A complex intersection of state and federal tax laws
Advocacy
Robert Doty, Minnesota Department of Revenue commissioner | September 2021 Footnote
Editor's note: Updated August 30, 2021
Federal tax conformity often takes center stage in legislative discussions about Minnesota tax law changes, particularly in recent years — and with good reason.
Like most other states, Minnesota bases our definition of taxable income on the federal tax code, with some adjustments. The closer we match IRS definitions, the easier it is for Minnesotans to complete state tax returns and determine their tax liability or refund.
But federal tax provisions often change from one year to the next. Some can cost millions of dollars in tax revenue. Conforming with every federal provision, every year would be very expensive and bring more volatility to Minnesota’s budget process.
By contrast, using federal income with adjustments provides a more stable revenue flow and greater control over the state tax benefits we provide for individuals and businesses — such as letting individuals itemize deductions on their state return even if they did not on their federal return.
The last five years have produced several large federal tax changes and temporary relief measures. Historically, Minnesota tends to update its tax laws to comply with most federal provisions, with some variations in certain cases (such as bonus depreciation).
But the pace and number of federal changes and relief measures has challenged Minnesota and other states that base their returns in some way on the federal tax code.
In addition, federal changes may come shortly before (or even during) filing season. This often results in Minnesota law updates that affect previously filed returns — sometimes for multiple years.
Each year looks a little different
This year, for example, Minnesota tax laws were updated July 1. By then, most people and many businesses had already filed their annual returns, and our annual process to update tax forms and instructions for next year had already begun.
After each legislative session, our policy team analyzes any state tax law changes. Then we reach out to tax preparers and other stakeholders. We send initial updates as soon as possible, followed by full law summaries.
Our team was discussing this year’s potential law changes even as the bill moved through the legislative process. But we could not start implementing law changes until a final bill was signed. Only then could we start:
- Identifying which returns are affected and how many we can adjust.
- Programming (and testing) our tax management system to adjust returns and issue refunds where possible.
- Notifying taxpayers if we need more information to adjust their returns or requesting they amend their returns to fully benefit from the law changes.
We’re committed to adjusting as many returns as possible and issuing refunds without additional work for those filers. That may sound simple, but the reality is more complex.
The department’s technical, policy and processing staff spend many hours on development and testing in our tax management system. Our top priority is making sure accurate adjustments, refunds and notices all go to the right filers.
Each tax return is unique. Changing one section of a return — to account for the unemployment income exclusion or forgiven PPP loans deduction, for example — can impact other sections. We need to be certain each return is adjusted correctly, with no unexpected errors or system issues.
Our team is working hard to implement these tax law changes as efficiently, accurately and transparently as possible.
Meanwhile, I encourage you to:
We recognize these are challenging times, and that every dollar is important for Minnesota families and businesses. Thanks for your partnership — and for the work you do on the behalf of Minnesotans.
Robert Doty is commissioner of the Minnesota Department of Revenue.
