Since the Los Angeles Times covered Citibank’s practice of sending out 1099s to customers who earned points for opening bank accounts, there’s been a lot of interest in the issue. Taxation of frequent flyer miles has always been a hut button issue.

Now the LA Times has done a followup story in which they get the IRS on the record saying that Citibank’s position is a reasonable interpretation of law, and much handwringing has ensued — quite a bit of it overwrought.

Wandering Aramean, for instance, titles his post on the subject, “The IRS moves to hit frequent flier miles” and says “it is readily apparent that the IRS sees some miles as taxable and not at a particularly favorable rate.”

Except that’s not what the IRS has said, and they certainly haven’t commented about the tax rate to be imposed on miles if taxable, they’ve commented on the value of miles only to say that like anything else of value received it is the actual value rather than the cost that’s relevant for tax purposes. Very little new information here.

The LA times pushed and pushed the IRS for an answer on taxation.

What does the IRS have to say about the matter? After days of my pestering the tax agency for a response, it finally took a stand on the taxability of miles.

When frankly the best approach here is not to ‘poke the bear in the zoo.’ Certainly under the law there’s some argument that miles would be taxable, although the IRS does not pursue enforcement actions against anyone for failing to pay taxes on frequent flyer miles. But if pressed, they’re not really in a position to say that the policy couldn’t change. Under the law they’re empowered to do so, but it would be complicated and messy and unpopular and so they don’t. If you really need an answer though no IRS bureaucrat will foreclose the future possibility. And naturally they didn’t. They said Citi’s position is a reasonable one.

“When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law,” said Michelle Eldridge, an IRS spokeswoman.

That’s a very careful answer. The miles can be taxable under current law. We know that. They didn’t say that this is a priority enforcement area, or one in which the IRS will even take a stand that non-reporting of miles is a failure on the part of the provider of those miles or on the recipient. And it’s a far cry from saying, as Seth appears to suggest, that taxation will logically next be applied to credit card signup bonuses.

Tax law raises all sorts of really interesting theoretical issues. Taken literally there’s very little that wouldn’t be subject to tax, from things your friends receive from you (gift tax for items not specifically included under the excludable caps) to bonuses you might receive from a company for liking them on facebook provided those bonuses are sufficiently lucrative or you receive enough of them from a single payer during a calendar year. What if you receive a bunch of Starwood points for liking various Westin properties, Starwood Preferred Guest provides you with the points are they the payer or is the individual property? And what about bonuses for getting your friends to sign up for TripAlertz under your referral link? Or for Jetsetter or Sniqueaway provided your friends make a qualifying purchase?

Miles aren’t, under many programs, legally even yours. Have you received something of value when receiving miles? Or only when the airline allows you to cash in those miles? The more miles you have the more valuable additional miles are, up until the point you have too many. Certainly the IRS wouldn’t value miles on an individual circumstance basis, but there’s also no consensus about average value. My advice about disputing the value of a mile as-reported on a 1099 stands, I think, since there really is no consensus value. We know it’s not the provider’s cost per mile, but neither is it likely the price at which an airline sells a mile (which again is about marginal value, since mileage purchases are frequently done to top off towards an award). The most frequent redemption is the 25,000 mile coach award. So perhaps an average redemption value, not of an expensive coach ticket (highest theoretically possible value) but a fairly low priced ticket (as mileage seats are most often available on flights that won’t sell out). Perhaps some study of how mileage programs value the miles as liabilities on their own books would inform the valuation judgment for tax purposes.

And of course there’d be an uproar. It’s clear that miles earned for personal travel (ie travel you pay for yourself) would constitute a rebate, but what about business travel? Your employer pays, isn’t the mileage rebate a taxable fringe benefit?

It’s a murky, thick area and to date the IRS has chosen not to pursue it because of how complicated it is, and because of how unpopular such a pursuit would be. But don’t poke the bear in the zoo. Back them up against the wall and they’ll almost have to say that of course miles earned from a variety of activities (and a variety of life activities unrelated to miles) which aren’t pursued now certainly could be in the future.

Almost all of us break government rules every day, not out of malice but because of the complications of those rules, and tax policy is one of the most arcane and complex and most anyone with income outside of salaried employment certainly falls into this category. And even most of the rest of everyone too. I recently read that all oil companies which produce gasoline are now paying fines for failing to mix in a biofuel which does not exist.

Bottom-line is that tax law is complicated, getting the IRS on the record on matters of policies is complicated, but a single, carefully crafted, and limited statement by an IRS spokesperson doesn’t change wholesale the manner in which miles are or are not taxed. Which isn’t to say that policy won’t change, just that we do not yet have reason to get excited or concerned.

Of course a big stash of value that’s currently untaxed is and always will be a tempting target for a state which has failed to live within its means. So it’s primarily a poltiical rather than legal question, whether going after the miles is worthwhile in political terms compared to going after other sources of income (such as reneging on Roth IRAs and taxing distributions of those, to give one random example).