I assumed it was because they appear buried in something and you "dig em up." Which would be cute. But a cursory search reveals it to be just a cheese/hash brown casserole, and

Funeral potatoes get their unique name from being a crowd-pleasing casserole served as a side dish at after-funeral luncheons (particularly in the culture of the Church of Jesus Christ of Latter-Day Saints).

So that's a thing people do in the Midwest, I guess.