Reward Miles for Opening Financial Account Can Be Taxable, According to IRS Spokesperson

The IRS, at least unofficially, appears to agree with certain Form 1099-MISC reporting agents that not all frequent flyer miles are excludable from a recipient’s income. This position can be inferred by the IRS’s response to CCH’s inquiry relating to the receipt of certain 2011 Forms 1099-MISC that report as income the value of reward miles received during 2011 for opening checking or savings accounts. Although "frequent flyer miles" as originally awarded only on airline travel were easy to categorize as a nontaxable rebate of the original ticket price, use of "reward miles" and "reward points" to incentivize certain other consumer activity apparently does not automatically receive the same treatment.

At least some Citibank customers reportedly have expressed surprise over receiving 2011 Forms 1099-MISC that list as income the value of miles received as an incentive to open financial accounts. Receiving the Form 1099-MISC requires them to declare the value of those miles as income on their 2011 returns, seek a correction of the Form 1099-MISC from the issuer or independently explain the issue to the IRS.

"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," an IRS spokesperson told CCH in investigating the latest Form 1099-MISC issue. However, the IRS spokesperson further noted that, "if taxpayers have questions about the information they receive on a Form 1099, they should follow up with the issuer or their tax professional to resolve any questions about valuation, timing or other issues regarding the income reported."

Commenting on the recent Forms 1099-MISC sent to certain of its customers, a Citibank spokesperson explained to CCH in a written statement, "The Internal Revenue Code (IRC) recognizes rewards as taxable income - with the exception of promotions tied to credit and debit purchases. This recognition by the IRC is disclosed to customers prior to their election to participate in the promotion. Citibank is committed to providing our customers with exceptional service and a banking experience that is simple, transparent and value driven."

CCH Comment. There is no blanket rule that reward miles are not income, although consumers may have assumed they are never taxable due to their more limited use in the past. Treatment of reward miles currently depends upon whether they are received as a price reduction or rebate, as an incidental benefit to using a credit card for business travel or as inducement. In any case, the issue only arises for most practical purposes if a Form 1099-MISC is filed, which is required only if all reportable payments exceed $600 for the tax year.

The receipt of miles or other reward points for credit card purchases generally has not been subject to information reporting in most situations due to the administrative exception first carved out by the IRS in Announcement 2002-18, 2002-1 CB 621, as well as an earlier letter ruling. Announcement 2002-18 indicated in effect that the IRS would not view employees as realizing income when they receive frequent flyer miles through use of their credit cards to charge travel expenses properly reimbursed by their employers. IRS Letter Ruling 199920031 earlier held that the receipt of frequent flyer miles as an inducement to purchase should be treated as a rebate. In effect, the value reward miles lowers the cost of the product being purchased with a credit or debit card, rather than generating income. No formal IRS guidance has been published, however, that directly addresses the situation in which reward miles are given not for the purchase of a particular item but as an incentive to open an account.