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Blackwater USA Denies Lawmaker's Tax Evasion Jibe

by Leroy Baker, Tax-News.com, New York

23 October 2007


Blackwater USA, the private security firm operating in Iraq and Afghanistan, has strenuously denied an accusation by Henry Waxman, a senior Democrat lawmaker, that it evaded federal taxes by treating its staff as contractors rather than employees.

Blackwater, which is already the subject of Congressional scrutiny after its guards allegedly opened fire on and killed a number of civilians in Iraq, was recently called before the House Committee on Oversight and Government Reform to explain why it chooses to employ its personnel as contractors rather than as direct employees.

However, according to Waxman, Chairman of the Oversight Committee, new documents suggest that Blackwater may have engaged in "significant tax evasion" by failing to withhold and pay millions of dollars in Social Security, Medicare, unemployment, and related taxes. Waxman also alleges that the firm sought to conceal its conduct from Congress and law enforcement officials.

Waxman has based his accusations on an Internal Revenue Service ruling in March 2007 which stated that Blackwater had violated federal tax laws by treating an armed guard as an “independent contractor”.

"Unlike DynCorp and Triple Canopy, the two other major private military contractors providing security services to the State Department in Iraq, Blackwater classifies its armed guards as independent contractors rather than as employees. Under federal tax laws, this classification has important ramifications," Waxman wrote in a 13-page letter to Eric Prince, the Chairman of the Prince Group, which owns Blackwater.

"Businesses must pay Social Security, Medicare, and unemployment taxes for their employees. They must also withhold federal income taxes on their salaries. By classifying its armed guards and other personnel as independent contractors instead of employees, Blackwater has apparently evaded withholding and paying these taxes," Waxman added.

It emerged from the October 2 committee hearing that while its competitors classify their personnel as employees, Blackwater said that its guards prefer the "flexibility" of the contractor relationship and the method is "a model that works".

Waxman further accuses the company of concealing the IRS ruling from Congress by requiring an employee who questioned his classification as an independent contractor to sign a non-disclosure agreement.

In response to Waxman's letter, the Blackwater Group countered that: "The Chairman’s contention is incorrect."

In a statement released on Monday, Blackstone argued that the US government "has always been aware" of its relationship with its deployed personnel. It pointed out that the US Small Business Administration has determined in an official finding applying “the criteria used by the IRS for Federal income tax purpose” that “Blackwater security contractors are not employees”.

The company also stated that Waxman's accusation "depends heavily upon a single letter from an IRS Field Office" which is not a final determination and by law “may not be used or cited as precedent".

"The Chairman also fails to mention that Blackwater has appealed the ruling by the IRS Field Office and that no final determination by the IRS has been made," the statement added.

"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 Blackstone statement concluded.


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