Tax Fraud Allegations Against Blackwater

Blackwater USA continues to be in the news, this time over allegations that it thinks that it is above the tax laws. 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. A copy of Waxman's letter to Erik Prince can be found here: (http://oversight.house.gov/documents/20071022094624.pdf ) 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. More coverage can be found at FoxNews (http://www.foxnews.com/story/0,2933,304221,00.html) Here are some highlights:

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.

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.

Naturally, Blackwater claims total innocence in everything. Then why the nondisclosure agreement?