The Journal of Accountancy (JOA) reported in its August issue that Citibank issued Forms 1099-MISC to its customers to report the value of frequent flyer miles received in a promotion program to open new bank accounts. Naturally the Citibank customers were upset that they had to pay taxes on the receipt (not the use) of the miles. Are frequent flyer miles (FFM) taxable?
IRS Announcement 2002-18 addressed FFM but provided little guidance. The announcement stated that “[T]he IRS will not assert any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles.” The announcement only addressed FFM earned from business or official travel, not with product promotion.
So why did Citibank risk alienating its new customers by issuing these 1099 forms? The JOA article raised the possibility that Citibank did so to avoid the possibility of the IRS assessing the bank non-compliance penalties. The penalty for failure to file a Form 1099 is $100 per form per calendar year, not to exceed $1.5 million in any calendar year. For intentional disregard, penalties are $250 per form and there is NO cap. As most business clients know, the IRS began asking the following two questions on 2011 business tax returns which the taxpayer signs under penalties of perjury that the information included in the return is true, correct and complete: (1) Did the business make any payments in 2011 that would require it to file Form(s) 1099? (2) If “Yes”, did the company file or will it file all required Forms 1099?
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