Special Report
IRS now going afterCredit Card slips
David Cay Johnston
New York Times
The Internal Revenue Service (IRS), strugglingagainst Caribbean havens it suspects of draining away at least$70 billion a year in personal income tax revenue, has set itssights on a new target - the credit card slips of suspected taxevaders.
The agency has asked a federal judge in Miami to issue summonsesfor two years' worth of records of MasterCard and American Expresscard transactions in the United States that were billed to bankaccounts in Antigua and Barbuda, the Bahamas and the Cayman Islands.
Using the Internet and other outlets, banks in those nations openlysolicit tax evasion in ways that the IRS says have proved attractiveto corporate executives, business owners, doctors and other wealthypeople in the United States.
Americans can legally move their assets offshore but are requiredto notify the IRS of those transactions and to pay taxes on theirincome worldwide. Some Caribbean countries offer an alluring taxhaven, however, because they impose no income tax and do not generallycooperate with IRS efforts to track down incomes.
But Americans who shelter income offshore face the problem ofputting their money to use. That is where a credit card or chargecard billed to an account at a Caribbean bank comes in handy,investigators say.
Banks in tax refuges issue MasterCards and Visa cards, which canbe used anywhere to draw cash and to pay expenses. The bill isthen paid automatically from the bank in the tax-haven country,leaving no record of income or spending except for the transactionreports from the networks that MasterCard, Visa and American Expressoperate.
Credit cards with $1 million monthly charge limits are being offeredby some of these banks, according to documents filed by the IRSin United States District Court in Miami. A federal judge thereis expected within days to decide whether to issue the summonsesrequested by the IRS.
MasterCard Inter- national, which, like Visa , licenses banksto issue credit cards, said yesterday that it would try to cooperatewith the government, but might not have the records the IRS seeks.Spokeswoman, Ms Sharon Gamsin, said MasterCard would also weighthe privacy interests of customers in deciding whether to fighta summons, if it is issued.
Ms. Gamsin said she did not know of any bank that had been droppedfrom the MasterCard system for helping tax evaders. The company'scontract, she added, requires member banks "to comply withall local laws." It is not a crime in the Caribbean tax-havencountries to help an American citizen evade American tax law.
The charge-card unit of American Express declined to comment lastweek on how it would respond to the court action.
Visa, the other big credit card issuer, was mentioned in the courtpapers, but the IRS is not seeking its records. Officials wouldsay only that the scope of the investigation was widening.
John Buchanan, one of the IRS managers supervising the campaignagainst tax evasion, said the request for credit card recordswas part of a widening inquiry into tax evasion using offshorebanks. He said the agency was stepping up its efforts both tocombat such evasion and to educate people that Congress taxestheir worldwide income.
The $70 billion estimate of lost tax revenue was in an affidavitby Jack A. Blum, a Washington lawyer who has long experience investigatingdrug dealers, money laundering and tax evasion for the UnitedStates Senate and other clients. He said that figure was his lowestimate. If the $70 billion proves to be correct, it means thatclose to a dime of each dollar individual Americans pay in federalincome tax is used to make up for offshore tax cheating.
The Organisation for Economic Cooperation and Development (OECD)in Paris and the United Nations have tried in recent years toascertain the extent of worldwide tax evasion through offshoreaccounts. They say they can only guess that in total it runs inthe hundreds of billions of dollars.
Joseph C West, an IRS special agent, said in an affidavit seekingthe payment records that "credit, charge and debit cardsare a common and purportedly a nontraceable method of accessingoffshore funds in any location where the card is honoured."
The request for records relies heavily on evidence supplied byMr John Mathewson, a Chicago executive who set up Guardian Bankin the Cayman Islands, which was used by more than 1,000 Americansto evade taxes. Mr. Mathewson, 72, a convicted money laundererwho received probation in return for helping convict his bank'scustomers, told investigators that 95 percent of his customersused credit, charge and debit cards. "Mr. Mathewson advisedthat he promoted the use of credit/debit cards so that his clientscould covertly access funds stored in the Cayman Islands,"Mr. West wrote in his affidavit.
That affidavit also described a mechanism used by the Royal Bankof Canada to routinely help wealthy Americans set up accountsoverseas and arrange for them to get American Express cards.
A Royal Bank spokesman in Toronto, Joe Konecny, confirmed thatthe bank helps some big clients obtain American Express cards,but said he was unaware of any evidence that it was helping Americansevade taxes. The bank is an investor-owned corporation, not aCanadian government agency.
A variety of Web sites feature the logos of MasterCard, Visa andAmerican Express and describe ways to get around United Statestax laws. The Web site of the Travelers Holding Company in theBahamas, for example, notes that Americans must report assetsbeing moved offshore, but adds that "there are several waysto establish an offshore account" without having to informthe IRS.
The site of Corporate Trust Services (Caribbean) Ltd. in Antiguasays under the heading `tax avoidance' that "although thereis in the United States the legal requirement to report holdingsin offshore companies to the local tax authorities, no matterhow restrictive these rules may be a greater tax savings may beachieved by the use of an offshore company."
All three credit and charge card companies said they were unawarethat their logos were being used in advertisements solicitingtax evasion. Mr. West said that the charge slips sought by theIRS would advance a number of investigations, including one into77 stock brokerage accounts established in tax-haven countries,66 of which use charge cards for access to funds in the accounts.
He said the IRS was also investigating a Medicare billing techniqueinvolving the use of an offshore bank to evade taxes on the saleof medical devices to the government at huge markups.