Economic and technological developments have been great for offshore tax havens: Overnight mail has largely replaced wire transfers, prosperity has given Americans more money to shelter, and the Internet has given Caribbean banks and tax-shelter companies an easy marketing tool.
But credit card companies have suddenly found themselves caught up in these trends. As federal officials try to crack down on the companies that encourage U.S. citizens to shield assets from income tax, they say the easiest paper trail to follow is credit card transactions.
Last week the Justice Department filed a petition in U.S. District Court in Miami seeking to identify the John Does, as the filing put it, who used MasterCard or American Express cards credit, charge, or debit to conduct transactions with financial institutions in Antigua and Barbuda, the Bahamas, or the Cayman Islands in 1998 and 1999. The Justice Department is acting on behalf of the Internal Revenue Service.
A court ruling is expected imminently, and MasterCard International, American Express Co., and Visa, if it gets pulled into the investigation, will have to weigh their desire to cooperate with the government against their obligation to protect the privacy of their cardholders. At the moment, it is unclear whether the companies network records can yield the data the IRS is seeking.
As difficult a predicament as this is for the card companies MasterCard, for one, is already battling the Justice Department in an antitrust case that is expected to conclude soon it does speak to the success of credit card proponents in displacing cash, checks, and other forms of payment.
The memorandum filed by the Justice Department states: It is clear that as a practical matter, American Express and MasterCard are the only sources from which the requested information can be obtained. Even if the taxpayers at issue have filed tax returns with the Internal Revenue Service, their names are unknown, and, in fact, actual inspection of a particular taxpayers return is not likely to reveal understatements or misstatements of income resulting from transactions concealed through the offshore transfer of funds or the failure to report foreign accounts.
Moreover, the information sought cannot be obtained from the offshore banks, as Antigua and Barbuda, the Bahamas, and the Cayman Islands do not currently have information-exchange treaties with the United States that would allow the Internal Revenue Service to seek the requested information in connection with a tax investigation.
Jack A. Blum, a Washington attorney representing the IRS, said the tax-evasion problem has existed for years, but recently there has been an explosion on the Internet of people offering these accounts. It is not illegal to open an account with an offshore bank, Mr. Blum said, but U.S. citizens are required to report the existence of such accounts to the IRS, and many do not.
An American Express spokeswoman said the company would not comment until we see and receive documents about the matter. A company spokesman said AmEx does not issue cards through any banks in the countries named by the Justice Department.
MasterCard released a statement Friday saying it routinely cooperates with government investigations, but had received scant details about what information the Internal Revenue Service is seeking. MasterCard said it is mindful of our cardholders privacy concerns, and maintain[s] minimal, if any, personally identifiable information regarding MasterCard transactions.
James L. Accomando, a credit card consultant who is president of Accomando Consulting Inc. of Fairfield, Conn., said the data the IRS wants are not housed at MasterCard. Information about a MasterCard holder resides with the bank issuer, and transaction records reside at merchant-processing companies, he said.
All MasterCard knows is sales, Mr. Accomando said. They look at things at a very top level. American Express, on the other hand, has a closed-loop system for merchant processing and card issuing and thus would be more apt to house the information.
The card companies will probably argue that they dont own the information in the transaction, and therefore arent able to release it, said Alanna Kellogg, president of the Kellogg Group, an electronic payment consulting company in St. Louis.
David Bartone, a Washington lawyer with clients in the credit card business, said the court has to do a balancing act to decide between the right of the individual to be free of government intrusion, versus the governments right to enforce its statutes and laws.
According to court documents, the amount of income tax being lost is at least $70 billion a year. Papers filed by a lead counsel in the petition estimate that more than $5 trillion resides in offshore accounts, and there are more than 580 banks licensed in the Cayman Islands alone.