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!