We’ve all executed it to some extent: making purchases by bank card as an alternative of by money or test with a purpose to earn rewards factors. However there are some folks, together with some safety clearance holders, who take it to a complete totally different stage.

Gaming Credit score Card Rewards

No matter one calls them – factors harvesters, bank card churners, system avid gamers – these people all have the identical goal: beating the bank card firms at their very own sport, and making a tidy, tax-free revenue within the course of. They do it by means of a fairly ingenious cycle that appears one thing like this:

Step 1: The person purchases cash-redeemable (e.g., Visa, MasterCard, AMEX) present playing cards at an area retailer. A number of $500 present playing cards are bought in a single transaction, for a complete buy worth of $5,000, $10,000, or extra.

Step 2: The person makes use of the present playing cards to buy cash orders by means of the Postal Service or Western Union, which s/he then instantly deposits into their checking account.

Step 3: The person instantly pays off the bank card stability utilizing the newly deposited funds earlier than any curiosity might be accrued on the bank card stability.

Individuals who do that prolifically – and there are apparently fairly a couple of of them – can accrue tons of of 1000’s of {dollars} per 12 months in transactions, leading to tens of 1000’s in rewards factors revenue that they use to reimburse themselves through assertion credit for his or her regular month-to-month bills (that are all charged to certainly one of their quite a few bank cards). One current consumer advised me that in a mean 12 months, his efforts can web $80,000 utilizing a mixture of excessive reward level playing cards and level bonuses for opening new playing cards. With revenue like that, who wants a full-time job?!

And if that wasn’t loopy sufficient, a current U.S. Tax Courtroom resolution affirmed the IRS’s longstanding therapy of bank card rewards factors as a reduction on the products bought – even when these “items” are cash-redeemable present playing cards – making all of this revenue utterly tax-free. (See Anikeev v. Comm. of Inside Rev., T.C.M. 2021-023, Feb. 23, 2021). Virtually-speaking, which means that $80,000 in non-taxable rewards factors is akin to incomes $100,000 or extra in a taxable wage, assuming the person is within the 22% tax bracket and lives in a state with state revenue taxes.

Threat to Safety Clearance Holders

If all of this sounds too good to be true, it’s as a result of there are a few catches. First, though the bank card firms aren’t shy about promoting their rewards factors packages, in addition they take a dim view of people that milk the system and have been identified to close accounts of customers caught doing this. Second, though there may be nothing unlawful in regards to the exercise below present legislation, the big infusions of money into financial institution accounts can generate Suspicious Exercise Studies (or “SARS”), which banks are required to file with the Treasury Division’s Monetary Crimes Enforcement Community (“FINCEN”). U.S. Authorities background investigators question FINCEN databases as a normal a part of safety clearance background investigations, and that is the place issues can go off the rails.

I’ve solely seen in a handful of occasions in my profession – first as an investigator and now as a protection lawyer – however individuals who prolifically sport bank card rewards factors can wind-up with dozens and even tons of of SARS on file. Even with a superbly legitimate rationalization, it nonetheless raises suspicions and may end up in a preliminary safety clearance denial or revocation wherein safety officers should be educated on the propriety and legality of the conduct.

When that occurs, we’ve got to elucidate – amongst different issues – that no social gathering to those transactions is definitely dropping something; everybody wins. The bank card firm will get its contractual gross sales price from the service provider (which exceeds the worth of the rewards factors or they might be out of enterprise). The service provider earns the sale of the present playing cards, for which they’re compensated by the cardboard firm. The cardboard firm earns the distinction between the price it fees the purchaser for the present card above the present card’s worth and the price it pays to the service provider for making the sale. The submit workplace or cash switch service earns a price for promoting the cash order. And the financial institution earns curiosity off of the cash the account-holder deposits, nevertheless fleetingly.

Absent uncommon circumstances, a compelling case might be made that there isn’t any safety threat right here. However the safety clearance course of may also be a wildly unpredictable black field. Clearance holders ought to at all times weigh the dangers, nevertheless slight, in opposition to the rewards. Even if you happen to grasp the artwork of the bank card rewards hustle, you’ll nonetheless want an revenue to make it work.

This text is meant as normal info solely and shouldn’t be construed as authorized recommendation. Though the knowledge is believed to be correct as of the publication date, no assure or guarantee is obtainable or implied.  Legal guidelines and authorities insurance policies are topic to alter, and the knowledge supplied herein might not present a whole or present evaluation of the subject or different pertinent concerns. Seek the advice of an lawyer concerning your particular scenario.