New Client Incentives - Which 1099 to Use?

7/21/2011

By Mark Corey, CPA

A common method for banks to attract new clients is to offer an incentive. In the old days it was common to see a bank offer a toaster or dishes. Nowadays it seems good old cash is the preferred method of rewarding a client to open an account or do other business with your bank. The confusion comes when you go to report the "gift" to the Internal Revenue Service (IRS). If the gift of cash or a tangible item (toaster, dishware, etc.) is in exchange for the client maintaining a minimum cash balance for a period of time it appears clear that you report the cash or fair market value of the item to the client on a 1099-INT. However, if you require the new client to use direct deposit to get the incentive, then a 1099-INT may not be the correct reporting form. What if you require the client to maintain a minimum balance for a period of time and use direct deposit? What if you require a minimum opening balance and the use of direct deposit but do not have to maintain the minimum balance? In these cases the rules are not as clear.

A quick scan of the internet reveals the confusion, even among large banks. For instance, a $120 billion national bank offers $125 to a new client for opening a particular checking account. In the fine print the bank mentions the requirements to get the $125 is a $100 minimum opening deposit and the use of direct deposit for at least six months. The bank also states that the $125 will be reported as interest on a 1099-INT. However, another incentive the bank offers is a cash bonus for setting up direct mortgage payments for six months. The webpage states that this cash bonus is miscellaneous income and subject to 1099-MISC reporting.

In the first offer there is no requirement to maintain a minimum balance, other than the initial $100 to open the account, but you are required to use direct deposit. Is the incentive for the $100 initial deposit, or for the use of direct deposit or for some combination? Is the incentive for the use of direct deposit an "amount paid for the use or forbearance of money" which is the definition of interest requiring a 1099-INT filing? In the second offer, is the client requirement to use direct debit to pay their mortgage an "amount paid for the use or forbearance of money?" Or is it a payment for fixed and determinable income requiring a 1099-MISC?

Per Revenue Procedure 2000-30 interest is "amounts paid for the use or forbearance of money, which includes amounts, whether or not designated as interest, paid on savings accounts and other deposit arrangements." Code section 6049 requires the issuance of a 1099-INT for payments of $10 or more in a calendar year. Revenue Procedure 2000-30 goes on to state that there is no 1099-INT reporting required for non-cash incentives of $10 or less on a required deposit of $5,000 or less ($20 for more than $5,000).

1099-MISC is required to be filed under code section 6041 if the taxpayer in the course of their trade or business makes payments of fixed and determinable income of $600 or more in any calendar year. In the scenario where you require direct deposit for a new account holder to get their incentive, it is arguable that a 1099-MISC may be required. The incentive is not for the use of money directly, but for the use of the direct deposit service. The same applies to the bank offer that requires direct debit for mortgage payments to get the cash incentive. In that case the money is being offered for the use of the direct debit of the mortgage payments, not for the use or forbearance of money. However, the 1099-MISC is not required until the payment is in excess of $600 for the calendar year, so most current incentives would not qualify if they were determined to be payments for fixed and determinable income.

The bottom line is that if you are going to offer cash or non-cash incentives to new clients to open an account, or use one of your services you would be well advised to review the specifics of the program with your tax advisor. Incorrect tax reporting to both the IRS and the client can create monetary penalties for you. With recent changes to the tax code increasing the penalties for informational reporting errors, mistakes can cost you significantly if you had the same mistake multiplied over several new clients.