Citibank is treating certain frequent flyer miles as taxable income,
and they are sending IRS Form 1099 to customers who were given miles in
exchange for opening bank accounts. (1099s report income other than
wages to the IRS.) Now, don't panic, not all frequent flyer miles are
taxable. In fact, the IRS issued a policy announcement in 2002 regarding
frequent flyer miles stating "[t]here are numerous technical and
administrative issues relating to these benefits," including issues of
timing and valuation, and as a result of the unresolved issues, "the IRS
has not pursued a tax enforcement program."
How is the Citibank situation different? Frequent flyer miles and cash back on credit cards have historically been treated as rebates
on spending which are not taxed as income. That is likely the type of
miles the IRS announcement was referring to. Citibank takes the position
that the miles they are taxing are different, the miles were given as a
reward/prize for opening a bank account, not as a rebate
on spending, and therefore the miles are taxable. (The IRS said earlier
this year taxpayers must pay income tax on prizes greater than $600.)
However, one news agency refers
to a statement by IRS representatives that the 2002 announcement
focused on a specific area and does not address the issue Citibank
faces. The IRS has not released an official statement on this issue.
This may be the beginning of a debate whether these particular frequent
flyer miles are taxable. United States Senator Sherrod Brown of Ohio
wrote a letter earlier this week that is receiving a lot of attention, urging Citibank to stop treating the miles as income.
Bottom Line: The only certainty at this point is if you received a
Form 1099 from Citibank, the IRS sees those miles as income to you.