Rep. Henry Waxman (D-CA), chairman of the House Committee on Oversight and Government Reform, accused Blackwater of "significant" tax evasion on Monday. The charges stem from the company's reliance on the "independent contractor" relationship to categorize all armed guards working on their contracts.
Waxman pointed out that DynCorp and Triple Canopy make their armed guards working on State Department contracts in Iraq full-fledged employees, which means they're required to pay federal income tax withholdings. Blackwater, by only hiring guards on an independent contractor basis, have not paid Social Security, Medicare, or unemployment taxes.
The issue came to light as the result of a Blackwater independent contractors' inquiry to the IRS, in which the government agency ruled that the company had improperly classified the individual as a contractor, when in fact the working relationship was one of employer-employee.
Waxman implies that Erik Prince gave misleading testimony to the committee during its hearing on Blackwater three weeks ago when he said that he employed his security force as independent contractors because "it is a model that works" and because BW guards prefer the "flexibility." Prince made those statements despite the IRS ruling, which had been concluded in March 2007.
The IRS had advised Blackwater: "You are responsible for satisfying the employment tax reporting, filing, and payment obligations that result from this determination."
Blackwater and the individual who had raised the complaint with the IRS reached a negotiated settlement on the matter, which included a non-disclosure agreement that has the oversight committee chairmen questioning Blackwater's intentions.
Waxman writes that the terms of the agreement specifically forbade the guard from disclosing any information to "any politician" or "public official," making it appear appears that Blackwater "used this illegal scheme to avoid millions of dollars in taxes and then prevented the security guard who discovered the tax evasion from contacting members of Congress or law enforcement officials."
The assessment only concerned the one person who had inquired, but the IRS's ruling could be disastrous for Blackwater, considering that the vast majority of the company's hired guns are independent contractors.
The IRS warned that its ruling "may be applicable to any other individuals engaged by the firm," which Waxman believes could pertain to the majority of those working Blackwater contracts in Iraq and Afghanistan. Getting their accounting in line with IRS expectations could add up to millions in back taxes for the company.
Blackwater's situation could also have sweeping implications across the private security industry, which uses (or abuses in Waxman's and, possibly, the IRS's view) independent contractor agreements to manage their work force.
Letter from IRS to Blackwater20071022100001.pdf
Letter from Henry Waxman to Erik Prince 20071022094624.pdf
Redacted non-disclosure agreement 20071022100027.pdf