Citibank Issues Customers Inflated Form 1099s

COMMENTARY | Citibank continues to amaze me. They were once one of the largest banks in the world and as of June 30, 2011, are not even in the top 10.now. They have seen their stock fall from a split adjusted price of $503 per share to a current price of $33, all within a five-year span.

Citibank ran a promotion offering people airline miles in exchange for opening a new account. Most people who responded gave little though to the value of the offer or of the tax consequences until they received Form 1099-Misc, valuing each mile at 2.5 cents. That was an eye-opener.

Our politicians, the people who make the tax code, are confused on this issue and did not realize that there was a tax issue. According to a recent article in Investment News, Senator Sherrod Brown (D-Ohio), sent the Chairman of Citigroup a letter advising them that they were incorrect in considering the miles to be taxable. The Senator is wrong, but that is to be expected.

What is ridiculous about the actions by Citigroup is that they are using an inflated value to bolster than own expenses, thereby reducing their tax liabilities, at the collective expense of an unsuspecting public. The consumer is burdened with paying an out-of-pocket expense on something that may have no real value. If you are in the 25 percent tax bracket, your federal tax will increase by $156 for each $625.

If I received a 1099-Misc with an amount that I consider to be incorrect, I would contact the issuer. In this case, it is Citigroup, and the contact information is on the form. I would explain to them that their FMV is incorrect and ask them to re-issue a 1099 with the proper valuation. They probably won't, although with the negative PR which they are receiving, that may change.

The next step is to file my tax return with what I consider to be the correct amount, an amount based on Fair Market Value. I would need to attach an explanation as to why my amount is different from the amount reported by Citigroup. Many of the software programs allow you to attach explanations to your e-filed return.

In my explanation might show that at websites which buy miles from the public, the value is between 1 cent and 1.5 cents per miles. If you had received 25,000 miles, the value would then be only $313 and the tax only $78.

I could also considering contacting one of the attorneys that seem to be paving the way for class-action lawsuits, but financially, I would likely be better off simply contacting the IRS.

There should be a law that all promotions have a value assigned to them at the time they are given, and that people understand that they may have to pay tax on that amount.

If Citigroup issues new form 1099s with a lower amount, the IRS and our government, still benefit from the fact that they will have collected tax on some income that would likely have gone unreported.