IRS Reconsiders Memo on Taxing Frequent Flier Miles

WASHINGTON —  The Internal Revenue Service is reconsidering advice it gave that could result in an extra tax liability for workers who are allowed to keep frequent-flier miles from business trips, the agency said Tuesday.

A seven-page “technical advice memorandum,” reported by The Wall Street Journal on Tuesday, was issued in July to just one company that lets employees use business-generated frequent-flier miles for personal travel.

After a day of uproar, the agency issued a statement saying it had “no special enforcement program for frequent flyer miles” and was reconsidering the advice it gave in the memo. It stressed the memo applied only to the company to which it was issued.

“It does not establish precedent for any other case involving any other employer,” the agency said. “The IRS does not want other employers to be misled by applying the analysis . . . to their (employee reimbursement) plans.”

In any case, the memo did not mark a policy change on the taxability of the frequent flier miles themselves, IRS spokesman Frank Keith said.

The IRS has always said taxes are due when someone converts to personal use those frequent-flier miles earned on business trips paid for by an employer, he said.

If the policy outlined were applied to all companies, it could subject many employees to extra tax and force them through a complex calculation on their tax returns.

The IRS memo said that because the unidentified company lets employees keep frequent-flier miles, it should report as income on the worker’s W-2 form the full cost of the plane ticket that led to the accumulation of the miles.

The employee could then deduct from income the ticket’s cost--minus the value of any frequent-flier miles used for personal travel.

That could raise the tax bills of some employees because business and other miscellaneous expenses can be deducted only to the extent that they exceed 2% of a taxpayer’s adjusted gross income.