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Obama, Durbin, Kerry Call for Investigations of Alleged Blackwater Tax Dodge
The mad proliferation of Blackwater investigations continues.
Earlier this week, House sleuth Henry Waxman (D-CA) accused Blackwater 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.
Today, Sens. Barack Obama (D-IL), Dick Durbin (D-IL), and Sen. John Kerry (D-MA) piled on, asking for investigations of Blackwater's alleged tax dodge.
Obama and Durbin asked U.S. Treasury Secretary Henry M. Paulson for a full investigation and audit of the company's tax setup. Noting that legislation they introduced earlier this year would forbid contractors from using this kind of loophole, they write (the full letter is below):
It is difficult to fathom how Blackwater employees in Iraq can be considered independent contractors. They are trained by Blackwater, paid by Blackwater, and told whom to guard by Blackwater. These are not independent small businessmen establishing their own individual working relationships with those they are hired to protect.
As for Kerry, he wants the Senate Finance Committee, of which he's a member, to dig in and investigate too. So he wrote Chairman Max Baucus (R-MT) and ranking member Chuck Grassley (R-IA) to request an investigation.
All of the senators don't think much of Blackwater's reliance on a determination by the Small Business Administration that they could classify guards as independent contractors. First of all, as Spencer reported earlier this week, the SBA determination only dealt with an employee in Guam. More importantly, the SBA says it carries "no legal weight."
Unfortunately for Blackwater, Kerry is also the Chairman of the Committee on Small Business and Entrepreneurship, and he's on the case. Now he wants Blackwater to explain what the SBA finding has to do with anything. His letter to Prince, sent today, is also below.
Obama and Durbin's letter to U.S. Treasury Secretary Henry M. Paulson:
Dear Secretary Paulson:We are writing to ask for a full investigation and audit of Blackwater USA’s practice of classifying many of its personnel as independent contractors instead of employees. As House Oversight Committee Chairman Henry Waxman recently found, Blackwater may have enjoyed an unfair competitive advantage over other contractors if its classification were incorrect, and as a result, may owe the American taxpayer millions of dollars in Social Security, Medicare, and unemployment taxes.
Misclassification of workers as independent contractors is a widespread problem in our country, but it is particularly disturbing that a government contractor of Blackwater’s scope may be engaged in it. According to the Internal Revenue Service (IRS), the misclassification of workers accounts for 30-40 percent of the $20 billion annual federal employment tax gap and can also lead to the loss of basic worker protections under labor law. As you may know, we introduced S. 2044, the Independent Contractor Proper Classification Act (ICPC), earlier this year to improve enforcement of existing laws protecting workers from misclassification and laws ensuring that employers comply with their employment tax obligations. The legislation also modifies the Section 530 safe harbor in tax law that currently encourages misclassification and protects some employers engaged in it.
The Section 530 safe harbor in tax law requires the IRS to excuse misclassification for employment tax purposes and allow an employer to continue reporting employees as independent contractors if the employer (1) has been treating similarly situated workers as independent contractors; (2) has been consistently reporting the workers as independent contractors to the IRS and has been issuing 1099’s to the workers; or (3) has a reasonable basis to classify employees as subcontractors. The reasonable basis test is satisfied if the employer meets any one of the following: (a) the employer reasonably relied on a court decision or IRS ruling issued to the employer; (b) it was the subject of an IRS employment-classification audit that did not result in any “assessment” for misclassification; or (c) it relied on a long-standing practice of a significant segment of the industry.
We are concerned that Blackwater may be violating the law by inappropriately classifying its workers as independent contractors. It is difficult to fathom how Blackwater employees in Iraq can be considered independent contractors. They are trained by Blackwater, paid by Blackwater, and told whom to guard by Blackwater. These are not independent small businessmen establishing their own individual working relationships with those they are hired to protect
In a statement to the Associated Press, a Blackwater spokeswoman said the company has appealed an IRS ruling related to a specific Blackwater associate where the IRS determined that the worker had been misclassified. The spokeswoman further stated that the Small Business Administration (SBA) told the company that Blackwater security guards do not have to be classified as company employees. We do not believe it is appropriate for Blackwater, or any private company, to rely on the SBA for tax classification determinations either under Section 530 or any other provision of law and ask you for clarification.
The Blackwater case is a perfect example of the failure of tax enforcement and the need for reform of the Section 530 provision. That provision currently bars the IRS from writing rules, regulations, or guidance on complying with the law. Without the ability to provide direction to employers and its own auditors, the IRS is left with piecemeal enforcement that, at best, creates confusion among businesses, and at worst, allows companies like Blackwater to purposefully evade the law.
Our legislation is pending before Congress, and we look forward to working with you on it. In the interim, we ask that you open a full investigation into Blackwater’s classification practices.
Sincerely,
Senator Barack Obama
Senator Dick Durbin
Kerry's letter to Prince:
October 26, 2007
Mr. Erik Prince Chairman
The Prince Group
1650 Tyson Boulevard, Suite 800
McLean, VA 22102
Dear Mr. Prince:
Earlier in the week, I sent a letter to Small Business Administrator Stephen C. Preston regarding a press release issued by Blackwater Worldwide in response to House Committee on Oversight and Government Chairman’s Waxman inquiry about possible tax evasion by Blackwater Security Consulting, LLC. The letter inquired about the following statement by Blackwater: “The U.S. Small Business Administration has determined in an official finding applying ‘the criteria used by the IRS for Federal income purpose,’ that ‘Blackwater security contractors are not employees.’’’
I received a prompt response from SBA Administrator Preston indicating that the Small Business Administration issued a size determination regarding Presidential Airways, an affiliate of Blackwater. As expected, the letter states that “…SBA’s size determinations are solely for the purpose of ascertaining eligibility for our small business programs and have no applicability to tax liability matters.”
I would like to know why Blackwater relied on or referenced an SBA size determination for classifying its workers for tax purposes. Please send me any documents related to the SBA size determination and your classification of workers as employees for tax purposes, an explanation of the chain of command of Blackwater workers who are deployed in Iraq and Afghanistan, and the status of any IRS audit of Blackwater and any related companies.
Thank you in advance for your cooperation.
Sincerely,
John F. Kerry
Chairman
Comments (20)
v. popvli wrote on October 26, 2007 3:12 PM:even soldiers of fortune have to pay taxes. you can't chase the taxman away with hired guns. don't give cheney any ideas.
watercarrier4diogenes wrote on October 26, 2007 3:16 PM:Shades of Faux News chyrons, Max Baucus is a 'D-MT', not an 'R-MT'.
TheraP wrote on October 26, 2007 4:03 PM:How independent can you be in a compound that's almost like a prison?
Dee Illuminati wrote on October 26, 2007 4:07 PM:The Independent Contractor Proper Classification Act. Hmmmmm... learned something new here.
I was not aware of the act.
I agree in the part:
"The Blackwater case is a perfect example of the failure of tax enforcement and the need for reform of the Section 530 provision. That provision currently bars the IRS from writing rules, regulations, or guidance on complying with the law. Without the ability to provide direction to employers and its own auditors, the IRS is left with piecemeal enforcement that, at best, creates confusion among businesses."
In my initial reading of this news story I discounted the story as a "yawn" based on pre Independent Contractor Proper Classification Act passage.
But as of September 12, 2007 there might have been a failure to pay taxes????
hmmmmmmmmm... interesting development, make a mental note and attach to lint trap mind in the event that somebody proposes 1099 work....
intp wrote on October 26, 2007 4:14 PM:This one cuts two ways. If Blackwater treated them as independent contractors, they each individually would need to pay their own taxes (FICA, income, etc.) Blackwater must have the records of their 1099s, so it will not be hard to track them down individually to see if these "patriots" are paying their fair share of taxes. Won't it be interesting to know if they actually did? However, from what I know of the IRS rules, there is no way these guys are independent contractors. It is an interesting concept though: State Department hires private contractors outsourcing security, then the contractors outsource it again to independent contractors. Hurray for private enterprise.
dasher wrote on October 26, 2007 4:17 PM:Please do not misunderstand me; I am 100% opposed to Blackwater in every concievable way. I'm also a corporate and business lawyer who is quite familiar with the legal and tax issues involved in classifying person as employees versus independent contractors (and my spouse is an accoutant who specializes in small business; we have been known to discuss these issues under the topic of "how was you day, dear?").
Unfortunately, I can practically hear Herr Princes' reply to Senator Kerry's letter, which will probably contain the equivalent of the words "pound" and "sand".
I'd like to say I can't wait for these investigations to heat up, because there's no way Blackwater should have a snowball's chance in hell on the merits of this argument, yet I can't escape the sneaky suspicion that they'll wiggle out of it somehow.
They've got powerful friends looking after them, and those friends control 2/3rds of the government, a great deal of corporate interests and most of the media.
Tross wrote on October 26, 2007 4:17 PM:It's worth noting that Blackwater is a darling of the Republicans.
And isn't it Republicans who get outraged about people thinking the government should support them?
Isn't why they're all mad about S-CHIP?
Just wanted to point out that here's an entire multi-million dollar company living almost entirely off of the government through contracts and still they can't pay there fair share of taxes.
chabuka wrote on October 26, 2007 5:41 PM:The Independent Contractor Proper Classification Act...FedEx is being sued for the same thing, right here in this country
Beau wrote on October 26, 2007 6:01 PM:As an independent contractor (I was a programmer in the computer games industry), I can personally testify to how badly the "Independent Contractor" scam is. Without exception, every time I was hired as a 1099, aka "Independent", contractor, I found myself in a worse position financially than if I had been hired as an employee. I was always treated as an employee, i.e., told when to work, where to work, what equipment to use, without any of the perks that an employee gets. My taxes are nearly twice what you would pay as an employee. I get no paid holidays, sick days, or even my own desk. And finally, I was often docked for time missed but not paid for overtime. This is because I was given the choice of signing the company's "standard" contract or not getting the job at all. In a time when a lot of programming jobs were outsourced out of country, bad treatment with money was better than no money.
I don't know what's going to happen with Blackwater but they get a 'tip of the hat' from me for bringing this long-time business scam into the spot light.
Beau wrote on October 26, 2007 6:01 PM:As an independent contractor (I was a programmer in the computer games industry), I can personally testify to how badly the "Independent Contractor" scam is. Without exception, every time I was hired as a 1099, aka "Independent", contractor, I found myself in a worse position financially than if I had been hired as an employee. I was always treated as an employee, i.e., told when to work, where to work, what equipment to use, without any of the perks that an employee gets. My taxes are nearly twice what you would pay as an employee. I get no paid holidays, sick days, or even my own desk. And finally, I was often docked for time missed but not paid for overtime. This is because I was given the choice of signing the company's "standard" contract or not getting the job at all. In a time when a lot of programming jobs were outsourced out of country, bad treatment with money was better than no money.
I don't know what's going to happen with Blackwater but they get a 'tip of the hat' from me for bringing this long-time business scam into the spot light.
Rick B wrote on October 26, 2007 6:08 PM:Dasher,
If Blackwater gets away with this then the IRS is going to find it impossible to collect employment taxes, on everything from the maid up to people like pilots in airlines. If nothing else, just the very cost of evaluating all the employer appeals will require a sharp increase in the IRS budget.
While I like to think that when aware of the law, the politicians will follow the Rule of Law, in this case the sharp decrease in collected taxes will hit every congressperson in Washington in the pocketbook.
Blackwater could get away with this as long as they were under the radar. Now that they have been exposed, it will be way too expensive to let them skate on this. And as I recall, I think that when the employer gets an adverse decision on an employee contractor decision like this, the employer pays all the back taxes, both the employee share and the employer share.
I wouldn't bet on Eric Prince winning this one. Especially with the Congress in Democratic hands.
dasher wrote on October 26, 2007 7:15 PM:From your keyboard to god's screen, Rick B!
I must say, from what I've observed so far, I'm not impressed with the quality of Blackwater's legal and financial counsel. I would have thought they'd have some real sharks, but from what I've seen, they may have thugs, but not sharks.
TheraP wrote on October 26, 2007 7:21 PM:Seems like the mercenaries employed by Blackwater will be powerfully motivated to get the IRS on the side of insisting that Blackwater pay its share of their taxes. It seems unlikely, once the cat is out of the bag on this, that these macho guys are going to meekly accept the contracts that have been forced on them till now. In no time, I'm thinking, they will be on the side of the IRS, insisting Blackwater is an employer, asking for holidays and overtime and payment of taxes, etc.
Prince is going to have a powerful rebellion on his hands if he fails to pay their taxes for them! And let's face it, you don't want to anger these mercenaries!
JNagarya wrote on October 26, 2007 8:05 PM:I'd like to see enforcement of the laws prohibiting the forming of private military organizations, thus putting Blackwater and its anti-Constituional ilk out of business.
And exposure of the rancid, cynical hypocrisy: Prince is a "Christian" whose sole business practice is to kill people.
Steve5117 wrote on October 26, 2007 8:09 PM:Perhaps "God" is on the take to these thugs?
TheraP;
Check out this list of Bush Scandals.
Elliott wrote on October 26, 2007 9:13 PM:This is a means to avoid workers compensation insurance which would cut into profit. Prince is being paid very high rates per guard due to the level of risk each of these people must meet. This high rate is to compensate them accordingly which would also include injury and death. By making them contractors, Prince is cutting their compensation which the taxpayers are paying in these high dollar contracts, and pocketing the difference. He is transferring all of the financial risk to the employees. If they are injured or killed it is not his problem. Workers compensation is to cover harm to workers from on the job conditions. Prince is passing off the responsibility to the taxpayers in Social Security disability benefits and survivors benefits, rather than workers compensation which is an employer cost. Prince's contracts almost certainly factor these costs, but he is not providing it to his employees. He is a war profiteer in more ways than one.
chucktrotter wrote on October 26, 2007 10:57 PM:When I worked for a private company overseas, my income taxes were exempt if I stayed out of the U.S. for 510 days within an 18 month period. I've heard that our GIs are being enticed with re-enlistment bonuses that get the same treatment.
TheraP wrote on October 26, 2007 11:56 PM:Wow, Steve5117, that is one list! I was going to thank you - but it's such a tale of woe, I don't know whether to be grateful or depressed.
I wonder if tpm should link to it on a permanent basis. Have you sent it to their tipline? Or you could simply link to it in every post you make here.
The list reminds me of Mrs. P. Mrs. P and her never-ending list of scandals under bush.
Will we ever see the end of this?
Shawn Fassett wrote on October 28, 2007 1:59 PM:Its a shame that those Senators have to ask Lieberman to actually do his job as Chairman for the Senate Committee on Homeland Security and Governmental Affairs.
Doubt anything will come of it.
Compare what Waxman has uncovered to his counterpart (Lieberman) in the Senate.
Richard Pilat wrote on October 31, 2007 1:57 PM:The IRS rules are clear if just one of the following are true. If the Blackwater associate had his travel paid for by the company, if his guns and ammo were provided for him, if he has any fringe benefits such as medical, dental, life insurance, meals provided for him, if he was told when and whom to guard, if training was provided and many others. I am a small business owner and would benefit greatly if some of my employees were considered independent contractors, but I do whats right.