Senator Asks Citi To Stop Reporting Frequent Flier Miles As Taxable Income

As we mentioned last week, a number of Citi customers around the country have been scratching their heads wondering why they received 1099 tax forms from the bank over frequent flier miles, even though IRS policy explicitly states that the agency as no interest in going after freebie miles as taxable income. Now the chair of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection has fired off a missive to Citi asking the CEO to not be such a pain in the rear-end to its customers.

Here is the text of the letter from Ohio Senator Sherrod Brown to Citi CEO Vikram Pandit:

Dear Mr. Pandit:

As Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, I write to express my concern regarding recent reports that Citibank is sending 1099 tax forms to customers who received frequent-flier miles as a reward for opening a checking or savings account.

During these challenging economic times, middle-class families are pinching pennies to help pay for the cost of a flight to fly home from college, visit an ailing relative, or see friends. To some, signing up for a bank account in exchange for frequent-flier miles to help make a trip more affordable is an offer that is too good to resist. However, your actions are leaving working families with the seemingly incorrect impression that when they rack up miles, they are hiking up their taxes, too.

Citibank arbitrarily calculates the value of each frequent flier mile as 2.5 cents of taxable income. Based upon its incorrect interpretation of a rule requiring individuals to report rewards and prizes as taxable income, Citibank has been sending its customers 1099 tax forms to report their frequent-flier miles. A spokesperson stated that the bank is following instructions from the 2012 Internal Revenue Code, and that income tax must be paid if at least $600 in “prizes and awards” is received. These miles are neither a prize nor an award.

Furthermore, the Internal Revenue Service (IRS) has made clear that frequent-flier miles are not taxable income. In a ruling made in 2002 – which still stands – the IRS highlighted that frequent-flier miles are not subject to income tax due to the “numerous technical and administrative issues relating to these benefits.” Furthermore, the IRS stated that it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

Most importantly, given the IRS’s ruling, why is Citibank sending its customers 1099 tax forms? Reporting frequent-flier miles as taxable income is inconvenient to consumers, raises their anxiety unnecessarily, and is not required by law.

I urge Citibank to halt this practice. 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.

Thank you for your consideration of this matter.

Sincerely,
Sherrod Brown

UPDATE:
A rep for Citi sent the following comment to Consumerist:

Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting. When a customer receives a gift for opening a bank account – whether cash, a toaster or airline miles – the value of that gift is generally treated as income and subject to reporting. This is separate and distinct from miles or points earned by our credit card customers for their purchases.

He also points us to a Time.com article wherein an IRS rep says, “When frequent flyer miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law.”

Comments

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  1. Fubish says: I don't know anything about it, but it seems to me... says:

    Good to hear from Citibank again after a few months of Chase, BofA, and Wells Fargo. Welcome back Citibank! Nice to see you bastards again.

  2. oldwiz65 says:

    The big banks don’t really care about customers anyway. Finding new ways to annoy customers is very appropriate for those yet-to-be-jailed criminals.

  3. smartmuffin says:

    Bank covering its ass just in case Congress gets any fresh ideas. Seems like a good idea to me!

  4. Quake 'n' Shake says:

    Lighten up Senator, this is just badly needed revenue for the Postal Service.

  5. NeverLetMeDown says:

    “Furthermore, the Internal Revenue Service (IRS) has made clear that frequent-flier miles are not taxable income.”

    No, they didn’t. The IRS said that frequent flier miles “attributable to the taxpayer’s business or official travel” weren’t compensation. In other words, if you fly for work, and earn miles because of it, you don’t have to treat the miles as income that your employer is paying you.

    The IRS did this because the tracking hassles associated with these miles were just too large to be feasible.

    Miles you get for using your credit card are also nontaxable, since they’re viewed as a rebate on your spending (just like cash back). Citibank is taking the position (which isn’t at all unreasonable) that, in cases when somebody gets miles for opening a checking or savings account, the miles aren’t a rebate, nor are they related to business travel. If you open a checking account, and get $100 for it, that’s clearly taxable. Citi is taking the position that these miles are just a form of in kind payment.

  6. Dallas_shopper says:

    Vikram Pandit? More like Vikram BANDIT.

    Someone had to.

  7. NeverLetMeDown says:

    So, if you get one of these 1099s, and proceed to not include it on your taxes, and the IRS comes after you for unpaid taxes and penalties, I assume Senator Brown will be happy to cover your losses.

    • Bsamm09 says:

      I would include it on my taxes and then have a negative amount to offset it and explain the reasoning. If they send you a 1099 it usually means the IRS has that record of it and will send a letter with increased tax, interest and penalties and then you will have to respond to it. This should prevent that.

      If you find the relevant laws pertaining to this you might even want to file a Form 8275.

  8. WaywardSoul says:

    Dear Mr. Brown:

    As you are aware, these are very trying times financially. It’s very hard for executives such as myself to live not knowing where our next multi-million dollar bonuses are coming from. We have nearly exhausted our repertoire of fee schemes by which we regularly bilk, or otherwise take advantage of, our customers in order to justify and provide for these bonuses. We also know that eliminating rewards programs, such as our Frequent Flier Miles, can and will cause more bad publicity and cost us more customers than we spare with the public eye being so focused on our greedy, self-servicing, behaviors. This has demanded a new line of thinking and subterfuge.

    Our decision to report frequent flier miles as taxable income was merely an attempt to play on our customers fears of the IRS, taxes, audits, and the effort involved in avoiding such them. We feel that, for most customers, these fears outweigh the benefits of rewards programs and thus our customers will, by and large, cease to desire or demand rewards programs. This will allow us to eliminate or substancially curtail these programs without customer backlash and that in turn will allow us to redirect those expenses and ensure sizeable executive bonuses for ourselves once again.

    Thank you for your letter of concern. We take these matters seriously. I can assure you that our next attempt will be less transparent.

    Vik

  9. AustinTXProgrammer says:

    I think my biggest peave was the valuation which should probably be closer to $0.01 instead of $0.025… Most point/cash/mileage conversions value them much closer the the penny.

    • longfeltwant says:

      I have only ever once bought miles from Alaska Air, and they charge $25 for 1000 miles.

      Thus I thought the rate was exactly correct.

  10. loggg says:

    Why is Citi doing this? The article didn’t say. Surely it must be so Citi can count all these miles as a liability on their own taxes? I can’t think of any other reason. Sounds like Citi is stooping to scamming of Nigerian quality.

  11. Cat says:

    See what Brown can do for you?

  12. Nighthawke says:

    And now Citi’s CEO is considering stepping down. Fallout from this little thunderbolt from the Fed? Or is he throwing an executive hissyfit cuz he’s not getting his annual Mercedes…

  13. FrankEliason says:

    Hey everyone!
    This is Frank and I work for Citi. I wanted to share more information to assist everyone here regarding this issue. Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting. When a customer receives a gift for opening a bank account – whether cash, a toaster or airline miles – the value of that gift is generally treated as income and subject to reporting. This is separate and distinct from miles or points earned by our credit card customers for their purchases. Here is a link to a Time story on this topic in which the IRS is asked regarding this

    http://moneyland.time.com/2012/01/30/citi-customers-learn-bonus-airline-miles-have-a-high-price/#ixzz1kxfWLP80

    Thanks!
    Frank Eliason
    frank.eliason@citi.com

    • Cat says:

      Wait, are you the same”Comcast Cares” Frank Eliason?

      • scoosdad says:

        It’s a franchise operation:

        “Yes you, too, can be a Frank Eliason on the internet! Sign up for our course now. In just three short weeks you could be representing very important companies (or, ones like Comcast) on internet discussion and social media sites.”

        • FrankEliason says:

          lol! My favorite was a Consumerist post that questioned my name eLiason! It is just me.

          • scoosdad says:

            I kid. You personally solved a problem I had with Comcast a long time ago (before there was the internet).

            Thank you, I’ll watch for your book.

      • FrankEliason says:

        I am! I will also have a book out in April called @YourService which I think many here many like! Companies want to win in social media, but to do so they must fix the employee and Customer experience!

    • larrymac thinks testing should have occurred says:

      So Citibank is making policy based on random IRS representatives quoted in Time magazine?

      Sad to see Frank reduced to quoting bullshit from the legal department.

      • FrankEliason says:

        No the time piece came after the story that ran last week. Credit card rewards on purchases are considered rebates, but incentives to sign up for things are considered taxable even without a tax form. The only time a tax form is required is when the value is considered to be over $600.

        • incident_man says:

          Your company is just trying a slimeball move to end up having to pay less taxes this year by trying to engineer itself some additional deductions. In effect, your company is trying to get someone else to pay a portion of it’s tax liability, plain and simple, by having them pay taxes on “rewards” while conveniently attempting to claim a deduction on the same “rewards.”

          I may not be a hotshot CPA or MBA, but I DO know enough about tax law to say that when an entity sends a taxpayer a Form 1099, that same entity is attempting to deduct the same amount as a business expense or equivalent. SOMEONE has to pay the tax on that, and Citibank would prefer it be some middle-class shmuck than themselves. Citibank can more than afford to pay this themselves.

          The simple fact of the matter is that the douchebag that hatched this scheme was hoping that he/she could net the company some extra cash (ill-gotten at that) without anyone noticing. Well their plan was ruined; someone DID notice.

          • FrankEliason says:

            The amount on a 1099 has nothing to do with tax basis for Citi. It is similar to if you won something at a charitable event (recently happen to me). You make full donation that you offered but the charity provided a slip with the amount of my donation and the value of the items that I won. The value is based on perceived market value. They did not have an offset for that amount, and the items were probably donated too. I am not a tax advisor but I have worked in the Customer service industry for years and these types of things always cause concern. The IRS mandates companies use fair value, but what is that for miles? It is an open question. In this case we used .025 which is the same if you purchased miles. If anyone were to look around they would find varying possible answers but the most obvious is the cost to purchase miles which is typically .025. Obviously this is not a simple process and would be open to various debate. We are striving to do what is required by law, yet offer something that is of value to our Customers. I hope this helps!

            Frank

    • huadpe says:

      Why is Citi calling the miles income in the year they are issued as opposed to when they are redeemed? That is, the miles would seem to constitute a debt owed by Citi to the customer, and would not constitute income until redemption. This is particularly true because the customer doesn’t actually get anything of value until redemption, and the actual dollar value of the miles is unknown until redemption.

      To quote from my comment below, suppose I get 100,000 miles in 2011 (which Citi claims is worth $2500) which I then redeem in 2012 for 2 airline tickets, but the airline tickets are only worth $1800.

      Did I get:
      a. $0 taxable income in 2011, and $1800 taxable income in 2012
      b. $2500 of taxable income in 2011 and a ($700) loss in 2012 (for which loss I can give citi a 1099 of sweet sweet revenge)
      c. $2500 of taxable income in 2011 and no loss in 2012
      d. $1800 of income in 2011 (the value of which I could not have known in time to file my 2011 returns)
      e. other

    • Slader says:

      I get all my tax advice from Time magazine too.

    • jamar0303 says:

      And why can’t the valuation be a little closer to what we actually get for them? Most people would be hard-pressed to get 2.5 cents’ worth of airfare from a mileage redemption.

  14. Hoss says:

    “These miles are neither a prize nor an award.” Sure they are — they are awarding compensation to you so that you will be their customer. The could have sent a large check but they used 25,000 miles instead. The bank is taking a safe harbor approach. What the taxpayer does with the 1099 is their business — Citi has not asserted any reporting requirement beyond their own resposibility

  15. longfeltwant says:

    Fine. Then I say let’s change the law to make it clear that these gifts are taxable. I’ll accept anything which helps stamp out “rewards” from the face of the planet. JUST MAKE YOUR SERVICES BETTER AND CHEAPER AND STOP WITH THE SHENANIGANS KTHXBAI.

    • Hoss says:

      Rewards simply allocate a portion of what business pays to the bank for processing payments. Why wouldn’t you want a piece of the bank’s profit as encouragement to use their profit mechanism?

      • longfeltwant says:

        It’s a dead-weight-loss program. They take some of their income and run a program with it, where consumers get some “rewards”. The cost of program administration is absolute loss to the economy. They would simply CHARGE LESS, consumers would save 100% of the money instead of losing the admin costs, and most importantly we wouldn’t be annoyed by dealing with jumping through hoops to get things that we would otherwise get by, you know, buying them.

    • NeverLetMeDown says:

      People who want to stamp out rewards are generally those not financially savvy enough to benefit from them.

      • longfeltwant says:

        Who, me? I won’t defend my financial savvyness to you in general, but let me say that this week I got a “free” luggage bag as a “reward”. And as I did that, I was pissed off, because if the service had just been cheaper, then I could have bought EXACTLY the bag I want, instead of whatever bag was part of the rewards program. Plus, I had to put up with all the nonsense of logging into a website and other things that free people shouldn’t have to do.

        Not that anyone has to accept the rewards they are given. I sometimes let them go. But if credit card companies charged lower fees, then stores would charge lower prices, and we could all benefit. Instead the “free market” does what it always does, which is become un-transparent, un-competitive, and anti-consumer. Can we get a little government red tape here please?

  16. Sam2k says:

    The Senator is actually in the wrong here. Frequent flier miles are non-taxable when they are a credit card reward earned by making purchases because they are a rebate/return of capital invested in the item purchased. Frequent flier miles offered as an incentive to offer a bank account are no different than a cash incentive offered to open a bank account. Both are taxable as interest income. Valuation of the points for tax purposes, however, is certainly open to debate.

    Summary:
    Credit card rewards = non-taxable
    Incentive to open bank account (toaster/cash/frequent flier miles) = taxable

    • huadpe says:

      Supposing at some point they constitute taxable income, do they constitute income when you get them, or when they’re redeemed.

      E.g. suppose I get 100,000 miles in 2011 (which Citi claims is worth $2500) which I then redeem in 2012 for 2 airline tickets, but the airline tickets are only worth $1800.

      Did I get:
      a. $0 taxable income in 2011, and $1800 taxable income in 2012
      b. $2500 of taxable income in 2011 and a ($700) loss in 2012 (for which loss I can give citi a 1099 of sweet sweet revenge)
      c. $2500 of taxable income in 2011 and no loss in 2012
      d. $1800 of income in 2011 (the value of which I could not have known in time to file my 2011 returns)
      e. other

      IMHO it makes much more sense to count the miles as income when they’re redeemed, at the value for which they’re redeemed. Until they’re redeemed, they’re not income, but a debt owed to you by Citi.

      • Sam2k says:

        Good question.

        You would never be allowed to claim a “loss” on such an item. In fact, losses are never allowed for tax purposes on personal property – otherwise, you’d be allowed to claim a loss every time you traded in or sold a vehicle.

        You should be taxed on the miles when they have value. Without researching the issue further I think I would argue that they don’t have value until they are redeemed. So, I think I’d report the miles as income only when I used them to purchase a flight (at the value of the flight) unless the miles are immediately redeemable for cash.

  17. MrMagoo is usually sarcastic says:

    If the 75,000 miles I got for signing up this year expire in a couple of years, can I then deduct them as a loss?

  18. astraelraen says:

    Maybe they are making the distinction between giving you X for opening an account vs giving you X for opening and account AND meeting certain requirements (purchase 500 bucks in a month or whatever)

    Generally if you are given something of value for simply OPENING an account (no stipulations or conditions to meet) banks will send out a 1099. My local bank does this all the time when they give free ipods or whatever other crap they give for opening an account. It states on the offer that they will send you a 1099.

    If you open a credit card and have to meet a requirement before you get the reward, then it is clearly a rebate on your credit card. As other credit card rewards have been treated in the past.

    Anyway, the IRS is getting really anal about 1099s this year, so I’m guessing that is where this is coming from. The penalty for not filing 1099s/filing incorrect 1099s went up significantly, so Citi is just trying to cover its behind.

  19. There's room to move as a fry cook says:

    I suspect calling it ‘taxable income’ gives a tax benefit to Citibank.

  20. Shorebreak says:

    “The only two certainties in life are death and taxes.” ‚ÄìMark Twain

  21. dougp26364 says:

    Since I’m paying an annual fee on the CC account that has been opened, then the miles are a form of a rebate.

  22. PortlandBeavers says:

    It’s common sense, you value whatever you give away as low as reasonably possible, then give away a quantity that keeps it just under the threshold for a tax form. Why do you think certain dollar slots pay off $1,199. It’s because $1,200 gets the winner a tax form. There’s nothing illegal about it. Just do it while you can. Someday, $600 won’t buy a decent meal, and the amount for a 1099 will still be $600. There will be a blizzard of the things at that point.

  23. jnolan says:

    I gotta side with Citi, reluctantly I will add, on this one.

    The problem is Congress for creating a tax code so fucking complex that the government itself cannot agree on what is taxable and by how much.

  24. incident_man says:

    Citibank is hoping they can take a tax deduction on that “gift”, which is why they’re reporting it as such. If they take a tax deduction on it, then the person who receives it has to report it as income, should they be allowed to take the deduction. They’re just attempting to engineer a way to save millions on their corporate tax returns.

  25. shinazzle23 says:

    Banks tend to just report everything now, and let the Feds worry about what’s important. Why should this be any different?

    “…by its own admission, FinCEN has approximately 15 analysts studying SARs [suspicious activity reports]. If we divide the total number of SARs filed in 2007 (1,157,468) by the number of purported analysts, it becomes apparent that each analyst must have examined 77,164 SARs last year. That translates to approximately 350 SARs a day or approximately 44 SARs each hour if they work eight hour days! With this in mind, it is difficult to believe Treasury’s claim that FinCEN “does not have a ‘backlog’ of SARs.””

    http://www.johncassara.com/index.php?option=com_content&view=article&id=13:each-fincen-analyst-reviewed-44-sars-an-hour-in-2007&catid=2:articles&Itemid=8

  26. AEN says:

    Citibank, which pays no taxes, wants you to pay your fair share.