State error means wealthy Minnesotans owe more taxes

Wealthy Minnesotans, it turns out, owe the state $38 million.

A Minnesota Department of Revenue error meant the state didn't collect enough taxes from some of its wealthiest residents for two straight years. Those taxpayers now have 60 days to come up with the additional money.

After the Legislature changed the standard income tax deduction during the 2019 session, that change wasn't reflected correctly in the Department of Revenue worksheet that tax preparers used, according to Ryan Brown, a department spokesperson.

The error, reported by an individual, affected about 45,000 tax returns in 2019 and 2020. The department notified tax preparers last fall and began sending letters to taxpayers in mid-April, he said.

"We apologize for the error and if the taxpayer is unable to make the payment, they should contact us to discuss their payment options," Brown said in an e-mail.

Once collected, about $38.4 million will go to the state's general fund.

The Legislature has been grappling this session with a record nearly $9.3 billion projected budget surplus. While House Democrats and DFL Gov. Tim Walz want to fund measures related to health care, paid family leave, public safety, education and climate change, Senate Republicans say the money should go primarily toward tax cuts.

"We continue to take in more money than necessary," said Senate tax committee chair Sen. Carla Nelson, R-Rochester, in an interview Friday. She said she learned about the error Thursday afternoon, and called it "a fundamental breakdown."

"I just think our taxpayers deserve better than that," Nelson said. "Taxpayers rely on the department for accurate information and tax forms."

The mistake affected taxpayers in the state's highest income tax bracket, with federal adjusted gross incomes above about $280,000 for single tax filers and about $360,000 for married couples filing jointly.

Taxpayers will not be assessed penalties or interest if they pay balances due within 60 days of notification, Brown said.

House tax committee chair Rep. Paul Marquart, DFL-Dilworth, said he doesn't anticipate the affected taxpayers will owe large amounts. He estimated that someone earning $500,000 a year would likely owe an additional $400.

"Is it money? Yes it is, but we're not talking about huge amounts of money for each taxpayer, which is a good thing," he said.

Minneapolis-based CPA Kris Dahl said so far, 18 of his clients' 2020 tax returns have been affected. It's frustrating to follow the rules and then learn about an error like this, he said, and he wants it to be clear that the mistake wasn't tax preparers' fault.

"We only abide by the rules that we're given," he said.