IRS relaxes its rules on frequent-flier miles

Associated Press

WASHINGTON — Business travelers who use their frequent-flier miles for personal trips won’t get grounded by the IRS.

Seeking to clear up confusion, the Internal Revenue Service announced Wednesday that frequent-flier miles accrued on business or official travel will not be counted as taxable income when they are converted to personal use.

Some legal interpretations have held that these miles are just another form of compensation not exempted from taxation. But IRS officials say it would be difficult to place a value on the miles and to separate those a taxpayer got on personal trips or through credit cards from those obtained through business travel.

"The principle has always been: We probably should tax them, but the question is how?" said Gillian Spooner, director of tax policy at KPMG LLP.

Because of these difficulties, the IRS has never pursued an enforcement program on frequent-flier miles or other similar benefits from business trips. Wednesday’s announcement is intended to put any lingering questions to rest.

"It’s very difficult for taxpayers to comply," said agency spokesman Frank Keith. "They don’t have to report them. We will deem them to have met their tax obligations."

The IRS announcement leaves open the possibility that its position could change in the future, but that any taxes would not be imposed retroactively.

Organizations representing airline passengers hailed the move, coming as air carriers struggle to recover from the Sept. 11 terror attacks.

David Stempler, president of the Air Travelers Association, said frequent-flier miles rank third in importance, behind price and schedule, among factors people consider when deciding which airline to fly.

"One of the things that attracts people to flying is their miles. And they create customer loyalty," Stempler said.

Travelers can also earn frequent-flier miles from rental cars, hotels and credit cards and qualify for promotional benefits such as seating upgrades and discounted travel-related services. All these benefits will not be considered as taxable when converted from business to personal use.

Not all travel-related benefits are covered by the announcement. Those that are converted to cash, compensation that is paid in the form of travel or other benefits and "circumstances where these benefits are used for tax avoidance purposes" will be subject to tax, the IRS said.