Tax & Accounting Blog

IRS Private Rulings on Tax Reporting of Account-opening Bonus Payments for IRAs and 529 Plans

1099, ONESOURCE, ONESOURCE Nonresident Alien Taxation, Tax Information Reporting, Trust Tax May 15, 2013

The Internal Revenue Service has issued two private letter rulings concerning the reportability of a cash bonus credited to a customer’s IRA account – or to a section 529 higher education savings plan account – as an account-opening incentive. In both rulings, the IRS held that an IRA new-account incentive bonus required no 1099 reporting. Because the incentive payment under the payer’s IRA Bonus Plan was characterized as interest or other earnings (e.g., dividend) paid on an IRA as an exempt recipient, the payment was not subject to the information reporting requirements of IRC sections 6042 (dividends) or 6049 (interest). The payment also was not reportable under section 6041 (fixed or determinable gains, profits, and income such as reported on the Form 11099-MISC) or any other information reporting requirements of the tax Code.

However, the 529 Plan new-account incentive bonus was 1099 reportable. Because the incentive payment under the 529 Bonus Plan was characterized as a payment of income to the client (not characterized as interest), it was subject to the information reporting requirements of IRC section 6041 (if the total bonus payment was at or above the $600 threshold of section 6041, Form 1099-MISC, reporting).

Note that IRS private letter rulings are applicable only to the taxpayer that requested the ruling, and may not be used or cited as precedent. They are useful, however, as illustrations of how the IRS sees various tax situations. [IRS Letter Ruling 201317017, Feb. 1, 2013; IRS Letter Ruling 201310043, Dec. 11, 2012]

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