filers, the time and costs more than triple, to an average of 25 hours and $530.
3
Individual taxes can be filed electronically or on paper. Taxpayers may prepare and file their own returns
(self-preparation) or use a paid tax professional. Of the 27 tax software providers surveyed for this
report, 13 (48%) offer products for self-preparation of individual taxes; the other 14 (52%) serve tax
professionals.
One overarching challenge with tax preparation is the current complexity of Minnesota’s income tax
laws. As greater complexity is introduced, it becomes more difficult for taxpayers and tax preparers to
file a return, as well as for Revenue to administer the laws passed.
Some existing programs provide free tax preparation to filers who meet income, age, or other
requirements. The federal government partners with tax filing programs that also serve Minnesota
individual income taxpayers. These IRS programs include (among others):
• IRS Fr
ee File
• Volunteer Income Tax Assistance (VITA), which includes MyFreeTaxes by United Way
3
IRS 2022 Instructions 1040 (and 1040-SR), p. 107. (https://www.irs.gov/pub/irs-pdf/i1040gi.pdf#page=107,
viewed December 18, 2023)
Free File Options for Minnesota - Page 7 of 18
• Tax Counseling for the Elderly (TCE), which includes American Association of Retired Persons
(AARP) Tax-Aide
4
These programs do not meet the needs of all Minnesotans, however, as not all customers are eligible. In
2022, only 4% of Minnesotans used one of the listed programs (Figure 1).
Figure 1
Summa
ry: In 2022, free file tax programs accounted for only 4% of all Minnesota filed returns.
The
next sections will focus on trends in Minnesota taxpayer filing data, free market pricing research,
and the IRS Free File program.
4
Free Tax Return Preparation for Qualifying Taxpayers, IRS website. (https://www.irs.gov/individuals/free-tax-
return-preparation-for-qualifying-taxpayers, viewed December 18, 2023)
IRS Free File
2%
VITA
1%
TCE
1%
All Other Filers
96%
2022 Summary of Minnesotan Filing Methods
IRS Free File VITA TCE All Other Filers
Free File Options for Minnesota - Page 8 of 18
Taxpayer Filing Practices
Taxpayers may use various methods to prepare and file Minnesota income tax returns each year. They
may self-prepare or use a tax professional and deliver their returns by electronic or paper filing.
• Electronic filing options:
o IRS Free File Program
o Volunteer Income Tax Assistance (VITA) sites
o Tax Counseling for the Elderly (TCE) sites
o Commercial tax software products
• Paper filing options:
o IRS Fillable forms
o Print and Mail
Electronic Filing by Preparation Method
Most individual income returns are filed electronically (94% for tax year 2022). Minnesotans hiring tax
professionals to prepare and file their individual income taxes accounts for 58.4% of electronically filed
state returns (Figure 2). State law requires tax professionals to file electronically if they prepare 10 or
more returns.
5
Minnesotans using tax software, self-preparing, and electronically filing their taxes
accounts for 41.6%.
Figure 2
Self Prepared
1,195,721
41.6%
Professionally Prepared
1,675,535
58.4%
2022 Electronic Individual Income Tax Preparation Method
Self Prepared Professionally Prepared
Summary: For tax year 2022, over 1.1 million Minnesota electronic income tax returns were self-
prepared and over 1.6 million were prepared by paid tax professionals. Complexity in the tax code
drives a high percent of Minnesotans to choose tax professionals.
5
Minnesota Statute 289A.08. ( https://www.revisor.mn.gov/statutes/cite/289A.08 viewed December 22, 2023)
Free File Options for Minnesota - Page 9 of 18
IRS Free File Program
The IRS Free File program allows qualified taxpayers to prepare and file federal income tax returns
online using guided tax software. Established in 2002, Free File is a Public-Private Partnership (PPP)
between the IRS and the Free File Alliance (or Free File Inc.), a coalition of tax software companies. The
partnership is governed by agreements linked to Memos of Understanding (MOUs).
6
Seven tax software providers participated in Free File for tax year 2022. The IRS limits eligibility to those
with adjusted gross income (AGI) $73,000 or less, but all seven members restricted eligibility further by
income, age, or both. Two of the members offered a free federal return but charged a fee for state
returns. Four of the providers make their free file software available for Minnesotans.
Taxpayers with an AGI above $73,000 can use fillable PDF forms provided by the IRS Free File program.
Key stats about the IRS Free File program as of 2023 include:
• Aro
und 68 million returns have been filed through the Free File program since it began in 2003
• 70% of American taxpayers (about 100 million people) are eligible for Free File
• 97% of users would recommend the program to others (based on a 2021 survey)
7
Whi
le the IRS Free File program has many benefits, some shortfalls have been identified, such as:
• Free File providers are not required to meet requirements for federal digital services in areas
such as accessibility, analytics, multi-language support, and mobile support
• Some Free File providers have redirected customers from free to paid services
• Free File providers may charge a fee to file amended returns
• Taxpayers may not know how to access the Free File versions of software
• Free File providers may use more restrictive criteria than the IRS for filing a free return
• Free File providers are not paid by the IRS and can leave the program when they choose
National usage remains low, at an average of 2.8% of eligible taxpayers from 2003 to 2019.
8
6
About the Free File Alliance, IRS website. (https://www.irs.gov/e-file-providers/about-the-free-file-
alliance#Why%20Was%20The%20Free%20File%20Alliance%20formed?,viewed December 18, 2023)
7
Free File Alliance website. (https://freefilealliance.org), viewed December 18, 2023)
8
The Internal Revenue Service’s Free File Program: Current Status and Policy Issues, p. 2, “Use of the FFP.”
Congressional Research Service, January 26, 2023. (https://crsreports.congress.gov/product/pdf/IF/IF11808,
viewed December 18, 2023)
Free File Options for Minnesota - Page 10 of 18
Free File in Minnesota
Free File usage is low in Minnesota, accounting for 2% of returns filed in tax year 2022 (Figure 3). The
number of state returns filed through the program has declined over the last four years, despite efforts
to promote the program.
Though Minnesota has never signed an MOU to participate in the IRS Free File program, the
Department of Revenue website promotes the four software providers available for Minnesotans.
9
Figure 3
Summa
ry: Free File usage by Minnesotans has declined steadily over the past four years. A large factor
is that the two largest IRS Free File software providers, Intuit/Turbo Tax and H&R Block, left the program
in 2021 and 2022, respectively.
9
Free Electronic Filing, Minnesota Department of Revenue website. (https://www.revenue.state.mn.us/free-
electronic-filing, viewed December 22, 2023)
206,962
177,942
107,452
53,051
6 6
5
4
0
1
2
3
4
5
6
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
2019 2020 2021 2022
IRS Free File Returns Received
IRS Free File Returns IRS Free File Software available in Minnesota
Free File Options for Minnesota - Page 11 of 18
IRS Direct File Pilot Program
Until 2019, the IRS stated it would not develop its own filing services to replace the Free File member
services. In 2022, the IRS began actively developing its own free filing program called Direct File.
10
The
IRS has published analysis around usage and cost estimates of the program.
11
The IRS will pilot test its Direct File program in 2024. Thirteen states in total have been invited to
participate in the program, with four of those being individual income tax states (Arizona, California,
Massachusetts, and New York).
Survey of Tax Software Providers
Interest
The Department of Revenue sent an electronic survey to 27 tax software vendors to gather information
on potential Free File options for Minnesotans. None of the vendors who responded to the survey
currently operate a similar e-File program in other states.
Of the providers surveyed, 13 offer products for self-preparation and self-filing of Minnesota individual
income taxes and 14 offer products specifically for paid tax professionals.
In all, nine providers responded to the survey, and four indicated potential interest in contracting with
the state of Minnesota to provide e-File services.
Cost to Minnesota and Services Provided
To help identify the cost of implementing a Free File system for Minnesotans, we asked about estimated
costs to the state of Minnesota and any additional costs not included in the contract. The request
included estimated costs to the state to provide a system that allows Minnesotans to prepare and file
their Minnesota Individual Income Tax return (Form M1 and related schedules).
Estimates varied by software provider, but followed some general trends:
• We de
rived cost estimates based on software provider responses and Revenue’s data on
customer filing habits. We estimated a cost range from $2.4 million to $19.5 million per year to
support a free file program.
10
Direct File, IRS website. (https://www.irs.gov/about-irs/strategic-plan/direct-file, viewed December 22, 2023)
11
“Under varying scenarios relating to the scope and usage of Direct File, the study estimates that annual costs of
Direct File may range from $64 million (assuming 5 million users and a narrow scope of covered tax situations) to
$249 million (assuming 25 million users and a broad scope of covered tax situations). Customer support accounts
for more than half of the cost in all scenarios, and 84% of the cost in the 25 million users broad scope scenario.
These estimates do not include potential cost savings due to taxpayers who may shift from paper filing to a
potential Direct File option.” p. 3. IRS Publication 5788 (5-2023). (https://www.irs.gov/pub/irs-pdf/p5788.pdf,
viewed December 22, 2023)
Free File Options for Minnesota - Page 12 of 18
o Only two providers gave cost estimates, which indicates a difficulty in pricing this unique
type of public-private partnership.
o The estimates were provided without a firm set of requirements and depended on a
large set of assumptions from the software providers. Reasonable estimates of cost
need to be further analyzed.
o Costs for Revenue and MNIT to support this program have not been evaluated and are
not included in the above estimates.
• Mid-year or federal conformity tax law changes would increase costs, with estimates varying by
software provider.
• Costs would have to be discussed each year or by each contract, as the number and scope of
returns could change based on customer use and complexity of legislation.
• A minimum fee or fixed cost would be needed to support the development of the software
product, and a variable cost could be set based on the usage of the product.
• The product could offer optional add-on services for purchase by Minnesota customers, just as
commercial tax software offers additional à la carte beyond the basic product. Examples include,
but are note limited to:
o Speaking with a tax expert by phone, video, or text
o Additional reviews of a return by a tax expert before submitting the individual income
tax return
o Prepaying for tax expert support in case of future audit
o Ability to file an amended return or prior year return
o Prepared and printed copies of returns sent to the customer
o Refund transfer products
Tax software providers use different pricing models. Getting a more precise cost estimate would require
a full discovery and requirements analysis through an RFP (request for proposal).
Security
Security and the protection of customer data are crucial to provide a successful and trusted free file
solution. The survey for this report directed tax software providers to consider in their estimates the
cost and time needed to meet the requirements of both:
• Minnesota Statutes, Chapter 13 and Chapter 270B
• IRS Publication 1075
Providers already meet these standards with their current software products. They are required to
secure customer data, report any data breaches, perform and report fraud analysis, and share
information related to keeping customers’ data safe.
The Department of Revenue would maintain current costs and efforts to ensure customer data is
protected by the security standards. This would not drive additional costs for the software providers.
Free File Options for Minnesota - Page 13 of 18
Quality
Two of the four interested software providers reported a plan for their testing and quality assurance
process. Their responses detailed stages and types of quality assurance, demonstrating their
commitment and interest in creating a long-term quality product.
The Department of Revenue would also participate in quality reviews and field user feedback and
complaints as part of any future free file arrangement. The reputation of both the software provider and
Minnesota state government would relate to the performance of any free file solution.
We also asked about resources the vendor would need to develop, roll out, and run a Minnesota free
file program. The software providers did not see this as a barrier, provided future contracts would allow
a rollout period of up to two years.
Free File Options for Minnesota - Page 14 of 18
Alternative Options
This section explores alternate options for Minnesota customers to file their state income taxes,
including:
1. Reimburse taxpayers for Minnesota filing costs
2. Reimburse software providers for Minnesota filing costs
3. Provide a free in-house solution for all Minnesota filers
4. Keep the current system (business as usual)
5. Build capabilities based on the IRS Direct File pilot
6. Try to increase the use of IRS free file VITA, TCE, and other existing free programs
Each alternative option has its own potential benefits and drawbacks, as summarized below. All of the options that
reduce filing costs could reduce the need for professional tax preparers.
Option 1: Reimburse Taxpayers for Minnesota Filing Costs
Summary: The state of Minnesota could provide a refundable credit or directly reimburse income tax filers
with a variable or set amount of money to cover the cost of using a software product to file their own taxes.
Opportunities:
• Refundable credit would reduce tax owed or increase refund for taxpayers who file electronically
Challenges:
• Complex to implement and operate
• Could increase the rate of fraudulent refund claims
• Hard to administer equitably in some scenarios (such as married separate filers, deceased taxpayers,
or those with no access to file electronically)
• 1-year lag between taxpayer buying the software and receiving the credit
• Refund could be reduced (offset) by tax debt and not sent directly to taxpayer
• Minnesota taxpayers must still file a federal return which may not be free unless the state also
reimburses those costs
Free File Options for Minnesota - Page 15 of 18
Option 2: Reimburse Software Providers for Minnesota Filing Costs
Summary: The state could directly reimburse tax software vendors for the cost of providing and submitting
Minnesota returns through their products.
Opportunities:
• An efficient, easier-to-implement reimbursement method
• No taxpayer behavior change needed
• Offers both immediate and long-term solution
Challenges:
• No incentive for software providers to keep costs low for Minnesota customers over time
• A flat fee reimbursement may:
o Underpay for the service if add-ons are chosen by the customer
o Over-pay for the actual value of the service with less-complex returns
• Minnesota taxpayers must still file a federal return which may not be free unless the state also
reimburses those costs
Option 3: Provide a Free In-House Solution to All Minnesota Filers
Summary: The state could work with its current tax administration software vendor to develop its own free
file system. Currently 19 states have done this or are in the process of doing so. Minnesota’s tax software
administration solution is compatible with this approach.
Opportunities:
• The state of Minnesota has full control over development of its free file solution
• Can be built and more easily customized to fit Minnesota's specific needs and guidelines
Issues:
• Roll out requires a phased approach to customers over years
• IRS link to federal return information (Form 1040) does not currently exist
• Complex tax filings would be costly to support
• Data entry from federal return (Form 1040) required for customers
Free File Options for Minnesota - Page 16 of 18
Option 4: Keep Current System (Business as Usual)
Summary: The state could continue with its current system. Do not change the scope of Revenue work and
minimize any impact to the tax industry.
Opportunities:
• Does not change the scope of Department of Revenue’s people, processes, and technology
• Minimizes impact to tax software providers and paid tax professionals
Cha
llenges:
• Inaction will not alleviate the burden or cost for Minnesotans to file their taxes
Option 5: Build Capabilities based on the IRS Direct File Pilot
Summary: The state could be an early adopter of the IRS Direct File system, which will allow individuals to
directly file taxes through an online portal.
This would preserve the integrity of Minnesota tax data and
provide a way to file state income tax based on customers’ federal tax returns.
Opportunities:
• Customers can fill out and send a free federal return (Form 1040) and be directed to a state
supported tool to file a Minnesota return
Challenges:
• Direct File program is in early stages of development and is limited to simple tax filings
• Level of state effort needed to participate is unknown
• Current plans don’t solve the issue of linked federal returns (1040). Some federal information will be
provided to Minnesota Revenue, but it will involve duplicate data entry, depend on customer timing,
or not include the full accepted federal return information. Linked federal information is needed for
fraud prevention and to administer complex tax filings.
Free File Options for Minnesota - Page 17 of 18
Option 6: Try to Increase Use of IRS Free File, VITA, TCE and Other Free Programs
Summary: The state could sponsor, promote, and take a larger role in running current no-cost programs –
such as Free File, VITA, and TCE – to increase the number of eligible Minnesotans using them. The state could
also advertise private no-cost software products.
Opportunities:
• Increased promotion would cost less than some other alternatives
• IRS provides tax software to VITA and TCE sites at no cost
Challenges:
• VITA and TCE programs are more income restrictive than Free File, which limits eligibility and usage
• High costs to support rural sites
• Promoting other non-IRS supported free tax services may be seen as a conflict of interest by
customers
12
Other States
All 50 states and the District of Columbia participate in electronic filing to some degree. e-File programs
standardize the transmission of tax data among various stakeholders, both private and public.
The use of e-File extends beyond self-prepared returns to include (for example) how corporations file
employee W2 data and how tax software providers update their products to stay current with federal
and state tax changes.
The IRS administers the VITA and TCE grant programs to help operate free tax service sites. Grant
recipients for 2024 include:
• VITA s
ites in all 50 states and the District of Columbia
• TCE sites in 22 states and the District of Columbia
13
Othe
r state e-File efforts include:
12
For example, Cash App Taxes is a free and commercially available tax filing software, available to filers without
age or income limitations. (https://cash.app/taxes, viewed December 28, 2023)
13
Tax Counseling for the Elderly (TCE) and Volunteer Income Tax Assistance (VITA) Grant Recipients – October 1,
2023-September 30, 2024. IRS Publication 5788 (5-2023). (https://www.irs.gov/pub/irs-pdf/p5788.pdf, viewed
December 22, 2023)
Free File Options for Minnesota - Page 18 of 18
• 22 states and the District of Columbia belong to Free File Inc., the non-profit that operates the
IRS Free File program
14
• 19 states have built some form of direct e-File service for individual income tax filers
• 13 states have been invited to participate in the IRS Direct File pilot. Four of those states have
individual income taxes (Arizona, California, Massachusetts, and New York)
Conclusions
Based on our survey of tax software providers and the other research outlined in this report, the
Department of Revenue has three policy recommendations about potential free filing solutions:
1. Partnering with a single software provider to give Minnesotans a free filing option is feasible if
the solution is adequately funded and allows a multi-year rollout period.
2. Future legislative direction for any free filing solutions must be politically stable, multi-year
commitments.
3. Recent advances in technology and our software capabilities could make any of the options in
this report feasible.
Future policy decisions on free filing in our state should be weighed at a higher level with these three
questions:
• Wha
t is the role and scope of government?
• What is the role of public-private partnerships?
• Is it worth the cost and resources to provide Minnesotans a free or subsidized filing service?
Thank you for reading this report. Should the Minnesota Legislature choose one of the options available
in this report or require more information, we stand ready to partner with legislators and other
stakeholders to benefit all Minnesotans.
14
Many taxpayers may be able to file their state tax return using IRS Free File, IRS website.
https://www.irs.gov/newsroom/many-taxpayers-may-be-able-to-file-their-state-tax-return-using-irs-free-file,
viewed December 22, 2023)