House panel chair accuses Blackwater of tax evasion

The Democrats' top House investigator has turned up the heat on Blackwater USA, accusing the embattled security company of evading millions of dollars in taxes from its contracts in Iraq.

In the past four days, Rep. Henry Waxman, D-Calif., head of the House Oversight and Government Reform Committee, has issued two sternly worded letters to Erik Prince, chairman of the Prince Group, which owns Blackwater. The letters asked for information related to the firm's business dealings, financial management and annual profits. They also suggested that a pair of lucrative security contracts may have been awarded without competition.

The most aggressive salvo in this increasingly public feud may have been fired in Monday's letter, as Waxman accused Blackwater of classifying its overseas security guards as independent contractors -- rather than company employees -- to avoid paying Social Security, Medicare and unemployment taxes.

Blackwater denied the accusation and said the government approves of its classification system.

Waxman's committee released a letter from an Internal Revenue Service field office that was investigating a complaint by a former Blackwater "personal security specialist" in Afghanistan who had questioned his employment status. The field office said Blackwater's independent contractor classification was "without merit."

Before it agreed to pay the former security specialist back pay and other compensation, the company required the employee to sign a confidentiality agreement, according to Waxman.

The agreement, which was released by the committee, prohibited the guard from disclosing the settlement to "any politician" or "public official," and emphasized, in bold, underlined and all-capital letters that, "The utmost protection and nondisclosure of confidential information is of critical importance and is the essence of this agreement."

"This nondisclosure agreement is abhorrent on its face," Waxman wrote. "Nondisclosure agreements that prohibit individuals from reporting illegal conduct to public officials have been widely held to be unenforceable as against public policy. It is deplorable that a company that depends on federal tax dollars for over 90 percent of its business would even contemplate forbidding an employee to report corporate wrongdoing to Congress and federal law enforcement officials."

Blackwater is appealing the IRS ruling, which was limited to the status of just the one employee and "may not be used or cited as precedent." But the ruling "may be applicable to any other individuals engaged by the firm under similar circumstances," the IRS letter added.

Committee officials would not comment about whether the tax evasion allegations have been forwarded to the Justice Department.

In a statement, Blackwater said the government was aware of its classification system, pointing to an official finding by the Small Business Administration that for the purposes of federal income tax collection, "Blackwater security contractors are not employees."

Government Executive requested a copy of the SBA document from Blackwater, but it was not provided.

"At the recent [Oct. 2] hearing before the committee, Blackwater answered questions about the difference between employees and independent contractors and described why the contractor status was a superior method to suit the contractor's needs," the statement said. "It is unfortunate that the chairman has relied upon a one-sided description of the issue to color public perception without all the facts being presented."

Between May 2006, when the company won its current State Department contract, and the IRS ruling in March 2007, Waxman's staff calculates that Blackwater avoided paying $15.5 million in Social Security and Medicare taxes, $15.8 million in federal income tax withholding and $500,000 in unemployment taxes.

It is unclear if the nearly 1,000 Blackwater security contractors now in the Iraq are paid as company employees or independent contractors. Waxman has asked the firm to turn over documents clarifying the status of its employees as well as all communication with the IRS about the subject.

If the company continued with its classification system from April 2007 through September 2007, the taxes avoided would balloon by another $18 million, Waxman concluded.

DynCorp and Triple Canopy, the other two major private security contractors operating in Iraq, classify their guards as employees, the committee said.

Meanwhile, in his letter to Price on Friday, Waxman requested documents related to the firm's 2003 contract with the Coalition Provisional Authority and a 2004 contract with the State Department. Both contracts were let without competition, Waxman contended.

The congressman also wants documents related to the company's handling of the Dec. 24, 2006, shooting of a guard for the Iraqi vice president by a Blackwater employee, its payments to the families of Iraqis who have been killed or injured by Blackwater workers and a breakdown of all incident reports involving Blackwater guards in Iraq.

Waxman issued similar records requests to Secretary of Defense Robert Gates and Secretary of State Condoleezza Rice.

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