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House watchdog chairman says Blackwater may have violated tax laws, probably owes 'millions'

WASHINGTON — The Democratic chairman of a House watchdog committee said Monday that Blackwater USA violated tax laws and may have defrauded the government of millions of dollars, a charge the embattled security firm said is groundless.

Rep. Henry Waxman, who chairs the Committee on Oversight and Government Reform, released a March letter from the Internal Revenue Service that states the company's classification of a security guard as an independent contractor, instead of company personnel, was "without merit."

Under U.S. law, companies must pay Social Security and other federal taxes on their employees. But unlike other security companies operating in Iraq, Blackwater says the guards it trains, equips and deploys to Iraq and elsewhere are independent contractors hired directly by the federal government.

"By classifying its armed guards and other personnel as independent contractors instead of employees, Blackwater has apparently evaded withholding and paying these taxes," Waxman, D-Calif., wrote in a letter to Blackwater chief Erik Prince.

Waxman's charge comes as the company is struggling to salvage its reputation after a string of security incidents involving its guards, including a September shooting that left 17 Iraqis dead.

U.S. and Iraqi officials are negotiating Baghdad's demand that Blackwater be expelled from the country within six months, and American diplomats appear to be working on how to fill the security gap if the company is phased out.

Blackwater spokeswoman Anne Tyrrell said in an e-mail statement to The Associated Press that the company has appealed the IRS ruling and that no final determination has been made. Further, she said, the U.S. Small Business Administration has told the company that Blackwater security guards do not have to be classified as company employees.

"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," Tyrrell said.

An IRS spokeswoman declined to comment on the case, as is custom to protect privacy.

Waxman has been investigating Blackwater's business dealings for several weeks, including whether the State Department unfairly awarded Blackwater a noncompetitive contract and if its guards took control of two Iraqi military aircraft without permission.

According to the House Democrat, the IRS' finding was the result of an inquiry filed by a Blackwater guard. The guard later agreed not to discuss the matter with anyone, including politicians or public officials, in exchange for receiving compensation owed to him by Blackwater, Waxman said.

The worker's nondisclosure agreement, also released by Waxman on Monday, is "evidence that Blackwater has tried to conceal the IRS ruling and the evasion of taxes from Congress and law enforcement officials," he said.

The primary factor in determining whether a worker is an employee or independent contractor is the degree of control the business has over its worker. Incorrectly classifying a worker could mean steep penalties for the company, including a $25,000 penalty if the IRS determines an appeal is frivolous or groundless.

In its March letter to Blackwater, the IRS noted the company paid all of the guard's travel expenses and signed a written agreement detailing the type of work required.

"A worker who is required to comply with another person's instructions about when, where and how he or she is to work is ordinarily an employee," the IRS stated in the letter.

In testimony before Waxman's committee earlier this month, Prince said Blackwater was not trying to avoid legal responsibilities but rather wanted to give its guards more control of their schedule.

"We provide the trained person with the right equipment, the right training, the logistics to get them in and out of theater," Prince said. "When they get to Iraq or they get to Afghanistan, they work for the State Department."

Two other companies that provide similar services in Iraq and Afghanistan — DynCorp International and Triple Canopy — classify their workers as company employees.