Tax changes / proposals - discussion

Good point. Net across all accounts might work.
So at the end of the year money will go out to an account that is not required to report :slight_smile:.

No kidding. The college speaking circuit is nice work if you can get it,

Biden earned nearly $1 million from the University of Pennsylvania from 2017 to 2019, despite appearing rarely at the Ivy League school and raked in funds as a public speaker. He took $190,000 to speak at Drew University in New Jersey, $182,000 from Lake Michigan College and $180,000 to appear at Vanderbilt University.

So if we transferred $20k/yr to each of our daughters to support them while in college, their cashflow will look much higher than their AGI. And since it’s way under the annual gift limits, that is not something that is reported anywhere.

How would machine handle inheritance where people may get a significant cashflow that is not taxable? Will it flag all of those? Tons of audits for zero fraud.

Borrow $50k from your 401k, pay it back 2 years later would also increase annual cashflow vs. AGI with nothing wrong going on.

For expats, good luck getting this transaction data from banks overseas in currencies with variable exchange rate.

These are only a tiny fraction of the many cases where cashflow can be much higher than AGI without any tax evasion going on. That’s my concern about machine flagging all this junk to trigger audits that will generate nothing in extra revenues. Hence my skepticism that the IRS can pull off such a smart-enough system in a cost-efficient fashion.

Now they could limit it to either larger discrepancies or larger incomes to limit the number of false positives.

You’re thinking about this as a revenue source rather than an opportunity for the next Lois Lerner to have bigger and more intrusive tools to target any of Dear Leaders political opponents those ubiquitous domestic extremists. And years later after suppressing the political opposition, the emails will be lost, the person responsible will take the 5th, “mistakes were made” but all evidence of intent had been purged so bonuses and retirement pensions for all the good foot soldiers for a job well done.

Power given will not be taken back and will be abused.

1 Like

I was deliberately not going into the massive big brother invasion of privacy because that’s the obvious elephant in the room. It’s hard to imagine a scenario where the payoff in extra tax revenues collected would make it worth it. But I was contesting that this would even lead to a more cost-efficient tax collection system, regardless of the massive abuse potential.

Number of individuals flagged for manual review would be small enough so manual reviews are completed in some time. Many of the cases brought up could be handled in code. Patterns will be more important.

That’s one part I’m VERY skeptical about. The private sector risk assessment routinely screws up recognition of patterns based on much smaller data sets (borrowing only, balances only, inquiries, # of accounts, etc) in your credit record. The credit scores are not that great at predicting actual borrowing risk. Case in point, if you pay off your mortgage or auto loan and that was your only, your score goes down (due to credit mix assessment) which makes very little sense with regards to your ability to repay your debts (actually cashflow may be better afterwards). My belief that the IRS can pull it off with much larger data sets in a system that increases tax revenues vs. how much it costs is very low from previous track records.

The other aspect is the potential for abuse which is immense. Like xerty warned, if the model for triggering audits based on cashflow is not known, it’s seem trivially easy to discriminate against specific groups of individuals. Even if data provided by banks is not as granular but only aggregate inflow and outflow, that’s more than what the IRS currently has access to and still a high risk for abuse IMO.

Altogether, it seems like a very large pandora box ripe for either accidental screw ups and inefficiencies, or worse deliberate discrimination and invasion of privacy. I’m all for the IRS collecting more of the money it’s owed but for me the risks of this much data collection far outweigh the potential benefits.

It’d go a long way to explain the scope. If the IRS goal is to curb tax evasion from the self-employed and other taxpayers for whom W2 and 1099 forms are not the main sources of income, it’d be a little bit easier to accept, both in terms of costs to run this, compliance costs for the banks, and also reason why these would be targeted (ease of tax evasion).

It just means that borrowers with a varied credit mix are lower risk than borrowers who only have one type of credit. If that’s what the statistics are, then it makes plenty of sense.

Statistics can be made to say almost anything depending on how you slice them or sample size. Common sense though is that if you spent 30 years paying off your mortgage, you’re not suddenly a higher borrowing risk than a month ago because you’re now done. I’d guess that your ability to pay off debts without monthly mortgage payments is actually higher since your cashflow increased but your score says otherwise. IMO a false negative of increased lending risk.

If you transpose this to the IRS calculating a score reflecting the chance of someone evading tax based on cashflow data, their algorithm may be very prone to a lot of false negatives, especially considering how little empirical data they’d have to start their algorithm building - since they never collected such data before.

To me, it seems clear that the Biden administration wants to find money in self-employed and small business pockets to fund massive infrastructure spending. Maybe they determined that this is where the main loss of tax revenues are and they thought cashflow would help catch people under-reporting income. But I don’t like at all the blanket invasion of privacy they came up with to tackle it. Like xerty said, in terms of privacy, once the toothpaste is out of the tube, you ain’t putting it back in.

Their sample size is pretty big, because it includes everyone with credit. And the slicing is straight forward – people with one type and people with multiple types.

I’m pretty sure “credit mix” counts all accounts on file, including closed accounts. So you’re not instantly a higher risk, but 10 years later. What does “common sense” say about how responsible you are with debt if you haven’t borrowed for a house or a car for 10 years? Not a thing. Free cashflow after having paid off a debt also doesn’t matter, because that was 10 years ago. And even if it wasn’t 10 years ago, it still doesn’t matter, because income is not supposed to be on the credit report (if it shows up, it can be removed with a simple request) and is not included in scoring. Some people may time their final mortgage payment with retirement.

Think of it this way – it’s not that not having a mortgage or car payment is an increased lending risk, it’s that having one is a decreased risk. :slight_smile:

I’m not sure about that. A few years back, we took an auto loan which we paid off after 2 months to get a dealer incentive worth a lot more than the accrued interest. Since I had never taken an auto loan before, my credit score went up while having the loan and right back down after paying it off. By virtually the exact number of points it had gone up. Seemed too big of a coincidence since we otherwise did not have anything of note affecting our credit during this time.

I don’t have similar data point for paying off mortgage but that seems confirmed by everything I’ve read about credit mix contribution to credit scores. I’ve not seen mentioned that there’d be a delay until your closed account drops off your credit record before seeing an impact on your credit score. For payment history, I agree that it’ll keep contributing for 10 years but I think the credit mix hit is immediate. Let me know if you find evidence to the contrary.

Here’s a myfico thread where everyone agreed that closed accounts count, even though someone wrote that their score dropped after paying off a car loan. And this article says:

Some other articles I saw claim that FICO counts it, but Vantage doesn’t.

My own data points suggest that either 2 types (cc + mortgages) of open accounts are sufficient for a perfect FICO '08 score, or closed accounts also count and 3 types (+ student loan) are sufficient. My score went up when I paid off my student loan, but that also coincided with inquiries dropping off.

Retroactive tax hikes in the latest Biden infrastructure proposal.

https://www.wsj.com/articles/biden-budget-said-to-assume-capital-gains-tax-rate-increase-started-in-late-april-11622127432

President Biden’s budget assumes that his proposed capital-gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees, according to two people familiar with the proposal.

Mr. Biden’s plan would raise the top tax rate on capital gains to 43.4% from 23.8% for households with income over $1 million. He would also change the tax rules for unrealized capital gains held until death.

Regardless of the exact change, tax hikes should never be retroactive. I wouldn’t be affected since we don’t make close to $1M in annual income but still., it just reeks of bait and switch. Ideally don’t pass those in December either when people can no longer make any changes to minimize their liabilities.

Full proposal

Movement of income between states show no surprises - big losers are big taxers (NY IL CA), while big winners are low tax destinations like FL and TX

1 Like

Someone leaked a bunch of billionaires tax returns and they got written up for what they ended up actually paying.

it’s an anti-rich take, but basically these people like Buffett or Bezos avoid taxes by owning stock and not selling it, hence avoiding realizing taxable gains. Throw in some borrowing to fund your lifestyle against the stock and deductible charitable donations to your foundation and you’re pretty good until you die and step up on death (at risk under Biden’s tax proposals) avoids the income tax.

Notably the analysis does not include a mark to market on a rich person’s tax liabilities for appreciated stock gains in their “effective tax rate” / net worth growth analysis, but I guess if you plan on never selling, maybe that’s ok until you just have to worry about the estate tax taking 40-50% after you die.

1 Like

No punches pulled on the tax leak.

Makes me wonder if the IRS keeps data access logs. They keep track of all the logins to the “View Your Tax Account” site and take reasonable precautions in the sign up process, so I don’t doubt their abilities to do security right.

1 Like