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