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Waxman Accuses Blackwater of Millions in Tax Fraud, Cover-Up
It just gets worse and worse for Blackwater's relationship with the House Oversight and Government Reform Committee.
Today, committee chairman Henry Waxman (D-CA) accused Blackwater CEO Erik Prince of hiding "tens of millions of dollars, if not more" in Social Security, Medicare and retirement taxes by classifying its security guards in Iraq as independent contractors. In a letter (pdf) to Prince, Waxman also called a financial settlement reached with one such former independent contractor "deplorable." The settlement required that the ex-guard not disclose a March 2007 IRS ruling that Blackwater's tax records were out of whack; and the guard was specifically prevented from disclosing that to any "politician" or "public official."
Either last year or early this year (it's not clear from the letter), a former Blackwater guard sought to determine whether the tax code designates him a Blackwater employee, which would entitle him to compensation for the money he spent paying his own taxes in 2005. The company received the IRS arbitration (pdf) in March: the services rendered by the ex-guard for the company in Iraq qualified him as an employee. That would explain why the non-Blackwater private guards in Iraq on the same State Department contract, working for DynCorp and Triple Canopy, work as full-time employees of their companies, which take care of their tax liability.
In testimony earlier this month to the committee, Blackwater CEO Erik Prince described the company's decision to classify Blackwater's guards as independent contractors as a "model that works," preferred by the guards for providing flexibility. He did not mention the IRS ruling in his sworn testimony, despite questions from Washington, D.C. Delegate Eleanor Holmes Norton into Blackwater's hiring practices.
The IRS ruling concerned one particular case. But Waxman said its logic "would appear to apply to your entire workforce in Iraq and Afghanistan." Extrapolating from the one case, the Democratic committee staff calculated that Blackwater avoided paying $15.5 million in Social Security and Medicare taxes, $15.8 million in federal income tax withholding, and $500,000 in unemployment taxes from the start of its last contract, in May 2006, through the receipt of the IRS ruling in March. It's an "unanswered question," Waxman wrote, whether Blackwater has continued to avoid paying these taxes after the IRS ruling. If so, then Blackwater would have evaded an additional $18 million through September.
That's not all. Waxman took special note of a non-disclosure clause in the settlement Blackwater ultimately reached with the ex-guard on June 6. It prevented the ex-guard from discussing the case with any "politician" or "public official." The chairman sees it as evidence of a cover-up, and called it "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. It is deplorable that a company that depends on federal tax dollars for 90 percent of its business would even contemplate forbidding an employee to report corporate wrongdoing to Congress and federal law enforcement officials.
Waxman found the "timing" of the non-disclosure agreement "particularly suspect." It was signed by Blackwater's general counsel, Andrew Howell, who the previous month had received requests for information on the company from the committee as part of its initial investigation into security contracting in Iraq. Howell's non-cooperation led to the committee issuing subpoenas for the relevant documents in August. It was during this period, Waxman noted, that the company reached the non-disclosure agreement with the ex-guard.
An e-mail request for comment from Blackwater spokeswoman Anne Tyrrell was not immediately returned.
Update: Here's Tyrrell's reply.
Comments (43)
Jake D. wrote on October 22, 2007 12:09 PM:So, even if every single legal requirement for a "independent contractor" is met -- whether one particular guard was not or was bound by a different non-disclosure agreement is not relevant to whether the remainder were "independent contractors" -- Waxman is going to accuse them nonetheless?
Jake D. wrote on October 22, 2007 12:17 PM:See, Blackwater Response, above.
Saint Augustine wrote on October 22, 2007 12:19 PM:Blackwater is another card in the deck from which Bush has built his administration. How many more of these "patriotic" servants of Herr Bush need to be exposed before the house of cards fall?
Perhaps Mr. Prince has inside knowledge of plans for future events that will eliminate the collection of taxes or prosecution of crimes?
P J Evans wrote on October 22, 2007 12:30 PM:My understanding is (IANAL), if the company has control of where, when, and how the contractor does the job, and does the supervision of the contractor, or the contractor is doing the same work as an employee would be doing, then the contractor is, under IRS rules, an employee. (See the Microsoft case, which set the precedent.)
luneylegume wrote on October 22, 2007 12:32 PM:I saw on tee vee that stupidity was not contagious . Wow I sure am glad . I wonder though where the purveyors of obtuse can't tell right from wrong up is down light is dark get it from ? The profit motive ? Gee why can't the suckers and sheep just git along ?
Steve in Seattle wrote on October 22, 2007 12:52 PM:This falls into the: "What were they thinking?" area.
I ran over the 20 factor test for employee vs independent contractor and I can't see making a case for independent contractors with a straight face.
Blackwater had to have too much control over the guards.
Did they provide their own tools?
Could they quit at any time and go to work for a competitor?
I am just amazed that any corporation of any size would try to pass off what clearly are employees as contractors.
CC wrote on October 22, 2007 12:54 PM:Jake D, exactly the opposite is true - the relationship between Blackwater and the "contractor" in question met every requirement for an EMPLOYEE.
Are you actually this dense, or are you just being willfully stupid?
dkm wrote on October 22, 2007 12:58 PM:I am curious as to why Jake D thinks that "every single legal requirement for a "independent contractor" is met." Obviously the person in the IRS who made the initial ruling that Blackwater is contesting didn't feel that the conditions had been met, and according to other rulings, they don't meet the definition of contractor, either.
EH wrote on October 22, 2007 1:23 PM:dkm: The IRS is a well-known liberal enclave. This partisan witchunt knows no bounds in its effort to discredit and destroy the lives of the veterans and patriots who comprise the Blackwater payroll.
That said, is it just Blackwater? What about the other 50+ contracting companies?
anona wrote on October 22, 2007 1:23 PM:Remember when Microsoft started? They hired people as Independent Contractors too. It's the same story... they did it to save themselves millions/billions of dollars, later to be found out of compliance with IRS rules. Remember that suit the "ICs/employees" filed and won against Microsoft? At that time more millionaires were made overnight when their benefits and stock options had to be paid!
There are 10 rules a contractor has to comply with in order to meet the strict IRS standards. It's clear that Waxman is right and that the Bush administration has allowed their pals to break the law for profit and for the fun of Bush/Cheney being in charge of death sqauds. What about Condi? The three of them have created a mess that is FUBAR standards of being friggin' f*'d up!
Once again, are we going to allow Nancy to let them get away with this with no accountability? I hope you start screaming and calling Pelosi's office on this, just another illegal use of taxpayer dollars.
Anonymous wrote on October 22, 2007 1:31 PM:Of course, Nancy Pelosi is NOT going to impeach:
RUN, CINDY, RUN!!!
www.cindyforcongress.org
Jake D. wrote on October 22, 2007 1:32 PM:Of course, Nancy Pelosi is NOT going to impeach:
RUN, CINDY, RUN!!!
www.cindyforcongress.org
Jake D. wrote on October 22, 2007 1:34 PM:My first post about whether this guard is an "independent contractor" or not didn't go through.
Anonymous wrote on October 22, 2007 1:44 PM:Folks,
mac2151 wrote on October 22, 2007 1:46 PM:Please don't do any more to encourage our troll. He's a twin to the class clown we all had in our JHS classes -- and equally stupid. He'll take any kind of attention, even in the form of insult.
Ignore him or ostracise him and he might take the cue if we're lucky.
The piece notes Andrew Howell as being the General Counsel for Blackwater's shady tax dealings. This seems to go hand-in-hand with Tom Howell & Northstar Consultants being the auditors for CPA Iraq, even though they employed no auditors.
Wide stance Larry Craig's daughter Shae was married to a David Howell. And, M David Howell Jr was the Arkansas swindler that comitted suicide in Calif & was the banking partner of J B Hunt.
jack buster wrote on October 22, 2007 2:05 PM:"Independent contractors?" Erik Prince has amazing gall to issue this lie.
"Independent?"
Just picture their "independence!" Six Blackwater machine-gun-toting guards hopping out of the helicopter, all independently, to guard Paul Bremer? Four Blackwater "Little Bird" helicopter pilots and machine-gunners, all independently, deciding which State Dept. convoy to protect? And those four Blackwater new hires ordered to drive, against their better judgment, all independenly in one unarmored Blackwater SUV through Faluja?
Yeah, Blackwater treats them as "independent contractors" after they're dead, but not before.
JoshA wrote on October 22, 2007 2:22 PM:I'm pretty sure Jake thinks that because Blackwater said it, and that's all he needs.
But if you read the letters, Waxman's the one that cites the law and what the other security outfits do, and Prince's response is basically "well, the IRS had to know we were doing this."
Proo wrote on October 22, 2007 2:53 PM:Good to see Blackwater is taking its cues from the WWE, which also labels all of its employees "independent contractors" so they can avoid the long-term liabilities caused by the wrestlers' debilitating injuries and painkiller addictions. Nice company they keep.
loki wrote on October 22, 2007 3:09 PM:Shorter Erik Prince:
"Yeah, we may be a bunch of lowlife jack-offs, but hey, the IRS doesn't mind!"
Rick B wrote on October 22, 2007 3:11 PM:Not only does Blackwater have every right to determine the location of work, the hiring of others to assist, the methods of work and also supply the tools used (vehicles, weapons, and so on), they also provide the food and quarters.
Would anyone hire security guards who provided their own training? Not if they had any reasonable expectations of decent performance, they wouldn't.
Blackwater's big competitor is DynCorp, and DynCorp hires all their workers as employees. [Dyncorp hired the individuals who provided helicopters services and maintenance in Bosnia, as they still do in Colombia, and all the U.N. personnell who worked in East Timor were contract employees of DynCorp. Keyword is "Employees."]
The IRS has been fighting this 'contractor' scam since Social Security was passed and since employee income tax withholding was passed. This is settled law.
Look at section 2 of IRS Pub 15-A for the official distinction of who is a contractor and who is an employee. It simply does not pass the laugh test for a paramilitary organization like Blackwater to try to pass off its employees as 'contractors.'
This is settled law. And when the employer is caught, he pays the income tax that should have been withheld, the FICA tax that should have been withheld (both employee and employer portions) and a sizable penalty. With luck Eric Prince is going to be a lot less of a multimillionaire when he leaves court, even with good lawyers.
Then if he loses his contract with the State Department, his revenue stream will be damaged.
Of course, he has set up a non-American corporation in the Caribbean, so he is not out of business. Plus he hires a lot of Pinochet left-overs from Chile as well as South Africans. Eric Prince is the new incarnation of Heinrich Himmler.
Legalize wrote on October 22, 2007 3:21 PM:In almost every jurisdiction folks like bouncers, repo men, and security personnel are expressly considered "employees" no matter the contractual relationship between the servant and the employer, because the nature of the employment almost always involves physical confrontation that is prone to drawing ire from the confrontee. In other words, Blackwater can't hire a goon squad and sit back and disclaim liability for that goon squad's intentional torts and crimes. This is respondeat superior 101. It isn't even a controversial matter.
r€nato wrote on October 22, 2007 4:10 PM:this 'contractor, not employee!' business is an old, old dodge/scam run chiefly by shady businessmen. The IRS cracked down on it in the late 80s/early 90s; before then it was rather common and easy to get away with.
In most cases it's rather simple to distinguish between a contractor and an employee. If they use their own tools, do not work exclusively at your offices and are free to contract with other companies (and actually do so), they are contractors.
if they work in your office primarily, are largely under your direction and are not free to contract with others to do the same work (or are nominally free to do so but don't in reality), they are employees.
I realize not every employment situation is this simple, but most of them are. If you're an employer and you are straining mightily to shoehorn your contractors into the employee description, chances are they are not, in fact, contractors.
David in NY wrote on October 22, 2007 4:14 PM:Armed security guards for the State Department are independent constractors?? Is that a joke? Sheesh, those guys are really crooks.
r€nato wrote on October 22, 2007 4:15 PM:Just picture their "independence!" Six Blackwater machine-gun-toting guards hopping out of the helicopter, all independently, to guard Paul Bremer? Four Blackwater "Little Bird" helicopter pilots and machine-gunners, all independently, deciding which State Dept. convoy to protect? And those four Blackwater new hires ordered to drive, against their better judgment, all independenly in one unarmored Blackwater SUV through Faluja?
whoa there. "Independent contractor" in this sense does not mean they can do whatever they please while working for the contracting entity; it means they are free to work for whomever they like.
When I hire a crew to shoot video for me, the fact that they are independent contractors does not mean they can show up when they like, record video or audio in any manner they choose, and so on. It simply means they offer their services to anyone willing to pay their rate, they own the tools of their trade, and they do not work exclusively for me.
TheraP wrote on October 22, 2007 4:30 PM:If the Prince is such a Patriot, he will willingly step up to the plate and pay all the IRS is due. He's doing this as a public service, practically, the way he presented himself at the hearing.
So, Prince, show us your patriotism! Step up to plate and cough up the money. Pronto!
logorrhea wrote on October 22, 2007 4:37 PM:The IRS is clearly in cahoots with Osama bin Laden.
Bill Brock - Chcago wrote on October 22, 2007 4:38 PM:http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
(lightly edited)
Who is an Independent Contractor?
A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Example: Vera Elm, an independent contractor for Blackwater, submitted a job estimate to Blackwater for contract security work at $160 per hour for 400 hours. She is to receive $12,800 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $64,000. She also shoots fleeing Iraqi civilians at her sole discretion. Vera is an independent contractor.
jong wrote on October 22, 2007 4:39 PM:I'd bet just about anyone Blackwater "contracts" with has been trained extensively by the US at taxpayer expense - Navy Seals, Army Rangers, Green Berets, etc.
bh wrote on October 22, 2007 4:43 PM:There is absolutely no question concerning the status of Blackwater's employees. As several commenters have noted above, Blackwater's employees meet every single one of the IRS's requirements.
I have been amazed for years that no one in the news media had the initiative to even check the IRS Web site where the status of employees is clearly stated. News reports continued to describe Blackwater employees as "contractors" without any basis in law or fact.
By the way, the other industry that loves to classify its employees as "contractors" is strip clubs. In every case where a club owner has gone up against the IRS on this one, he or she has lost.
The big question is can Waxman get the IRS or the Bush Justice Department to prosecute Blackwater.
jack buster wrote on October 22, 2007 4:43 PM:Renato, you are correct that independent contractors must "own the tools of their trade."
Did you miss the tools of the trade noted above: "six Blackwater machine-gun-toting," "Four Blackwater 'Little Bird' helicopter," and "one unarmored Blackwater SUV"?
Tools like these are hard to miss. But maybe you and your video crew could miss them.
G-luv from Seattle wrote on October 22, 2007 5:36 PM:I bet these Independent Contractors aren't even paid by Blackwater directly probably through some tax-free holding company in Dubai where they receive split payments. This is an age old tax dodging scam, that the most governments won't do much about, because the most powerful people are involved. Why would Haliburton move to Dubai? That should be considered treason in a time of war. But for most Republicans its like a drug addiction to weasel out of as much taxes as you can. If you won't serve your country, it should be your duty to at least pay up your fair share.
Moses wrote on October 22, 2007 6:01 PM:Jake D. wrote on October 22, 2007 12:09 PM:
So, even if every single legal requirement for a "independent contractor" is met -- whether one particular guard was not or was bound by a different non-disclosure agreement is not relevant to whether the remainder were "independent contractors" -- Waxman is going to accuse them nonetheless?
JW wrote on October 22, 2007 6:19 PM:I'm a tax guy. You're not. Employee/Independent contractor rules can be very complex. However, all things considered, only an idiot would think the Blackwater Employees were Independent Contractors. It doesn't even meet the sniff test simply because of the control Blackwater has to maintain over it's operatives during it's operations.
When the strip clubs started to loose to the IRS on the Independent Contractor ploy they simply shifted their marbles around. Now they "rent" dancing "stations" to the girls and charge them a percentage of what they bring in from lap dances and drinks. They also make the dancers tip out the rest of the staff so the owners don't have to pay them. Since it's all cash none of the dancers or staff bother to report it or pay any taxes and everyone is happy (except Americans who pay their taxes).
So what comes next? The Bush Admin pays Blackwater in cash with laundered money from trafficking Opium in Afghanistan? All in the name of national security.
Jake D. wrote on October 22, 2007 6:23 PM:Perhaps you didn't understand my question -- not only did it pass your (undefined) sniff test, but the actual legal test on the books as well -- even if every single legal requirement for a "independent contractor" is met, Waxman is still going to accuse them of tax fraud, right?
You are correct, however, that I never practiced tax law. That does not prevent me from asking the above hypothetical question.
chris from boca wrote on October 22, 2007 6:43 PM:how can the guard be entitled to "compensation" for underpayment of tax?
Anonymous wrote on October 22, 2007 6:48 PM:Again, ONE determination as to a single guard does not matter to Waxman's Accusations against Blackwater (see above): "Millions in Tax Fraud, Cover-Up".
Jake D. wrote on October 22, 2007 6:57 PM:ONE determination as to a single guard does not matter to Waxman's Accusations against Blackwater (see above): "Millions in Tax Fraud, Cover-Up" (I have no idea why my "personal info" is not being remembered).
LEGAL SOURCE wrote on October 22, 2007 7:03 PM:The key factor distinguishing an employee from an independent contractor is the "right to control." An independent contractor must have an unfettered right to refuse or ignore any direction or assignment from his contract principal; and if that principla has the right to assign his duties and/or specify how he is to carry them out, he is an employer. Which makes Blackwater's stance particularly interesting. It is contending that it has transported several thousand trained killers to Iraq and armed them, but exercises no supervision or control over them so they can simply go out and do whatever they want to whomever they want, without any consequences. So why the hell are American taxpayers paying for this?
LEGAL SOURCE wrote on October 22, 2007 7:04 PM:The key factor distinguishing an employee from an independent contractor is the "right to control." An independent contractor must have an unfettered right to refuse or ignore any direction or assignment from his contract principal; and if that principal has the right to assign his duties and/or specify how he is to carry them out, he is an employer. Which makes Blackwater's stance particularly interesting. It is contending that it has transported several thousand trained killers to Iraq and armed them, but exercises no supervision or control over them so they can simply go out and do whatever they want to whomever they want, without any consequences. So why the hell are American taxpayers paying for this?
Sully18 wrote on October 22, 2007 7:57 PM:I`ve posted this before:"No truth;No honor."Nothing more to say.
Jake D. wrote on October 22, 2007 8:06 PM:Sully18:
Do you think that FDR told the truth during WWII?
winner wrote on October 22, 2007 10:24 PM:While Blackwater is certainly in the wrong about this, the numbers Waxman is throwing around don't seem to account for the taxes paid by those contractors, unless I missed something.
As a bona fide independent contractor, I find the IRS wants to call EVERYONE an employee if it can even remotely make the case, simply because it's easier for them, which makes my life and every other IC's very annoying. I have to structure contracts carefully to avoid reclassification, and some companies simply won't deal with me because they don't want the risk and ensuing penalties/audit.
Holly McLachlan wrote on October 23, 2007 2:00 AM:http://www.harpers.org/archive/2007/10/0081741
I don't have access to Harper's online, but the October issue (purportedly) contains a copy of a Blackwater employee contract. IANAL, but I am an independent consultant, and a contract that constrains the worker the way this one does clearly violates the IRS definition of 'independent' contractors. Having read a fair bit of the contract in the print version, I'm surprised that anyone with the necessary skills would work for Blackwater (if this is a representative example). Could be that Triple Canopy and Dyncorp have similarly wretched terms, but... it just looks like they're taking advantage of young men who still think they're (damned near) immortal, and who think $600/day is worth the gamble.