Earlier this year, Citibank surprised many of its customers by
issuing Forms 1099-MISC, Miscellaneous Income, to report the
value of frequent flyer miles the customers had received in exchange
for opening new accounts as part of an ongoing promotion.
Understandably, the customers were upset because, the value of the
miles notwithstanding, many of them ended up paying dearly (through
potentially as much as several hundred dollars in taxes) merely for
opening an account.
Two customers have filed a federal
lawsuit seeking class action certification (Hirsch v. Citibank,
N.A., No. 1:12-cv-01124 (S.D.N.Y., filed 2/14/12)), and Sen.
Sherrod Brown, D-Ohio, wrote Citibank to reprimand it and ask it to
discontinue the practice.
This seemingly should be a
cut-and-dried matter, but the Code and the regulations do not address
the taxability of frequent flyer miles. Announcement 2002-18
specifically addresses frequent flyer miles, but it does not provide
much guidance. Instead, it merely indicates the IRS does not plan to
pursue enforcement: “[T]he IRS will not assert that any taxpayer has
understated his federal tax liability by reason of the receipt or
personal use of frequent flyer miles.” In addition, the announcement
deals only with frequent flyer miles a taxpayer earns from business or
official travel, not with frequent flyer miles given to a taxpayer as
part of a product promotion. The IRS has seemed willing at times to
give taxpayers a pass on certain items that are relatively modest in
amount, involve subjective estimates of value, and are difficult to
enforce.
With this announcement in place, why did Citibank
file Forms 1099 to report the miles as income? The law is vague at
best, and the instructions to Form 1099-MISC call for reporting of
“prizes and awards” as income.
While conservative,
Citibank’s approach may not be unreasonable under the circumstances.
Penalties for nonfilers of Forms 1099 were recently increased to as
much as $100 per form, up to $1.5 million per calendar year for
inadvertent omissions (and, presumably, Citibank files many of them).
For intentional disregard, penalties equal $250 per form, and there is
no cap on the penalty. Finally, the IRS has made no secret of its
intention to increase scrutiny in this area. Most 2011 business tax
returns include new questions asking whether Forms 1099 are required
and whether they have been, or will be, filed.
For a detailed discussion of the issues in this area, see “Taxation of Frequent Flyer Miles,” by Stanley E. Rose, CPA, in the August 2012 issue of The Tax Adviser.
—Alistair M. Nevius,
editor-in-chief
The Tax Adviser
Also look for articles on the following topics in the August 2012 issue of The Tax Adviser:
- Results of our annual tax software survey.
- A discussion of converting from C to S status or an LLC.
- A look at the final regulations under Sec. 2036.
The Tax Adviser is the AICPA’s monthly journal of tax
planning, trends, and techniques. AICPA members can subscribe to
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