Article originally published on Forbes.com by Kelly Phillips Erb - 03/01//2012
Apparently, the banking industry doesn’t have enough bad press these days. They’re going to new heights to tick off customers… quite literally.
Citibank, part of Citigroup, America’s #3 bank holding company, launched a campaign offering frequent flyer miles for opening new accounts. Sounds great, right? Only there was a hitch: Citibank announced that it would issue a form 1099-MISC for those customers who receive frequent flyer miles for opening accounts.
Generally, frequent flyer miles and other promotional credits used as a reward are not considered income and are not taxable.
Citibank, however, has a different – and aggressive – interpretation. Citibank contends frequent flyer miles given as a reward for opening an account are taxable income, as would cash or other rewards, and must be officially reported to the taxing authorities. That’s the rationale for issuing a form 1099.
The bank has a similar strategy for cash awards. Here’s what the small print says:
To qualify for the $100 cash reward, open a new regular checking account in The Citigold Account Package or to qualify for the $50 cash reward, open a new regular checking account in The Citibank Account Package… Customer must be a citizen or resident alien of the United States (U.S.) with a valid U.S. taxpayer identification number. Your checking account in The Citigold or Citibank Account Package must be open and in good standing at the time the bonus payment is made to your checking account. The value of the cash offer will be reported to the IRS as miscellaneous income in the year received on Form 1099-MISC, as required by applicable law. Customer is responsible for any taxes.
I get the cash awards, sort of. If you’re going to take the position that rewards for opening an account are taxable, at least the value of a cash award is obvious. And as a consumer, you can make an educated decision about whether it’s worth the tax hit.
But what’s the value of a frequent flyer mile? Citibank apparently doesn’t make that disclosure to its customers; I couldn’t find an amount on any of their promotional materials. But the amount will show up on a form 1099-MISC, reportedly, at about 2.5 cents per mile (for comparison, you can buy 1000 extra miles on American, Citibank’s partner, for $29.50, making the value 2.95 cents per mile). And that’s a huge problem.
Customers are, not surprisingly, fighting back. A class action lawsuit has been filed against Citibank alleging that the banking giant failed to adequately notify customers of the potential tax consequences and further, that Citibank inflated the value of the miles for purposes of issuing the tax forms.
What does the IRS have to say about all of this? So far, they’re pretty quiet about the whole thing, offering some predictable, yet confusing, commentary that it can be a taxable situation subject to reporting under current law.
The IRS has previously taken the position – since 2002 (notice downloads as a pdf) – that frequent flyer miles earned due to business travel are not taxable. In the notice, the IRS states that it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.” The notice further says, with respect to promotional benefits, that “the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.”
Until now.
Citibank is making it an issue. And I can’t for the life of me figure out why. It’s such a dogged pursuit of a tax matter that I’m willing to bet would not have been raised by the IRS otherwise. Now, however, you can expect to see it again. The IRS has been painted into a corner on interpretation. I can’t imagine that it’s going to simply fly away…
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