WASHINGTON (CNN) -- A panel recommended to the State Department that the U.S. create a "central command center" to improve coordination among agencies using private security contractors in war zones, senior State Department officials and others familiar with the review told CNN Monday.
On September 20 a man bicycles past a car damaged in the September 16 Blackwater shooting incident.
The panel also recommended a thorough examination of the rules of engagement, especially when using deadly force, the sources said.
Led by Assistant Secretary of State Patrick Kennedy, the panel briefed Secretary of State Condoleezza Rice Monday on its recommendations. Other members include retired Gen. George Joulwan, Ambassador Stapleton Roy and Ambassador Eric Boswell.
Rice said the recommendations "point a very good way forward, and I intend to act on them expeditiously."
The panel did not focus on the September 16 incident in which Blackwater USA guards are accused of opening fire in Nusoor Square, an incident Iraqi authorities say killed 17 civilians. The Iraqi government has called Blackwater's actions "premeditated murder" and has called for the company to leave Iraq.
Blackwater officials have insisted the guards fired only after they were shot at following a nearby bombing.
Following the incident, Rice instructed Kennedy to undertake a complete review of the use of contractors in Iraq. Kennedy immediately proposed initial steps to improve contractor accountability, including more electronic surveillance in convoys and more government-employed diplomatic security guards working alongside contractors, which Rice promptly implemented.
The State Department and the FBI are conducting their own investigations into the shootings and a joint U.S.-Iraqi commission is reviewing the results of both probes.
The panel reporting to the State Department was charged with examining the larger issues of management, rules of engagement, oversight and legal authority over private security contractors.
Those familiar with the review said members found a lack of coordination and communication between U.S. diplomats and military officials and little oversight over private security contractors.
"We are looking for a unity of effort," one person familiar with the recommendations told CNN. "You need to create a system where you know in a war zone who is traveling through the battle space, what time you are going through what checkpoints, when they are getting where."
Defense Secretary Robert Gates has called for unified control of the use of contractors. The sources said it was possible that the military could take on that role, but it was unclear what Gates and Rice would decide when they sit down later this week.
"Your mission may be to get someone from point A to point B safely, but you have to judge if your actions have an impact on the larger mission," a source said. "What sort of risk are you willing to take? Look at what risks soldiers take. If you are not in imminent danger, you don't unload your weapon."
The panel also found a gap in accountability of contractors because of a provision put into place in the early days of the U.S.-led occupation of Iraq, which gave security contractors immunity from Iraqi law. Earlier this month, the House overwhelmingly voted to place private contractors overseas firmly under U.S. law, allowing American courts to prosecute crimes committed in a war zone.
The recommendations in the review would apply to management of all private security contractors in Iraq, including the U.S. embassy, U.S. military and others. The panel agreed with the assessment of diplomatic security officials who argued contractors would be needed to provide security for U.S. officials in Iraq for some time to come.
"Blackwater is one of three contractors being used by the U.S. and one of ten to fifteen being used in country by the U.S., the U.N. and others," one person familiar with the recommendations said. "The military can't do it all alone. You are going to be living with this for some time and so you need to have rules, regulations and a methodology."
The panel recommended Rice coordinate the next steps with the Pentagon and act with "a sense of urgency -- within days or weeks," the source said.
Rice said she may implement some of the recommendations specific to the State Department immediately, before sitting down with Gates.
Meanwhile on Monday, a congressional committee investigating Blackwater's performance questioned whether the North Carolina-based firm may have evaded paying millions of dollars in taxes.
By classifying its workers in Iraq as "independent contractors" rather than as "employees," Blackwater appears to have engaged in an "illegal tax scheme" that avoided an estimated $31 million in employment-related taxes in the last year of its contract alone, said Democratic Rep. Henry Waxman of California.
Waxman, the chairman of the House Oversight and Government Reform Committee, also accused the company of preventing a guard who discovered the practice "from contacting members of Congress or law enforcement officials."
"It is deplorable that a company that depends on federal tax dollars for over 90 percent of its business would even contemplate forbidding an employee to report corporate wrongdoing to Congress and federal law enforcement officials," Waxman wrote in a letter to Blackwater founder and CEO Erik Prince.
Blackwater denied the allegations in a statement issued Monday, telling reporters, "The chairman's contention is incorrect. The United States Government has always been aware of Blackwater's relationship with its deployed personnel."
Waxman's committee has been looking into the use of private security contractors in Iraq and has held Blackwater -- which has won more than $1 billion worth of government contracts since 2001 -- up to particular scrutiny.
Waxman asked Blackwater to provide his Committee with documents related to Monday's inquiry by November 19.
The latest allegations stem from a March 2007 letter from the Internal Revenue Service to Blackwater obtained by Waxman's committee. The letter informs Blackwater that the IRS reviewed the case of one single Blackwater worker in Afghanistan and determined that the individual should rightfully and legally be classified as an employee -- not an independent contractor -- for tax purposes.
That would require the company to pay Social Security and Medicare taxes and unemployment insurance premiums for its employees. The letter finds the ruling "may be applicable to any other individuals engaged by the firm under similar circumstances."
But Blackwater said the company has appealed the ruling, and "no final determination by the IRS has been made." An IRS official assigned to the case told CNN he was not authorized to talk to the media, and his manager did not immediately respond to CNN's request for information on the status of Blackwater's case.
In addition, Blackwater spokeswoman Anne Tyrrell said the security contractor who protested his employment status to the IRS was "a problem employee" who had similarly sought money from a previous employer. Tyrrell said the situation is "very easily explained, but I'm not at liberty to discuss it."
Blackwater and the former guard signed a settlement and confidentiality agreement in June, a copy of which was released by the Congressional committee. According to the document, both parties agreed not to contact any politician, public official, or Blackwater client about the issue.
And Blackwater said the Small Business Administration does not consider Blackwater's guards to be employees under its definitions. That finding stems from a small business contract awarded to Blackwater by the Navy, which was contested by other companies bidding for the contract.
But SBA spokeswoman Christine Mangi told CNN the agency's findings, "To the best of our knowledge ... carry no legal weight outside of our programs."
Waxman said, "The SBA doesn't determine the tax status for Blackwater or any other taxpayer.
"It's a question for the IRS and, in this case, common sense," he said. "The IRS and common sense both tell us Blackwater shouldn't evade its responsibilities by wrongly designating their employees as independent contractors." E-mail to a friend
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