Carol points me to a Flyertalk discussion from the past few days about Citibank sending 1099 forms to customers who earned miles from their checking accounts. I’m going to explain how to dispute 1099 prize value.
Folks are shocked, even though there have been plenty of references in early threads on Citibank banking promotions indicating that they do report the ‘value’ of miles provided to the IRS. It’s definitely not new.
Citbank reports as taxable the value of miles earned via bank accounts, but not credit cards (though apparently they once did this too – as a mistake! – since the latter are considered non-taxable rebates). This 2009 Flyertalk thread discusses Citibank reporting miles earning from banking products as taxable.
Aside from being annoying, folks think they’re getting a tax-free benefit but learn it will cost them real money, the net value of the benefit is lower — miles are often reported at a much higher value than is conventionally considered reasonable, e.g. at 3 cents per mile (consider redeeming 25,000 miles or even 50,000 miles for a $350 airline ticket, and you may redeem for premium cabin international travel but you wouldn’t pay the sticker price so that’s not a fair approximation either, I wouldn’t buy miles except to top off for a specific award at airline psoted prices). On the other hand when I ‘won’ a bunch of Starwood points for naming the Sheraton checkin kiosk, Starwood Preferred Guest sent me a 1099 for 1.5 cents per dollar, there was no dispute there.
From a legal standpoint Citibank is probably correct on tax reporting of rewards for banking products though I’d certainly be disputing the value of the miles if reported as particularly high. I posted in 2005 and reposted in 2008 how to handle the dispute of miles or prizes reported on a 1099 form to the IRS.
Obviously, this isn’t specific tax advice for your particular situation, and I am not a tax advisor. Rather, here is my best understanding of how this works…
First, you should attempt to negotiate with whomever provides the prize. The official way to do it (since in most cases you won’t be successful just asking for an adjustment) is to call the IRS at (800) 829-1040. It’s best to do so early in the morning in my experience, since you’ll have a better chance of getting through.
Explain that you received the 1099 and disagree with the amount that was reported on it, and that you’ve tried to resolve the situation but have been unable to.
Tell them that you were advised to have the IRS complete a Form 4598, “Form W-2 or 1099 Not Received or Incorrect.” It’s not something you can just download from their website.
You’ll need to give the IRS the payer information from the 1099 you received and the details of how you arrived at your own valuation figures.
The IRS will send the complaint form to the payer, who has 10 days to respond (you should receive a copy as well). Hopefully the payer will simply send a corrected 1099.
If you don’t receive a satisfactory response by the due date of your return, you have two options.
One is to include the amount that you believe to be correct on your return and attach the Form 4598 and an explanation. The IRS may later send you a notice of the discrepancy, so keep your records in good shape.
The other option is just to enter an adjustment as a negative amount. (You can even do that without going through the process of seeking to adjust with 1099, but your case may be more strongly documented if you’ve taken that step.)
If you received a Form 1099-MISC that shows $1,000 in box 3 for a prize yon won in a contest, but you know that a local store has the same item available for $750, you argue that the fair market value is $750. You can enter the $250 difference as a negative adjustment under Other Miscellaneous Income. One of the popular tax software packages advises that you enter “PRIZE FMV ADJUSTMENT” for the description and “-250″ for the amount.
No matter what course of action you pursue, you’ll want to document your adjustments, such as with ad clippings. If the prize was miles, and the fair market value was listed at a cost per mile greater than what the airline charges, simple printouts of the ‘purchase miles’ web pages should do the trick.
Fortunately, BankDirect doesn’t report the value of miles earned from checking accounts to the IRS…
Update: Commenter Harvey Mechanic that when you call the IRS as described about an incorrect 1099, they are now issuing letters in lieu of form 4598. But the procedure is otherwise the same. This was a minor change made after my original post on disputing the value of miles/prizes on 1099s, thanks for the catch!
So if this logic of FF miles as income is extended, can you take a write off if your miles unfortunately expire?
I think negotiating is going to be difficult. The problem here is, one party wants a WRITE OFF (citibank in this case) and the other party needs to be TAXED. The government sees it as a zero sum game. It also depends on where the airline would park the charge to them. An airline can put this in marketing expense, but I’m not sure about the banks. Regardless, they want a write off too.
@tivoboy I disagree, Citi isn’t going to write the miles off as an expense at greater than its cost. And it’s reporting to the IRS a value greater than cost.
Now, negotiating with an entity like Citibank may not be a simple tax because of its nature as a bureaucracy. But the challenge isn’t the divergence of interests.
You can call the IRS at 1-800-829-1040 and make a complaint as to
“Incorrect 1099”. The IRS agent then will follow their procedures
as in the Internal Revenue Manual at:
http://www.irs.gov/irm/part21/irm_21-003-004-cont03.html#d0e11041
That indicates that “letters will be used in lieu of Form 4598”
Harvey Mechanic, Attorney at Law –
Harvey108@hotmail.com
Gary, why would Citi in this case want to renegociate a lower 1099. A lower 1099 for you means less of a write off for the bank. So in effect it is costing them money to lower your 1099. Its all garbage anyway. They have no business writing off those miles. Another way to squeeze money out of the public.
@KennyG I am not saying that Citi will negotiate, they’re a terrible bureaucracy and likelihood of getting anyone in authority is low. Though going through these procedures and documenting your steps will help make your case when you declare something differnet than Citi reports on your tax return.
However, Citi is NOT ‘writing off’ the value they report on your 1099. They are writing off their actual cost of the miles they award to you. And that cost is lower than what they’re reporting the value at in any case. Though I’d argue that their cost, while not a perfect reflection of value, would better reflect value than what they’re using..
@gary, I don’t think they are writing them off at MORE than cost, but I don’t know what they pay for them. Technically, they cannot write them off for more than cost AND report to the IRS a 1099 number higher than the amount paid (the value that we the FF receive in their eyes)
If they are GETTING them for .01 say, and the FF receives a 1099 for .03$ this will end soon, it won’t pass the sniff test for the IRS and can easily be disputed by the end 1099 recipient.
@tivo order of magnitude you’re describing what’s happening — they’re buying miles very cheaply in bulk, closer to 1 cent apiece than 2 cents. And they’re reporting them at a higher value than their cost. Which may even be true, but their stated valuations are bordering on the absurd.
Unless you’re in a VERY low tax bracket (like you’re a starving student) it would seem like the best strategy is to avoid ANY situation where the bank/merchant is going to issue you a 1099 for frequent flyer miles. It would rarely be “worth it” — and that’s BEFORE you consider the hassle. Between federal and state taxes, most folks would pay about 1/3rd the value of the award in taxes. So if the bank says miles are worth 3 cents, that will cost you a penny a mile. Few of us would regularly buy miles at that price, so why take the hassle?
The cost that Citi paid for the miles is irrelevant, I believe. Its the fair market value that is important.
Unfortunately, Citi seems to be playing it fair — their valuation appears to be based off AA’s pricing as a benchmark – $250 for 10,000 miles. Seems crazy that anyone would pay that, but that is arguably the only legitimate valuation of the miles out there. Challenging that valuation seems like a definite uphill battle.
Afraid I have to agree with iahphx — the Citibank Checking deal at a $750 valuation for 25,000 doesn’t seem worth it…
Is there any way to deduct any of the fees associated with having the checking account that led to the earning of the miles?
The link in Harvey Mechanic’s post to the IRS site seems no longer to work, and I can’t find the page on their site that deals with Form 4598. Anyone have a current link?
Got an email today offering 20,000 AAdvantage miles for opening a checking account. Have emailed and asked what they will be valued at. No response, yet. Are there no laws/policies dictating that banks disclose this?
Know the amount before you take the prize!
I won 500,000 Hilton Honors Points and Hilton sent me a 1099 saying they were worth $5,000. This has turned out to make a big change in my taxes — $600 more on Federal and $300 more on state. I am using H&R block deluxe software, turns out it won’t let me put in Misc Income as a Negative so I can’t do that. I called the IRS and waited forever. The agent told me that I must put the full $5000 as Misc Income or they will see it as under reporting. He said that there is no form 4598 and I would need to call Hilton and have them change the Form 1099 which I am sure will not help. They are not going to change that. My points have been worth about .005 cents at the most so they are really worth about $2,500. Any suggestions? It doesn’t seem fair.
Hi @Melanie – form 4598 no longer exists. The updated advice is here:
http://viewfromthewing.com/2014/04/12/getting-taxed-miles-heres-dispute/
nice article