Citibank sends new customers a free tax turd
It's tax time once again all across the United States, and this week, Americans have been busy ratting each other out to the IRS, as required by law. And as each form was dropped into the IRS document maw, a copy was mailed to the taxpayer affected. Employees got W-2 forms from their employers. Investors got 1099 forms from their brokers. Retired folks got 1099 forms from their retirement plans. Homeowners with mortgages got 1098 forms from their lenders. Students got 1098 forms from their colleges. Depositors got 1099 forms from their banks.
But people who recently opened accounts at Citibank, picking up 25,000 frequent flyer miles as a promotion, got an ugly surprise -- a copy of a 1099 form, telling the IRS about the miles and reporting that they had a value of $645. That's $645 that the customers are each supposed to put down as income on their tax returns. If they don't, the IRS computer is going to add it onto their income and start hounding them for delinquent taxes -- or just take the surprise tax out of the refund they were expecting.
It's an unfolding disaster for Citibank from a p.r. standpoint. Some customers are furious, and the numbers of the outraged are going to swell as the tax drama plays out between now and mid-summer. A lot of customers aren't going to realize what hit them until the IRS processes their returns.
Did Citibank do the right thing? Usually, the receipt of frequent flyer miles isn't taxable to the airline customer -- it's just a tax-free rebate on money the flyer has already paid for other tickets. Even when employees get to keep miles that they didn't pay for because they racked them up on business travel covered by their employers, smart tax advisors counsel that it's a "de minimis" fringe benefit, excluded from income because it's unreasonable for the employer to keep track of something so small.
But when a bank transfers miles to a customer, there's no exclusion in play. It's a bit like the bank giving a toaster to attract a new account holder; in that case, the IRS has ruled for many years that the value of the toaster is income to the recipient. Certainly, if the bank paid a higher rate of interest to attract a customer, that would be income to the customer -- why not miles? So maybe Citibank was right; our friend and colleague Jim Maule at Villanova certainly thinks so.
But to us, the real ground for outrage is the valuation placed on the miles by Citibank. Are 25,000 miles really worth $645 on the open market? If they are, we suppose that the outraged customers can now sell the miles to raise the money to pay the tax on them. But that number seems awfully high. And avoiding that difficult valuation problem is one of the reasons often given for the policy of not taxing miles in other settings.
Anyway, condolences to the Citibank customers who are now gnashing their teeth. It's almost enough to make you want to Occupy. [Via TaxProf Blog.]
| Posted at 11:17 PM | Permalink |
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Comments (19)
I'm so glad I went with a credit union this year. And I'm glad Citibank and Bank of America are no longer companies I deal with
The downside is the lack of ATM access, but since I'm a bit more mature (ahem) agewise, I just realized I had to plan ahead, just like I used to.
Posted by Talea | February 5, 2012 6:27 AM
If you can realize two cents per mile of value on frequent flier miles, count yourself lucky. That $645 valuation is completely bogus, even without considering the fact that airline miles can't be transferred or inherited.
Posted by Allan L. | February 5, 2012 8:28 AM
Citibank's value on the 1099 of $645 is not conclusive. We won a cruise once and received a 1099 from the sweepstakes promoter. The federal tax return had a place where we could set forth a different actual value. We did so and this was not challenged by the service.
Posted by Chard | February 5, 2012 8:31 AM
If you're with a Credit Union you can use any CU in anywhere fee free. OnPoint, for some strange reason, has agreements with 7-11 and BofA to use their machines for fee as well.
Posted by canucken | February 5, 2012 10:21 AM
I've been following this saga for a few days just because I'm not especially fond of Citibank, but another issue has occurred to me: Chase recently opened a new branch at the former Blockbuster location on SW Barbur, and they've sent half a dozen mailings out, offering $150 for free if I'll just stop in and open an account. Wonder if they'll be sending out 1099 forms?
And in a similar vein - my credit union provides a free accidental death insurance policy. It's modest; pays just a couple thousand as I recall (without digging out the papers). Since they pay the premium on that....
Posted by Max | February 5, 2012 10:22 AM
I took the Chase bait (it was $200, though), and they sent me a 1099 characterizing the $200 as "interest". That seems reasonable to me, but if I were to close the account now, they'd take the money back, leaving me (I guess) with just the tax tab.
Posted by Allan L. | February 5, 2012 10:40 AM
Dear Chard: I hope the newly hired tax collectors won't have time to focus like a laser on your winnings.
"We won a cruise once and received a 1099" and "we could set forth a different actual value" "this was not challenged by the service[IRS]"
Posted by dhughes609 | February 5, 2012 10:53 AM
If you don't report what's on the 1099, the IRS computer is highly likely to spit you out at least a notice (if not a refund grab). Particularly if you don't report the benefit at all, which seems likely with some unsuspecting customers.
Posted by Jack Bog | February 5, 2012 11:33 AM
U.S. Bank does a related (if smaller) version of the same SCAM.
Their heavily promoted "START" promises a gift card worth $ 50 when you establish any periodic direct deposit and promises to add another $ 50 credited to the card later to insure you don't close the account right away.
But then they charge a monthly fee on the card which drops the account to ZERO. Followed by a 1099 reporting the CREDIT but ignoring the DEBITING of the monthly fee.
After receiving a 1099 for $ 50, you discover their FEES have reduced the card balance to ZERO and no branch manager can even make an inquiry on your behalf.
Posted by LTJD | February 5, 2012 11:44 AM
Allen: $200? Chase must think I'm a cheap date!
LTJD: I've seen some blather about a USBank "start", too - but never looked into it. The Citis and the Chases and the others just have no redeeming features that I can see.
Posted by Max | February 5, 2012 11:58 AM
I got the "free" money from Chase a few years ago, and no 1099. After opening the account since there was a branch nearby, I learned about the account minimums and potential for monthly fees if account balances don't meet activity requirements.
Fortunately, I was able to link to a Chase credit card account that had monthly usage that met the minimums.
After the 1 yr minimum required, I canceled the account.
Just goes to show you, that there is no such thing as a free lunch, and to inquire about possible fees or other liability with any "free" offer.
On a related note, there are many wh may have conducted a short sale in recent months. Be prepared for having to pay income taxes on the difference between what was owed on the original mortgage, and what the new negotiated balance is. Taxes are due on that "discount", which may come as a big surprise, to those who are already suffering from being underwater on their mortgages.
Posted by Mike (one of the many) | February 5, 2012 12:30 PM
I think you're wrong in your last observation. There is an exclusion in the tax code for discharge of indebtedness arising from one's principal residence. IRC 108(a)(1)(E). There is also an exclusion if the taxpayer is insolvent at the time of the discharge. IRC 108(a)(1)(B). Many homeowners who renegotiate won't be taxed because they will get relief under one of these two provisions.
Posted by Jack Bog | February 5, 2012 12:58 PM
RE: being wrong on the last point
I'll certainly defer to the tax experts on that one. Just relaying a situation of a friend who are relocating to another state, selling their home here. They are seeing if the employer will pick up their expected tax liability from a short sale of their home up here in OR. I'll be sure to pass along the tax citations so they can review with their tax adviser. Yes, they will be purchasing a new home out of state.
Posted by Mike (one of the many) | February 5, 2012 6:12 PM
Those of you who use a credit union heck your debit card info.
Most credit unions are part of a coop that allows you to use your card at other credit unions with no fee.
Posted by tankfixer | February 5, 2012 6:47 PM
I found out about this part of the tax code a few years ago when I was given an Ipod for opening a KeyBank checking account. They valued the "gift" at $150, which seemed about right.
Posted by Armon | February 5, 2012 9:49 PM
I'm curious, Jack: Is there any tax benefit to Citibank for inflating the valuation on the 25,000 miles given to the customer? It would seem to me that from an expense standpoint, they would have to value it at their actual cost to the airline's mileage program, not at the perceived value that the customer derives.
Posted by John Rettig | February 6, 2012 8:43 AM
Wouldn't that be special? The bank could "buy"miles for, say, a penny and "sell" them for 2.5 cents and book the "difference" as "profit".
Posted by Allan L. | February 6, 2012 9:03 AM
I have a few Chase accounts that were formerly WaMu accounts. The only reason I have not closed them and moved them to a credit union is that Chase HAS to honor the original terms of my accounts with WaMu...that's 2 FREE checking accounts (regardless of balance) and a MM savings with no minimums required. I keep $1.02 in one of those checking accounts, just to screw with them (it used to be the joint account I had with my mom, she has since died and I have no real use for the account ;o). I'll probably move my money to a credit union when I decide to buy property for their mortgage rates...but meanwhile, Chase can suck it.
Posted by Jill-O | February 6, 2012 9:34 AM
In February, I received a 50,000-mile 'bonus' from Capital One for getting one of their credit cards. No 1099 as of yet. But now you have me worried.
Posted by RJBob | February 6, 2012 1:56 PM