Lawmaker accuses Blackwater of tax evasion

Rep. Henry Waxman (D-CA) (R), Chairman of the House Oversight and Government Reform Committee, and ranking member Rep. Tom Davis (R-VA) (L) on Capitol Hill in Washington, February 6, 2007. Waxman said on Monday that documents obtained by his panel suggest that private security contractor Blackwater USA ''engaged in significant tax evasion.''

WASHINGTON (Reuters) - Private security contractor Blackwater USA "engaged in significant tax evasion," a U.S. congressman said on Monday as the company faced scrutiny over the killing of Iraqi civilians.

Rep. Henry Waxman, chairman of the U.S. House of Representatives Oversight and Government Reform Committee, accused Blackwater of "failing to withhold and pay millions of dollars in Social Security, Medicare, unemployment and related taxes."

The California Democrat said the firm "sought to conceal its conduct from Congress and law enforcement officials."

Blackwater spokeswoman Anne Tyrrell said in an e-mail that Waxman argues Blackwater cannot treat its personnel in Iraq and Afghanistan as independent contractors and contends they must be treated as employees for IRS purposes.

"The chairman's contention is incorrect," Tyrrell said.

U.S. Defense Secretary Robert Gates last week criticized security contractors in Iraq while Baghdad pressed the United States to pull Blackwater out of the country after the shootings involving its personnel.

Secretary of State Condoleezza Rice was given the findings on Monday of a State Department review into security contractors in Iraq that also examined a September 16 shooting incident involving Blackwater that killed 17 Iraqis.

RICE, GATES TO TALK

Rice said she would discuss the report with Gates before implementing its recommendations on oversight and rules of engagement.

"I believe that the recommendations point a very good way forward and I intend to act on them expeditiously," she said.

U.S. officials say options included terminating Blackwater's contract to guard U.S. diplomats in Iraq, not renewing the deal when it expires in May or deciding to impose far stricter controls on the North Carolina firm.

Earlier this month, Rice ordered the installation of cameras on all Blackwater convoys in Baghdad and said diplomatic agents should accompany them on each mission.

Blackwater employs about 1,000 people in Iraq.

Waxman released a copy of a letter he wrote to Blackwater Chairman Erik Prince on Monday. In it, Waxman said he has received documents that "suggest that Blackwater may have engaged in significant tax evasion."

He said that under a March 2007 Internal Revenue Service ruling, Blackwater violated federal tax laws by treating an armed guard as an "independent contractor."

Tyrrell said the government has always been aware of Blackwater's relationship with its deployed personnel, adding that the Small Business Administration determined that for tax purposes, Blackwater security contractors are not employees.

She said Waxman's contention "depends heavily upon a single letter from an IRS field office" and that he "fails to mention that Blackwater has appealed the ruling by the IRS field office and that no final determination by the IRS has been made."

Prince, a former U.S. Navy SEAL, founded the privately owned Blackwater in 1997.

(Additional reporting by Sue Pleming)

((Editing by Doina Chiacu; e-mail: kevin.drawbaugh@reuters.com; 202-898-83 9 5