It's ironic that Blackwater may end up being taken down by the IRS instead of an Iraqi court.
The back story is that Blackwater is owned by Eric Prince, one of the scions of the Holland, Michigan Prince family that built (and recently sold) a multi-billion dollar auto components company. Prince's sister Betsy is married to Dick DeVos, the billionaire would-be governor of Michigan. Blackwater was a $2 million dollar company in 2002 when the Iraq war and the Prince family's connections with the Republican Party helped turn it into one of the most successful suppliers of outsourced fighters for Bush's outsourced war.
Backwater's IRS problem concerns its decision to define its mercenaries as independent contractors instead of employees. This designation helps shield Blackwater from lawsuits and damages. It also releases them from paying Social Security, Unemployment and Medicare taxes. The use of the independent contractor designation was being widely abused until 2002 when the IRS dropped the hammer and really tightened up the rules.
It gets complicated, but I can't conceive of how Blackwater could have used the independent contractor classification. If they got a ruling from the IRS, it's certainly suspect. Fortunately, Henry Waxman is on the case and asking the IRS just what went on here.
Forgetting the technical points, Backwater's behavior is sleazy. The use of the independent contractor designation screws the employees and screws the government. These people are making a fortune profiteering off the Iraq war and are too cheap to pay their taxes or take care of their workers.