Comments (44)

Jake D. wrote on October 22, 2007 12:15 PM:

So much for "Blackwater spokeswoman Anne Tyrrell did not immediately respond" (see thread below).

Anonymous wrote on October 22, 2007 12:18 PM:

Why is the SBA issuing rulings on IRS regulations and classifications?

More importantly, who at the SBA made this ruling, what is its significance and was there political pressure applied by the White House to reach that ruling?

Blackwater is an umbrella of approximately 15 companies. Was their strategy to structure so they could be considered a "small business" by employing contractors, etc and having 15 shell companies so they fall under some legal definition of "small business?" Do they also receive HUBZONE preferences (like Shirlington Limo)? Are they an Alaska-Native Corporation?

Let the games begin.

taters wrote on October 22, 2007 12:21 PM:

What does the SBA have to do w/taxes?
Nothing.

The SBA, via this admin. has been providing loans to subsidiaries of corporations. God forbid a legitimate small business apply for one. This could even get more intriguing...

Cit92 wrote on October 22, 2007 12:27 PM:

Someone might want to check out an SBA (disaster) loan to "Austex Development." Austex Development is a Texas-based bundler for the GOP and for the Bush-Cheney campaign. Austex has made millions. Austex is allied with Karl Rove.

Why Austex needed an SBA loan is beyond me.

Ugh wrote on October 22, 2007 12:38 PM:

I'm fairly certain that any SBA determination is absolutely not binding on the IRS. If the facts are as they IRS puts them in the letter (which they generally are), then it's pretty clear that the so-called independent contractor was an employee. More damning is Waxman's quotes from Prince's prior testimony, which make it pretty clear that the security guys are employees.

Citi92 wrote on October 22, 2007 12:38 PM:

Well lookie here.

Here's an "investigations company" that is women-owned (getting Federal contracting preferences) that just happens to have the same address as Blackwater.

http://www.fedvendor.com/contractor/CRR00000000000101051/profile.htm

Anyone know anything about Progressive Investigations?

luneylugume wrote on October 22, 2007 12:40 PM:

They have a shrine to enron . Obfuscation arrogance and public relations are their mantra . Plunder The Lambs , except this time we do it right . Delicate Rambettes of of accounting wielding imaginary powers granted to them by a gross incompetent .

Michael wrote on October 22, 2007 12:46 PM:

How on earth can they not be employees????? That's absurd. A mercenary by definition cannot be an "independent contractor," because basically they are a soldier whose entire "work product" is directly controlled by supervisors, superior "officers." I hope all these criminals rot in jail.

Anonymous wrote on October 22, 2007 12:53 PM:

Erik Prince's regular references to "my guys" would belie their "independent contractor" status.

Plus, if they're all independent contractors, then he lied (or at least obfuscated) in his testimony. In questioning about accountability of "his guys," Prince said all he could do is fire them or hold back pay. If all of "his guys" were independent contractors, the Blackwater Inc or the State Department for that matter, could individually sue each and every "independent contractor" it wants to.

This whole "independent contractor" thing will quickly become problematic.

incunabulum wrote on October 22, 2007 12:54 PM:

Sounds a little too convenient to me. So if a Blackwater "(sub)contractor" does something wrong, they just terminate the contract with that "Business of One?"

"It wasn't one of our employees. We didn't do anything wrong. We did have a bad contractor, which we used. But that contractor no longer works for us. You'll have to talk to them."

TheraP wrote on October 22, 2007 12:55 PM:

Ok. Now we have to assume that the IRS is also favoring repubs. If you or I want to call people independent contractors, it's not allowed. But if a repub loyal bushie wants it... piece of cake!

Just like DoJ, the IRS seems to be nothing but a tool of the bush regime.

One more way to provide welfare for the wealthy!

Dennis wrote on October 22, 2007 1:24 PM:

Ordinarily, the IRS would swoop down real fast on this if it was a regular American citizen doing the scaming.

Gotta wonder, tho, who at this moment, in the White House or its connections, is making phone calls and sending emails to the heads of the IRS to cover this up.

You don't have to be a blind conservative not to see it, just an ignorant one to deny it.

judyinnm wrote on October 22, 2007 1:24 PM:

The IRS is as politicized as the rest of the Federal agencies.

I light of the IRS' decision to investigate a church for preaching against war; but refusing to investigate churches that campaign openly for bush/cheney - I don't think Waxman's umpteen millionth investigation into this administration's cronies is going to matter.

Steve in Seattle wrote on October 22, 2007 1:24 PM:

IRS not SBA determines tax status. They may be Independent Contractors to the SBA for loans or such but that has no bearing on a tax determination.

Also that was an Appeals Office Determination. Which means it was being reviewed not just one agent's determination.

Also, I am sure the Appeals Officer would have seen it applied to more than one person and sought a coordinated position (involving review higher up). This is IRS policy.

Acknowledging that Blackwater is appealing means they know they have a problem.

EH wrote on October 22, 2007 1:44 PM:

I hear the Department of the Interior has ruled that Blackwater is in full compliance with all tax laws, so back off!

Duckman GR wrote on October 22, 2007 1:45 PM:

If as Prince said all he can do is fire them or send them home than they clearly are employees, you don't control "contractors" in that way. And that's no colloquilism, that "fire" comment, he didn't sling words around during his testimony.

Just like when Bush says that the White House has determined that something they are doing is legal, what the SBA says means nothing, ultimately the courts make that decision, obviously, which is why the Democrats failures regarding all those lunatic judges they so blithely passed on are so devastating to making things right in this country.

SBA should have nothing to do with Blackwater, hopefully Mr. Waxman will look into that as well.

GreatAuk wrote on October 22, 2007 1:55 PM:

The ultimate outcome strictly concerning the legality of this business model under federal tax code is irrelevant. In the current environment where businesses write the tax code, it's probably not prohibited.

The important thing to note here is that yet another corporation is happy to belly up to the taxpayer trough, but completely unwilling to chip in their fair share.

Keep paying your taxes everybody, hired killers gotta eat too.

Bill W wrote on October 22, 2007 1:58 PM:

[ judyinnm wrote on October 22, 2007 1:24 PM:
The IRS is as politicized as the rest of the Federal agencies. ]

No big surprise there, not under this administration.

Remember this story?

IRS tracked taxpayers’ political affiliation
http://tinyurl.com/2k59b2

don de drain wrote on October 22, 2007 2:00 PM:

There is a statute commonly referred to "Section 530" which allows workers who are technically employees to be treated as independent contractors for federal employment tax purposes if certain criteria are met. Furthermore, I would want to carefully review the actual practices of Blackwater (including terms of contracts signed with the workers) before reaching a conclusion as to whether the workers are employees or independent contractors for employment tax purposes. The issue of worker classification for employment tax purposes is not as clear cut as Waxman says or as the comments here would indicate.

That being said, there is circumstantial evidence that Blackwater is playing games with the federal government on a much broader level. Suggest that someone dig through the pleadings in the suits brought against Blackwater based upon the actions of these so-called "independent contractors." Those pleadings likely have statements that will come back to bite Blackwater on the worker classification issue.

BTW, the IRS is not easily manipulated along classic "political partisan" lines. I am not saying tha such manipulation never happens, but such manipulation is difficult to pull off. It is also very difficult for the general public to get a good understanding of what goes on at the IRS, due to very strict anti-disclosure laws. (These laws were put in place in reaction to Nixon's misuse of the IRS.)

goodgirlroxie wrote on October 22, 2007 2:02 PM:

I used to work in the area of labor law in California (I am NOT a lawyer, however.) The laws describing the legal differences between employees and subcontractors are very strict. It will be interesting to learn what comes out of these allegations of possible labor law violations by Blackwater. Please keep following this, as I seriously doubt there will be anything in the MSM about this until such time as actual charges are filed.

gtash wrote on October 22, 2007 2:02 PM:

I think it is amusing that anybody is surprised by the subcontractor ruse, especially considering the SBA, but also just about any Federal contract for construction. This is not new. People who really do own and operate small businesses have seen this played for years and been unable to compete against job-shops who routinely operate like Blackwater.

grinner wrote on October 22, 2007 2:29 PM:

Contractor vs. Employee: is very simple.

1. Reports to work in your 'office'. Uses your facilities/resources
2. Does not work for anyone else at that time, generally offering similar services to others.
3. Takes directions from you. You have the right to assign work, supervise, accept/reject output.

No matter what you call him/her, he/she is your employee.

Anonymous wrote on October 22, 2007 2:33 PM:

to the one who says
H wrote on October 22, 2007 1:44 PM:

I hear the Department of the Interior has ruled that Blackwater is in full compliance with all tax laws, so back off!

....we shall see, but it doesn't look good. Don't mess with the IRS.

Plus Blackwater gets huge tax write offs if it indeed provides for transportation, and 'logistic equipment' for 'our guys'.

SVH wrote on October 22, 2007 2:53 PM:

It sounds like Prince forgot the 'Al Capone' model the govenrment uses for bringing slick criminals to heel.

As a mercenary I'll look for him to shoot his way out.

Billy Pilgrim wrote on October 22, 2007 3:08 PM:

SVH

You're overlooking one thing. Times have changed. Al Capone in his time was considered an outlaw. Outlaws are now running the U.S. federal government. Honest citizens will soon be at the mercy of paid killers like Blackwater "contractors."

The cook wrote on October 22, 2007 3:18 PM:

There are some 20 items as tests for those who are qualified to be labeled contractors. While I can't remember them all, a partial list would be something like:
Provides all own tools.
Chooses how when and where the work shall be performed.
Works for 30 days or less at the task. (there are exceptions for this one)
Performs similar work for other entities.
Self supervised

Oh heck, just go read it all here>>
http://www.dol.gov/oasam/programs/history/herman/reports/futurework/conference/staffing/9.1_contractors.htm

theswan wrote on October 22, 2007 3:27 PM:

refering to blackwater, "they answered questions..., and described why the contractor status was a superior method "to suit the contractors needs"."
From this statement you would think that the contractor sets the goverment's rules for employees/contractors. Has it gottten to that?

Rick B wrote on October 22, 2007 3:30 PM:

The SBA does not make determinations regarding the contractor-employee status and the taxation of those individuals. The IRS does.

The spokesperson is getting desperate to say "Chairman Waxman’s letter fails to point out that this IRS Field Office letter is not a final determination and by law “may not be used or cited as precedent."" That letter is the determination the IRS uses to collect the taxes and apply the penalities to the employer.

The statement that the letter is not a predecent merely means that the IRS decision in one case cannot automatically be considered to be a legal decision for a different employer. That decision is administrative (made by an agency) rather than legal (made by a court.) But that decision is the one that the IRS uses to collect the back taxes.

An appeal of that determination by the IRS does not delay collection of the taxes, and anyone familiar with section 2 of IRS Publication 15-A will know that there is no reasonable grounds under law that will lead to overturning that decision.

Nor is it likely that even political pressure can cause then IRS to violate the Rule of Law in this case. If they did, then they would open the floodgates to every crooked "employer" and his crooked wife (paying a house maid as a contractor rather than an employee) who would challenge the IRS. For the IRS to let Prince go on this scam would be to gut the IRS as a tax collector.

TheraP wrote on October 22, 2007 3:53 PM:

The mere fact that this is now "news" is gonna make it really, really hard for the Prince to get his way now. Maybe before. But probably not now.

I hope he has to pay the back taxes and interest and penalties too.

And kick him out of Iraq on top of it.

The Prince is in the muck now. Even the two other mercenary groups won't want to see him get away with this.

Nail all these turkeys to the wall!

don de drain wrote on October 22, 2007 4:02 PM:

The Letter from IRS to Blackwater was in response to a Form SS-8 submitted to the IRS. The IRS letter does NOT mean that there is an ongoing IRS audit of Blackwater's federal employment taxes. Such an audit may very well happen now that Waxman has made this matter public, but it will be many, many months, perhaps a few years, before Blackwater gets a bill from the IRS for employment taxes based on a reclassification of the workers from independent contractor to employee, if Blackwater ever gets a bill from the IRS. There are a number of legitimate ways for Blackwater to minimize (or even avoid altogether) employment tax liabilities, even if the workers are true employees (which they probably are). Section 530, mentioned above, is one such method. THere are many other ways to significantly reduce the total taxes that will be paid by Blackwater if the workers are classified as employees by the IRS.

The focus should not just be on the employment taxes. The focus should be on the fact that Blackwater is attempting to avoid all of the financial liabilities and obligations that comes with treating the workers as employees while at the same time the company is providing information to Congress and the Courts which is completely inconsistent with the "independent contractor" position.

It shows in a very graphic way that the company can not be trusted.

eddie wrote on October 22, 2007 4:18 PM:

As a former musician, it truly galls me that many of my former companions are constantly being questioned on the classification of "freelance" musicians hired for a particular "gig" as independent contractors and subjected to audits, threats of litigation, etc. These guys barely make ends meet with money from gigs, but are still under continuing scrutiny (including, from state unemployment insurance agencies). Musicians are small potatoes; but when you have such egregious errors made by billion dollar "small businesses", not even a peep.

Maybe it's the smirk. Smirks of a feather . . .

danger wrote on October 22, 2007 4:27 PM:

It's sort of off the point, but in that picture, Erik Prince looks like a tanned Adolf Hitler sans moustache. The shadow from his nose even makes it look as if it's there.

Mark in CA wrote on October 22, 2007 4:56 PM:

It appears the question isn't whether or not these guys are employees. They are. But apparently there is a way -- this so-called Section 530 -- for these guys to be employees of Blackwater yet be treated as independent contractors for tax purposes. The real question seems to be do all the parties meet the requirements to fall under this treatment?

Jake D. wrote on October 22, 2007 5:39 PM:

That's not the "real" question, Mark in CA, as I pointed out in the first Blackwater thread on this issue: even if every single legal requirement for a "independent contractor" was met, Waxman is still going to accuse them of tax fraud.

Richard S. wrote on October 22, 2007 6:07 PM:

I believe even if you consult with the IRS and they tell you something, and it is wrong, you are liable and can't point back to them. Their advice is only "advisory" and you are ultimately responsible. I suspect it would relieve any criminal liability but not civil.

This is also true in areas like building codes. If the Building and Safety Dept tells you you need a 15 inch beam and it turns out, even after passing inspection, it is wrong, you gotta fix it.

The Richfield Bldg in downtown LA, in the 70's had to spend mucho millions to replace the underpinnings of the building after plans were approved all the way up the line.

judyinnm wrote on October 22, 2007 6:20 PM:

don de drain - There were many laws put into place, in reaction to Nixon's shenanegans. (In fact, there was an entire Constitution put into place in reaction to King George III's acttions.)

It's all moot, now. King George the Junior has proven that "if the president does it, that means it's legal".

So yes, the IRS also has to do Bush's bidding (there's a joke there somewhere, considering we're talking about a company that is operating under a "no bid" contract).

Dee Illuminati wrote on October 22, 2007 6:22 PM:

I read the news at MSNBC and was a bit surprised, the practice of contracting for the government is certainly within the realm of a legal basis, irrespective of if that contract is created: Corp to Corp, 1099, W2 or as an employee of a "contractor."

It is NOT against the law to contract as an employee with the Federal or state government. It is illegal to not pay 1099 taxes, and there is penalties for not paying those 'estimated or actual' taxes (1099) on a quarterly basis.

As to the confidentiality agreement and the NDA (non-disclosure affidavit), these are standard agreements that cover everything from confidential information, such as the names, locations, and titles of the individuals that the contractor is to perform work for, or it coud be confidential business information. In effect, there is a client expectation that that non-disclosure not be made.

On the matter of payment disputes, especially if there is teaming and subcontracting going on, there is really two unregrettable recourses that can be made: One is to take the matter to the Omsbudman of the agency, if there is genuinely services that have not been compensated, then this is enough of an incnetive to get paid promptly but usually dismissed for 'another reason.' There is occasions when contractors late-pay as they ramp-up operations and seek to bring more personnel on contract and the payment schedule agreed with the federal contractor lags the operating capital and contractors get 'squeezed.'

There is also the option to send invoices by registered certified mail and to keep receipts of the confirmation of delivery. If the late payments of a bona-fide contract are not made within the stipulated contract under the domicile of where the contract was written: And the contract often stipulates that the domicile of any disagreements be settled in the jurisdiction of the corporate entity, then a breach of contract, and an ongoing breach of that contract constitutes fraud which is best handled by the USPIS if that fraud is intra-state commerce. So even if the contract payments are delayed and the domicile is to be the impediment: the results if documented with confirmation of receipt can be an inquiry by the USPIS whom can be real nasty about interstate fraud and accelerate an investigation faster than other recourses, especially if there is 'one or more late payments to contractors' and that breach of contract can be labeled 'racketeering' where the US mail is a conduit for an ongoing endeavour to steal.

What is "illegal" actually a "fine or penalized higher rate of obligated tax" is not paying the quarterly amounts to the IRS based on the reported earnings. Where it could get nasty is where per-diem (living expenses and food) was agreed upon and the monies that were to be paid were not paid in a timely fashion to the IRS as a consequence of the employement compensation being made upon completion of the terms of the contract.

It is not at all uncommon for disputes to arise, not illegal to be a 1099 contractor, but the finger pointing when the back due taxes are due is always interesting. It also brings to question the practices of "fines" which I'm not sure actually fall under a contract or could be argued as "a contract of attrition" where not agreeing to the clause was a burden which required personal responsibility under what is otherwise generally viewed as a 'contract' where there is an implicit agreement to 'pierce the corporate veil' so to speak of the contractor in regard to assigned liability.

Government contracting is NOT for everybody, and the salaries look good until you have to pay the quarterly taxes, keep two residences, assume allot of responsibility (which often should be the onus of the government) and watch for your interests with unscrupulous contractors, not to mention 'just keeping alive' as a 24x7 occupation in a war zone.

In my initial post on this topic I said that this would come to 'contracting' and that Blackwater would shuffle the issue with teaming and sub-contracting the personnel to other companies. It is not uncommon to have non-compete clauses as well in certain lines of trade or areas that would require that Blackwater agree to allow contractors legally to work in Iraq in the event that there was a disruption in the Blackwater contract and the contractor wanrted to seek employment with another company in that country.

That is a 'ify' proposition as well, some contractors walk and go to a competitor and the enforcement of non-compete is not sought, as it might alienate the agency if the individual were high profile, or if there was teaming between the two contractors.

Faced with a legal battle upon arrival home for breach of contract for violation of a non-compete while working in Iraq, versus.. saying screw it and taking a position outside the non-compete clause, the issue is usually avoided by teaming agreements between contractors to keep most of the people happy as far as that is possible.

But the word "illegal" is not applicable though the headline has made it to press.

Just more woes for blackwater and I haven't a dog in the fight...

Pete wrote on October 22, 2007 6:56 PM:

This contractor/employee ruse is used pretty frequently in my experience. Not that it really applies here, but I've been in the position of being classified by my employer as an independent contractor when I was quite obviously an employee. For any companies looking to cut costs and climb out of or stay out of the red, it's a great option because now they're not responsible for FICA, unemployment insurance, etc. Plus workman's comp, and some other stuff I'm sure i forgot. That's a good savings right there, whether the company has 3 employees or 3000.

Since I had been a security guard before (where they also classified us as contractors to avoid tax and insurance liability, but it was a part-time college job and I was making under the annual payroll tax minimum so I didn't make an issue of it), I was pretty familiar with the scam and I called up the business manager and told her that them classifying me an a contractor was ... I don't think I came right out and said illegal, but maybe wrong, and she brushed it off and suggested that I speak with an accountant, which I did (even though I knew what he was going to say) and his response to me was "How much do you like this job?" Because if an employer is doing this, you don't have many options. You can fill out an SS-8 form, which is the IRS form where the IRS determines whether you're legally an employee. If they rule in your favor, the company is subject to fines and penalties and it's no secret to them which of their workers is responsible, which can make for an unpleasant work environment, more so in a Blackwater employee's case I assume.

And this wasn't some shady mercenary service; I was working for a VERY prominent liberal blog! I didn't want a headline to show up on Drudge that X was dodging their tax burden so I pretty much rode it out until they gave me some W-4s to sign after I'd been there 3 months because i didn't drop the issue. But that just goes to show you how tempting this practice is. Unless you get reported, chances are you won't get caught, because most people don't know enough about their workplace rights to raise the red flag.

(And for those who might call my story into question due to the liberal blog angle, I 100% assure you I was an employee, and what they were doing was illegal. Either the business manager knew what she was doing, or she was ignorant of the distinction. I don't know which I'd prefer. But as an editor, it definitely jaded me about the Wild West of employment practices in the blog world.)

Jake D. wrote on October 22, 2007 7:35 PM:

Which liberal blog, Pete?

Jake D. wrote on October 22, 2007 8:15 PM:

"Pete":

Is that you, Kevin Drum?

Cy Guy wrote on October 23, 2007 12:56 AM:

This is only tangentially related, but it occurred to me this morning after hearing two outwardly unrelated stories on the DC Progressive Talk station that maybe the two stories were related.

One was on Blackwater, the second was on Don't Ask, Don't Tell. I wonder if some of the gays who are rejected or kicked out by the military are instead working for Blackwater and other contractors. It would seem the ideal situation especially for someone who did a tour in Iraq with the military and then was kicked under DADT to go back and serve (perhaps side-by-side with their old unit) as a contractor making 5 times the pay. Both Blackwater and the soldier end up better-off, Blackwater getting an already trained employee, and the employee getting the pay-boost and getting to serve. However the taxpayers end up getting screwed as they do for any of the Contractor by picking up the additional cost, and by losing their investment in training the soldier.

Maybe if we ended DADT there would be less need for contractors at the military's feeding trough?

2turk wrote on October 23, 2007 4:44 AM:

For an employer to be deemed exempt from employee payroll tax withholdings via a Section 530 is not the cake walk some seem to profess. Compliance is fairly stringent an IRS brochure explains the requirements.

http://www.irs.gov/pub/irs-pdf/p1976.pdf

Alta Koker wrote on October 24, 2007 1:15 PM:

Jeesh. Let’s put this in perspective. SBA defines “independent contractors” in order to limit its programs to defined small business concerns. The Internal Revenue Service adds its own definition to make sure that it collects payroll tax from some entity, albeit an employer or an independent contractor, as IRS defines. The Labor Department chimes in with its definition to make sure that employers comply with labor, insurance and pension laws pertaining to employees and not try to circumvent the laws by incorrectly defining them as “independent contractors.” SEC has a different view as well. Wanna talk about state definitions? Florida has eliminated “independent contractors” entirely from its workers compensation law and requires sole proprietors to incorporate and become “employers."

Keep in mind that Sen. Waxman is talking about IRS regs. But he may want to look at labor laws as well. Smart money is on Waxman. My hunch is that Blackwater is trying to avoid paying payroll taxes, pension & insurance benefits for these mercenaries (yes mercenaries) that are risking their lives because it is not politically expedient to reinstate the draft.

Bladesmith wrote on October 24, 2007 7:17 PM:

Blackwater mercenaries disarmed and held at gunpoint, US military personnel. And have so far, not been held accountable.

I have a professional soldiers disdain for Mercenaries, and that is EXACTLY what Blackwater is, make no mistake.

They deserve whatever hard knocks they get.

Dear White House, the Army trains it's own protective services personnel. Likewise, I'm sure the other services do as well.

Yet you've gone out of house to hire mercenaries. Thats a slap in the face of our servicepersons.

If you can't run an invasion (This is not a war) without hiring mercenaries, you don't invade. PERIOD. Full stop.

Strong message follows.