Direct File would provide Minnesotans another option for filing their income taxes that would be easier and could save time and money. Direct File is a free online tool to file and prepare income taxes, and Minnesota can build on positive federal progress on making this option available.
Paying taxes is how we come together to fund public services that Minnesotans value and count on, but with our current system, the majority of folks pay to meet their tax-filing responsibilities. A free public income tax-filing option would be a better option for many Minnesotans.
There are many ways a Direct File system would benefit Minnesotans:
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Easier and could save time and money. A survey of Direct File users by the Economic Security Project found that 74 percent of respondents preferred Direct File compared to the filing option they used in the previous year, and an overwhelming majority said they would recommend it to others. The survey results also showed that 44 percent of respondents saved money compared to their prior filing method, and 36 percent said it took less time to do their taxes.
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Improve access to tax credits. Direct file could increase the number of people who receive important federal and state tax credits that boost their incomes, such as the Child Tax Credit, that they are eligible for but are currently left unclaimed.
Direct File addresses problems of other filing options
Currently, Minnesotans have limited ability to access free tax-filing options. According to the Minnesota Department of Revenue, only 4 percent of Minnesota tax-filers use free options such as IRS Free File, VITA (Volunteer Income Tax Assistance), and Tax Counseling for the Elderly. With current resources, these services are not able to serve all Minnesotans who are eligible, and income, age, and other restrictions limit who can use them.
Additionally, only a few tax preparation software companies offer a Free File option in Minnesota. Moreover, the free filing options that are offered do not always end up being free. Free filing options by private tax software companies have problems that include some filers being redirected to paid services or are required to pay fees for amended returns. These software companies are also not required to be accessible or available to all tax filers who meet IRS requirements to qualify.
The federal Direct File pilot was a success
Starting in the 2024 tax-filing season, the federal government tested a free tool to file and prepare federal income taxes called Direct File. The Direct File pilot project was available to qualifying residents of 12 states. The states of Arizona, Massachusetts, California, and New York also tested approaches that included their state income tax returns. The pilot was available primarily for simple returns including W-2 wages and vital tax credits like the Earned Income Tax Credit and the Child Tax Credit.
At its conclusion, 140,803 taxpayers filed their taxes using Direct File, which was much higher usage than was expected. The Direct File program garnered a lot of interest with millions of people visiting the site to learn more. Overall, the user experience was great, with 90 percent of survey respondents ranking their experience with Direct File as “Excellent” or “Above Average”.
People who had the opportunity to also file their state income taxes through Direct File also reported positive experiences. Code for America, which designed the FileYourStateTaxes program to integrate state filing, found that 96 percent of survey respondents were “satisfied” or “very satisfied” with their experience with FileYourStateTaxes, and a similar percentage found the integration with the federal filing system was “seamless and quick.” They also found that 90 percent of Arizona and New York residents who filed their federal taxes with Direct File went on to file their state taxes through the state integrated tool.
An announcement from the IRS regarding their plans for the continuation of the federal Direct File program is expected sometime in late spring, after reviewing pilot data and gaining feedback from stakeholders.
To support expanding and making permanent the federal Direct File program, we encourage organizations to join the Economic Security Project’s sign-on letter.
Minnesota should move toward Direct File
In last year’s tax bill, Minnesota policymakers created a Tax Filing Modernization account, setting aside funds for options including setting up a free file option in Minnesota and coordinating with the federal system. This year, the House tax bill (House File 5247) includes provisions to create a free filing program and encourages integrating with the federal Direct File. The Senate tax bill (Senate File 5234) does not include Direct File provisions. We encourage policymakers to agree to create Direct File in Minnesota during their negotiations on final tax legislation during conference committee and the final weeks of session.