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If You Owe Uncle Sam, You Might Stay with Uncle Sam

April 9th, 2012 2 comments

On March 14, Senate Bill 1813 was passed by the U.S. Senate. The bill is described as “[a]n Act to reauthorize Federal-aid highway and highway safety construction programs, and for other purposes.”

One of the “other purposes” is far from insignificant. Reported by Fox Business, taxpayers who have “a seriously delinquent tax debt in an amount in excess of $50,000” could be prohibited from obtaining a passport to leave the country.

Some exceptions are built in. Taxpayers who are on a repayment plan or are not subject to active collection action may fall outside the bill’s scope.

Despite the exceptions, the bill’s language is too poorly worded. It’s easy to come up with scenarios for which placing the virtual handcuffs on U.S. residents seems far too excessive.

For example, suppose I am a banker making $200,000 per year. Suddenly, I am laid off. I live off savings for some time, but for several months am unable to obtain a new job paying even half my previous salary. Eventually, I am compelled to take an early distribution from my 401(k), and have a large tax liability as a result. The IRS then files a lien. I finally land a new job to cover basic living expenses but I can’t afford to address the growing tax liability.

I may be denied a passport pursuant to S. 1813 if the liability exceeds $50,000.

Although the intent of the bill likely is to keep more pronounced tax delinquents from escaping U.S. jurisdiction, the possible net casts far wider.

Unfortunately, that may not be enough to prevent the bill from passing. When it comes to taxes, we’ve seen before the federal government shooting the jaywalkers[1] while at the same time also punishing the more serious offenders.

Although S. 1813 passed the Senate by a 74 – 22 margin, the bill is expected to face more opposition in the House. Stay tuned.


[1] Credit to fellow tax blogger Joe Kristan for coining this phrase.

Categories: IRS, Travel Tags:

Class Action Suit Against Citibank over Frequent Flyer Miles

March 1st, 2012 No comments

About a month ago I wrote about Citibank issuing 1099-MISCs to some of its customers who opened a bank account and received frequent flyer miles.

Some customers aren’t happy. Last month, a class action lawsuit was filed against Citibank by lead plaintiffs Bertram Hirsch and Igor Romanov. They claim that Citibank did not tell new customers who received 40,000 frequent flyer miles after opening a new account that they would have to report 2 1/2 cents per mile as income to the IRS. They also claim that 2 1/2 cents per mile is a gross overvaluation.

Like many lawsuits, class actions take time to resolve. Often years. It is of no help to taxpayers and accountants who have to decide whether to report the income this tax season.

As far as I know, the IRS hasn’t said much about the issue since the news broke. This story has generated a lot of press, so maybe the government will step up. We’ll see.

(Hat tip: taxgirl)

Categories: IRS, Travel Tags: ,

Frequent Flyer Miles Now Taxable?

January 29th, 2012 No comments

Recipients of frequent flyer miles from Citibank sometime during 2011 may find a surprise in their mail right around now. The Los Angeles Times reports the bank is mailing 2011 Form 1099-MISCs to certain customers who received thousands of miles as rewards pursuant to its ThankYou rewards program.

via Wikipedia

This news comes as a surprise. It’s the first time I have heard a bank treating frequent flyer miles as income. Citibank is valuing each mile around 2.5 cents. If the total value of the miles received is $600 or greater, then Citibank will issue a Form 1099-MISC.

In IRS Announcement 2002-18, the agency stated it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.” The IRS hasn’t said much on the issue since then.

Perhaps Citibank views rewards attributable to use of a credit card for non-business purposes as outside the scope of 2002-18. By treating these rewards as income to the customer, Citibank may be entitled to a corresponding deduction. Here’s what Citibank has to say in the ThankYou Rewards terms and conditions:

Redemption of ThankYou Points related to your participation in ThankYou Rewards may result in your receipt of taxable income from Citibank in the tax year in which the ThankYou Points are redeemed. In accordance with U.S. tax law, Citibank may be required to send to you and file with the IRS a Form 1099-MISC (Miscellaneous Income) for the year in which a reward is issued to you. The valuation of ThankYou Point redemptions for Form 1099-MISC tax reporting purposes will be at Citibank’s sole discretion. You are solely responsible for any personal tax liability arising out of the redemption of ThankYou Points. Please consult with your Tax Advisor if you should have any questions regarding your personal tax situation.

I’ll paraphrase: We [Citi] believe the rewards may be taxable, but we’re not sure, so go ask someone else. And since we’re not sure, we’re treating it as income and likely increasing your federal income tax liability. And by the way, we and only we determine how to value something that you may have to pay tax on.

Gee, thank you for offering me ThankYou Rewards!

The amounts reported on 1099-MISCs by Citibank will be in the IRS system. What will the IRS do if a taxpayer does not report such amount on her tax return? Of course, the IRS can make life simple for the potentially millions impacted by issuing a new announcement. But that’s probably too much to ask for, leaving the situation in a state of flux.

(Hat tip: TaxProf Blog)

Categories: IRS, Travel Tags: ,

What Is the “Whole” Sale?

April 26th, 2011 No comments

Orbitz is an Internet travel company that adds significant convenience to making travel reservations.  Several times I have booked a flight and hotel room for a vacation at a great rate through the website within minutes.  I get a good deal, the airline and hotel get their cut, and Orbitz gets theirs.  Everybody wins, right?

Not so fast.

A report recently released by The Center on Budget and Policy Priorities claims that state and local governments throughout the U.S. are losing roughly $275 million to $400 million in sales tax revenue from business conducted by online travel companies (OTCs).  (Hat tip to Citizens for Tax Justice for alerting me to this report.)

The basis of this alleged deficiency is straightforward.  OTCs, such as Orbitz, apply the applicable sales and lodging tax rate only on the “wholesale” room rate that the OTC pays the hotel for the right to rent the room, and not on the “retail” room rate that is charged by the OTC to travelers who book a room through the OTC.  OTCs justify their position by claiming that the difference between the “wholesale” and “retail” room rate is a “facilitation fee” not subject to sales tax.

The report makes a fine counterpoint by comparing services provided by the OTC with those provided by hotels themselves:

The OTCs are providing the same kinds of marketing and room booking services that the hotels themselves engage in.  If the hotels may not deduct a pro-rated amount of their advertising and website operation expenses from the retail room charge prior to calculating applicable hotel taxes when they incur such expenses directly, there is no possible justification for compelling such a deduction when hotels pay an OTC to provide the same services.

I have to agree.  The uneven treatment by OTCs is further corroborated by the fact that non-Internet based travel agents use the “room” rate, not the “wholesale” rate, for sales tax purposes.

State and local governments have filed lawsuits against these OTCs in order to compel them to change their practice.  As the report notes, many of the applicable tax laws were written before the advent of the OTC industry.  As a result, I wouldn’t be surprised to see the courts in various jurisdictions take differing approaches in terms of statutory interpretation; this will likely result in contrasting court opinions.  In order to get what they want ($$$), many state and local governments may be required to amend their current tax laws in order to rectify the situation.

But don’t think that will necessarily be an easy task.  The OTCs claim that if forced to charge sales tax on the additional difference, this cost will be passed onto consumers; as a result, tourism travel will decrease.  Read the report linked above to read the Center’s response to that point.  This policy debate may stall progress in the state legislatures.

The current debates concerning sales tax on online purchases are actually taking place on both the federal and state levels.  Senators Durbin (D-IL) and Enzi (R-WY) plan to introduce to Congress the Main Street Fairness Act.  This bill requires online retailers to collect sales tax for states who join a formal compact.  I’ll save my thoughts on the “Internet Sales Tax” for another day.

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