Frequent flyer miles are generally awarded by the major airlines on a per flight basis. They are also earned through hotel stays, use of rental cars, and through other promotions. Accumulated miles can then be exchanged for free travel, upgraded seating, discounts on travel-related services, or other benefits. However, travelers who redeemed these miles faced a potential problem if the IRS decided in a later audit to include their value in the individual's taxable income. For the IRS, the problem is that taxing miles would be an administrative headache, including the problem of separating miles earned in business and personal use, and figuring out the timing of their being earned and then used and how to value them.  

IRS Announcement 2002-18 makes their stance on the frequent flyer use topic now official. "Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."  

"This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes."

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