Citibank Sued For Giving Frequent Flyer Miles That Count as Taxable Income

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Citibank customers who earned frequent flyer miles for opening accounts were caught by surprise when the bank labeled the bonus as taxable income. Faced with the prospect of hundreds of dollars in taxes for what they thought were free miles, angry consumers are fighting back with a lawsuit against Citibank.

“When I first received the 1099 from Citibank … it didn’t dawn on me at all that it was related to these miles I got back in 2010,” says Bertram Hirsch, one of the named plaintiffs in the suit. “I thought, ‘This has to be a mistake.'” Although Hirsch says he tried to resolve the issue with Citibank, “They just blew me off,” he says. “I was very ticked off.”

Current versions of the bank’s mileage disclosures warn customers that a 1099 will be generated for the value of the miles, but the lawsuit says it doesn’t spell out that this could mean owing $350 in federal and state income taxes for 40,000 miles with American Airlines. “Citibank failed to make these material disclosures because it knew that very few customers, if any, would take advantage of the airline miles offers because they did not make economical sense,” the suit charges.

(MORE: Income Taxes On Frequent Flyer Miles?!)

Earlier solicitations, like the one Hirsch responded to, only included the vague boilerplate statement: “Customer is responsible for taxes, if any.”

Most points or miles customers accrue by other means, such as booking an airline flight or using a rewards credit card, fall into the same category as rebates, which aren’t taxable. But Citibank contends that these promotional miles were a “gift,” and they therefore count as taxable income and must be officially reported. The IRS says 1099s must be filed if an individual receives “[a]t least $600 in rents, services (including parts and materials), prizes and awards.”

The complaint, which seeks damages for the amount of taxes plaintiffs paid and the lost investment opportunity on those funds, is seeking class-action status because of the number of Citibank customers it says were affected. “At this time, Plaintiffs believe that the Class includes tens of thousands of members,” it reads.

In addition, the 2.5 cents per mile at which Citibank valued the promotional miles is an inflated number, the suit charges. “Citibank’s practice of valuing the airline miles at 2.5 cents per mile is grossly unfair and deceptive,” it reads. “At least one study recently concluded that American Airline miles in particular are only worth about .76 cents per mile.”

(MORE: Et tu, Citi? Bank Raises Balance Requirements and Fees)

“We are aware of the lawsuit filing and confident in the appropriateness of our disclosures, and we will vigorously defend this lawsuit,” Citi spokesman Sean Kevelighan said in a statement. “The value of airline miles provided as a gift in connection with opening a bank account is generally treated as income.”

Hirsch says he received two verbal assurances that the miles would not be taxed, one prior to opening the account, and a second after he received the 1099. “I don’t want to pay taxes on something that I believe should not be taxed,” he says.

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