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...the Internal Revenue Code.

Before we discuss the tax rules, keep in mind that the IRS figures nothing in life is free--or more precisely, "tax free." Specifically, customers who receive a bonus or gift might need to pay income taxes on the amounts received, which may be considered taxable interest or miscellaneous income. Financial institutions that pay bonuses are probably required to report them under Internal Revenue Code (IRC) Section 6041 or Section 6049.

To better understand when and what to report, you must first understand the definition of "interest." For federal income tax purposes, interest is a dollar amount paid in compensation for the use of money. More precisely, for information reporting purposes under IRC [section] 6049 (the information reporting provisions for Form 1099-INT), interest is defined as amounts paid in respect of deposits or investment certificates. All interest totaling $10 or more per year per customer must be reported to both the IRS and the customer.

In addition to paying cash interest, a financial institution may provide a "gift" (also referred to as a premium or a bonus) as an inducement to a customer either to open a deposit account or to add to an existing account. Such gifts are also considered interest, the fair market value of which may need to be reported. The IRS does consider certain de minimis or very small noncash gifts to be free of tax and not subject to reporting on Form 1099-INT, under Revenue Procedure 2000-30. Specifically, if a noncash premium costs the financial institution less than $10 and the premium is given in connection with a deposit of less than $5,000 (or less than $20 on deposits of $5,000 or more), reporting on Form 1099-INT is not required...

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