Rep. Henry Waxman Levels Tax Fraud Allegations Against Blackwater

WASHINGTON – Rep. Henry Waxman has leveled new accusations against embattled Iraq security contractor Blackwater USA, saying the firm appears to be conducting a "tax scheme" to avoid paying millions of dollars to the federal government in payroll taxes, Social Security and Medicare benefits.

Waxman, chairman of the House Committee on Oversight and Government Reform, also alleges the company is trying to hide its actions — a claim the Moyock, N.C.-based firm vehemently denies.

Blackwater is the largest private security contractor working for the State Department in Iraq, and has been under heavy political fire from Waxman's committee for much of the past year for its conduct in Iraq.

The House investigation ratcheted up after a deadly Sept. 16 shootout on the streets of Baghdad left more than a dozen Iraqi civilians dead. The incident also is being investigated by the State Department and the FBI in cooperation with Iraqi officials.

The latest allegations stem from a complaint filed by an unnamed former Blackwater worker that turned up as part of the oversight committee's investigation. Blackwater — unlike its peer companies, DynCorp and Triple Canopy — classifies its workers as independent contractors rather than as employees. Under IRS rules, employers generally have to withhold payroll taxes, Social Security and Medicare payments from employees — but not for independent contractors.

In a letter dated Monday to Blackwater founder and chief executive Erik Prince, Waxman, D-Calif., says his claims of tax evasion are supported by an IRS decision earlier this year against the company and overall IRS rules outlining the difference between independent contractors and employees. Waxman adds that a nondisclosure agreement between Blackwater and the former employee proves the company is trying to prevent information about its tax preparations from being released.

Waxman says he believes that based on the IRS definition, most of Blackwater's workers probably fit the description of "employee" rather than "independent contractor," and therefore by his staff's calculations, Blackwater could owe as much as $15.5 million in Social Security and Medicare taxes, $15.8 million federal income tax withholding and $500,000 in unemployment taxes for the time frame between May 2006 and March 2007.

• Click here to see Rep. Henry Waxman's Oct. 22 letter to Blackwater USA.

• Click here to see the IRS letter indicating its ruling on the former Blackwater guard's complaint.

• Click here to see the Blackwater nondisclosure agreement with the former guard.

Blackwater spokeswoman Anne Tyrrell, reached Monday by phone at her Northern Virginia office, dismissed Waxman's claim as an unfounded attack on the company based on a complaint from a problem worker.

"I would say it's definitely a pile-on," she said, cautioning against "a rush to judgment" over the allegations.

"Those numbers reflect a presumption that the taxes in question have not been paid by the individuals, and it's a short-sighted approach to the issue," she said.

According to IRS rules, a company could face up to $25,000 in penalties if it wrongly classifies its workers as independent contractors when they are actually employees. The determination is based on criteria such as how much control the company has over the worker.

According to Waxman, the former worker — an unnamed "personal security specialist" stationed in Afghanistan — complained to the IRS about his classification.

On March 30, the IRS sent a letter saying that Blackwater's claim that the employee was an independent contractor was "without merit," and ruled that the worker was an employee, Waxman wrote.The letter also suggested that its ruling could be applied to other Blackwater workers.

Waxman also pointed to a nondisclosure agreement between the worker and Blackwater that Waxman writes, "prohibited the guard from disclosing any information about Blackwater to 'any politician' or 'public official.'"

"This nondisclosure agreement is abhorrent on its face. Nondisclosure agreements that prohibit individuals from reporting illegal conduct to public officials have been widely held to be unenforceable as against public policy," Waxman contends in the letter.

The agreement was signed on June 6 as part of a monetary settlement, more than a month after the IRS ruling. Under the agreement, the guard agreed not to talk about any confidential information, including the terms of the settlement.

"It is difficult to read the IRS ruling and the nondisclosure agreement and not question Blackwater's intent and actions," Waxman wrote.

Tyrrell declined to identify the worker in question, but said, "He was a person who knew that we were not in a position to publicly defend ourselves because of the nature of the work he was doing, and the nature of the work we do." She also declined to elaborate on the work the man — described by Waxman as a guard — did for Blackwater.

In the letter, Waxman demands several company documents, including communications with the IRS, internal legal discussions about the company's decision to classify workers as independent contractors and job descriptions and other information of any Blackwater worker hired under a federal contract as well as any nondisclosure agreements with its workers.

Tyrrell echoed remarks made by Prince in congressional testimony about the use of independent contractors, calling it "a model that has worked" and which the company plans to continue to use.

Tyrrell said labeling workers as independent contractors is helpful to them because it enables their schedules to be more flexible, for instance, around holidays and when they want time off to be with family. She denied that the company used the classification to hide other information about its role in Iraq.

"We've never ever concealed the fact that this is what they (independent contractors) do and this is how they are characterized. It's a model that worked for us and it's a model that worked for the people that worked on these contracts," Tyrrell said, adding that Blackwater has never been anything but forthcoming.

She added that the IRS letter that Waxman mentions is being contested by Blackwater, and doesn’t represent a final determination. She also noted that the U.S. Small Business Administration has determined that Blackwater security contractors are not employees.

Blackwater is authorized to have about 1,000 independent contractors at any one time in Iraq under the current contract with the State Department. Tyrrell said that the actual number that has served is closer to 4,000 because of scheduled rotations.

IRS spokeswoman Nancy Mathis declined to comment on the matter, saying federal privacy law prohibits the disclosure of taxpayer information.