A class action lawsuit claims Citibank lured new customers into opening accounts by promising “free” frequent flyer miles that actually cost them hundreds of dollars.

According to the Citibank class action lawsuit, the bank offered 40,000 frequent-flyer miles with American Airlines to anyone who opened a new account. The problem, the class action lawsuit says, is that Citibank did not tell new customers that they had to report 2 1/2 cents per mile as income to the Internal Revenue Service.

Lead Plaintiffs Bertram Hirsch and Igor Romanov say they only discovered this fact when they received 1099 forms from Citibank for $1,000 of income. Applying an average combined federal and state tax rate of 35%, this means that opening a new account with Citibank actually cost Hirsch, Romanov and other Class Members $350.

Hirsch and Romanov also claim in the class action lawsuit that Citibank grossly overvalued the miles, which have no actual value to customers and should not be taxable.

“It is widely understood in the marketplace that airline miles are not reported to the IRS as being taxable for income tax purposes. Indeed, Citibank expressly informed Plaintiff Hirsch that the American Airlines miles that he would receive for opening up Citibank checking and savings accounts were not taxable,” the class action lawsuit states.

"Even if the airline miles were taxable, Citibank's practice of valuing the airline miles at 2.5 cents per mile is grossly unfair and deceptive. Airline miles have no value to Citibank customers that can be fixed at the time they are awarded. If redeemed, these miles typically have an average value to customers of between .76 cents per mile and 1.2 cents per mile. At least one study recently concluded that American Airlines miles in particular are only worth about .76 cents per mile.”