Tuesday, January 31, 2012

Citibank sends 1099 forms to customers who received airline miles in return for opening a new account--Senator reacts, IRS responds

Frequent-flier miles are taxable? Really?

That sentiment sums up the reaction from readers — and particularly accountants and lawmakers — to last week's column on Citibank sending tax forms to customers who received thousands of airline miles in return for opening a new account.

Citi is notifying the Internal Revenue Service that the miles represent miscellaneous income, leaving customers on the hook for paying related taxes or possibly facing a greater risk of being audited.

What does the IRS have to say about the matter? After days of my pestering the tax agency for a response, it finally took a stand on the taxability of miles. I'll get to that in a moment.

First, it's worth noting how confusing the issue is even for those with a deep knowledge of tax law. Financial experts weren't sure what to make of Citi's claim that frequent-flier miles are a prize or award and thus represent taxable income.

Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, was so flummoxed that he wrote a letter to Citi's chief exec, Vikram Pandit, calling on him to stop sending miles-related tax forms to customers.

"The last thing Citibank should be doing is creating baseless fear in middle-class families, or placing a nonexistent tax burden on the backs of families who are already struggling to make ends meet," Brown wrote.

Tax professionals told me Citi's actions raised a lot of questions. If miles are taxable because they're a prize or award, does that mean any corporate freebie, no matter how small, must also be declared?

Since virtually all frequent-flier miles are awarded as an incentive by businesses, does that mean all miles are taxable?

And how should miles be valued for tax purposes — as whatever a company says they're worth, or, as in Citi's case, the almost certainly lower amount the bank paid to originally purchase the miles from American Airlines?


14 comments:

Third Generation Chicago Native said...

Sending out a 1099 is common practice.

If you open up an account and they give you something, money, toaster etc. You will also get a 1099 and pay taxes.

Since you are paying taxes for your gift from the bank, the bank does not have to pay taxes on that money. This is an age old process.

Third Generation Chicago Native said...

Actually anytime you win anything, or a company gives you something you will get a 1099, so you can claim it on your income tax and pay taxes.

Also go to CapitalFax, I am always there. Not commmenting but reading every day. That blog was my inspiration to get into blogging, which I don't keep up on my blog much, now that Todd Stroger is out of office. Blogging was therapy for dealing with the Toddler. (even though he is older than me)

SP Biloxi said...

But isn't ironic that Citibank who is caught up in illegal practices in the financial crisis that is doing something "legal" such as the 1099 forms to customers situation. Blogging is therapy but sharing information to others is even better. :D

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