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Senior Democrat seeks probe of Blackwater

Alleges violations of tax and labor laws

In a file photo, plainclothes contractors working for Blackwater USA take part in a firefight as Iraqi demonstrators loyal to Muqtada Al Sadr attempt to advance on a facility being defended by U.S. and Spanish soldiers, Sunday, April 4, 2004 in the Iraqi city of Najaf.

In a file photo, plainclothes contractors working for Blackwater USA take part in a firefight as Iraqi demonstrators loyal to Muqtada Al Sadr attempt to advance on a facility being defended by U.S. and Spanish soldiers, Sunday, April 4, 2004 in the Iraqi city of Najaf.

A senior House Democrat has called for a wide-ranging federal investigation into Blackwater Worldwide, alleging that the private security contractor violated tax and labor laws by classifying its guards as independent contractors rather than company employees.

Blackwater spokeswoman Anne Tyrrell said the charges are “completely without merit.”

“Blackwater’s classification of its personnel is accurate, and Blackwater has always been forthcoming about this aspect of its business with its customer, the U.S. government,” she said in an e-mailed statement on Monday.

But Rep. Henry Waxman, who chairs the Committee on Oversight and Government Reform, says Blackwater’s claims on its business status “appear dubious.”

In letters sent Monday, Waxman asked the Internal Revenue Service and the Labor Department to investigate whether Blackwater defrauded the government of tax revenue and violated labor laws. Waxman also asked the Small Business Administration to determine whether Blackwater violated federal regulations by claiming it was eligible for small business preferences.

“The implications of Blackwater’s actions are significant,” wrote Waxman, D-Calif., in a memorandum to his colleagues on the panel. “Committee staff have estimated that Blackwater has avoided paying or withholding up to $50 million in federal taxes by treating its guards as independent contractors rather than employees.”

Also, Waxman wrote, Blackwater’s claim as a small business has earned it more than $144 million in contracts, despite being one of the largest private military contractors and receiving nearly $1.25 billion in federal business since 2000.

Tyrrell said Blackwater “looks forward to continuing its cooperation with all inquiries that may result from these letters” and that “the company regrets the chairman’s decision to publicly air misleading information.”

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 and not company employees. Under U.S. law, companies must pay Social Security and other federal taxes on employees.

Waxman raised the issue last year, after he obtained a March letter from the IRS that warned that the company’s classification of a security guard as an independent contractor was “without merit.” The IRS’ finding had been the result of an inquiry filed by a Blackwater guard.

The company appealed the IRS ruling. Blackwater also said it had received assurances from the Small Business Administration that its security guards did not have to be classified as company employees.

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.

Waxman said Blackwater is trying to have it both ways. In defending itself against last year’s shootings involving its security guards, company officials asserted that they retained tight control of its guards and even fired some 122 guards in Iraq due to improper conduct. At the same time, Blackwater contends it does not have enough control over its guards to classify them as company employees, Waxman said.

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