The congressman leading an investigation into Blackwater USA said Monday that the embattled security company may have evaded tens of millions of dollars in federal taxes and was seeking to hide its tax practices.
Rep. Henry Waxman, a California Democrat, said that North Carolina-based Blackwater has avoided paying Social Security, Medicare and unemployment taxes by treating its armed guards as independent contractors and not employees. The other two large private security companies in Iraq, DynCorp and Triple Canopy, classify their guards as employees and pay the federal taxes that Blackwater has not, Waxman said.
The issue came to the attention of the IRS when a Blackwater guard working in Afghanistan complained that the company had classified him as an independent contractor. The IRS said Blackwater's classification was "without merit" and ruled in March that the man was an employee.
Blackwater agreed to pay back wages and other compensation to the man but only on the condition that he not talk to any politician or public official about the company.
"The utmost protection and nondisclosure of confidential information is of critical importance and is the essence of this agreement," the settlement stated in text that was all capital letters and underlined. It was released by Waxman, who obtained it from Blackwater after issuing a subpoena.
"This nondisclosure agreement is abhorrent on its face," Waxman wrote Monday to Blackwater founder Erik Prince. "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 issued a statement Monday saying that Waxman was incorrect about the tax issue and that the company was appealing the IRS ruling. The U.S. Small Business Administration has determined that Blackwater security contractors are not employees, the company 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," the statement concluded.
The company, based in Moyock near the Virginia border, deploys about 1,000 contractors to protect the U.S. ambassador and other diplomats in Iraq. Its federal contracts have cost taxpayers more than $1 billion since 2001.
Waxman, chairman of the House Oversight and Government Reform Committee, has been investigating Blackwater since 2004. The scrutiny intensified after a Sept. 16 shooting in Baghdad in which Blackwater contractors are said to have killed up to 17 civilians in a crowded square.
The Iraqi government has demanded that Blackwater leave Iraq and that the shooters be tried in a Baghdad court. The State Department has signaled that it will not renew Blackwater's contract when it expires.
Blackwater has been working in Iraq since 2003. Waxman's staff looked at the most recent State Department contract and estimated that between May 2006 and March 2007, Blackwater avoided paying $15.5 million in Social Security and Medicare taxes and $500,000 in unemployment taxes.
William Turnier, a professor of tax law at the UNC-Chapel Hill law school, said employees are subject to the control of their employers, who decide when and how work must be done.
Independent contractors, on the other hand, provide their own tools, decide when to start and finish work, and determine how to proceed with their work. The classic example of an independent contractor is a house painter, who negotiates a price, brings his own tools and truck, and decides how to do his job each day.
Turnier was skeptical that Blackwater security guards would meet this definition.
"These guys must go out when Blackwater tells them to," Turnier said. "They're following strict orders, and I don't think they are supplying their own guns or vehicles."