The Corporate Transparency Act: Key Considerations for Beneficial Owners and Reporting Companies

The Corporate Transparency Act (CTA), PL 116-283, enacted in 2021 as part of the National Defense Authorization Act, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud and other illicit activities. In short, it’s an anti-money laundering initiative designed to catch those that are using shell corporations to avoid tax.  It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.  The effective date of the CTA is January 1, 2024.

Who needs to report?

The CTA breaks down the reporting requirement of “beneficial ownership information” between “domestic reporting companies” and “foreign reporting companies.”  A domestic reporting company is a corporation, limited liability company (LLC), limited liability partnership (LLP) or any other entity that is created by filing of a document with a Secretary of State or any similar office under the law of a state or Indian Tribe.  A foreign reporting company is a corporation, LLC or other foreign entity that is formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or any similar office.

Note:  Sole proprietorships that don’t use a single-member LLC are not considered to be a reporting company.

Reporting companies typically include LLPs, LLLPs, business trusts, and most limited partnerships and other entities are generally created by a filing with a Secretary of State or similar office.

Exemptions

Exemptions from the reporting requirement apply for securities issuers, domestic governmental authorities, insurance companies, credit unions, certain large accounting firms, tax-exempt entities, public utility companies, banks, and other entities that don’t fall into specified categories.  In total there are 23 exemptions including an exemption for businesses with 20 or more full-time U.S. employees, report at least $5 million on the latest filed tax return and have a physical presence in the U.S.   But, for example, otherwise exempt businesses (including farms and ranches) that have other businesses such as an equipment or land LLC or any other related entity will have to file a report detailing the required beneficial ownership information.  Having one large entity won’t exempt the other entities.

What is a “Beneficial Owner”?  A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:

• Exercises substantial control over a reporting company, or
• Owns or controls at least 25 percent of the ownership interests of a reporting company

Note:  Beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.

What must a beneficial owner do?

Beneficial owners must report to the Financial Crimes Enforcement Network (FinCEN).  FinCEN is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other international crimes.  Beneficial owners must report their name, date of birth, current residential or business street address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document.  Company applicants can only be the individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S.  A company applicant may also be the individual who is primarily responsible for directing or controlling the filing of the relevant document by someone else. This last point makes it critical for professional advisors to carefully define the scope ot engagement for advisory services with clients.

Note:  If an individual files their information directly with FinCEN, they may be issued a “FinCEN Identifier” directly, which can be provided on a BOI report instead of the required information.

Filing deadlines

Reporting companies created or registered in 2024 have 90 days from being registered with the state to file initial reports disclosing the persons that own or control the business. NPRM (RIN 1506-AB62) (Sept 28, 2023). If a business was created or registered to do business before 2024, the business has until January 1 of 2025 to file the initial report.  Businesses formed after 2024 must file within 30 days of formation.  Reports must be updated within 30 days of a change to the beneficial ownership of the business, or 30 days from when the beneficial owner becomes aware of or has reason to know of inaccurate information that was previously filed.

Note:  FinCEN estimates about 32.6 million BOI reports will be filed in 2024, and about 14.5 million such reports will be filed annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

Penalties

The penalty for not filing is steep and can carry the possibility of imprisonment.  Specifically, noncompliance can result in escalating fines ranging from $500 per day up to $10,000 total and prison time of up to two years.

State issues

A state is required to notify filers upon initial formation/registration of the requirement to provide beneficial ownership information to the FinCEN.  In addition, states must provide filers with the appropriate reporting company Form.

Original article published October 30, 2023. Reprinted here with permission.

Professor of Agricultural Law and Taxation
Washburn University School of Law in Topeka, Kansas

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Another Thought by University of Illinois Tax School

There’s another issue that tax practitioners may wish to consider: does preparing a beneficial ownership information report under the CTA on behalf of another taxpayer constitute an unlicensed practice of law?

Aon Insurance has raised this issue in an October 17 posting titled, “Risk Alert: Navigating Corporate Transparency Act/Beneficial Ownership Reporting.” The article makes the important point that the enforcement of the CTA has not been delegated to the IRS, as the FBAR regulations have. Therefore, the privileges that CPAs and EAs have when representing clients before the IRS do not apply. Similarly, their errors and omissions insurance may not cover their actions in helping clients comply with the CTA, perhaps even to the extent of answering a simple question.

Therefore, tax practitioners who are not attorneys may wish to consult their attorneys and insurance carriers for guidance on responding to questions clients may ask about the CTA and filing the necessary reports. Even if they do not prepare the client’s beneficial ownership information reports, any answers they provide may give rise to liability. Practitioners may also consider getting their attorney’s advice about adding a statement to their tax engagement letter advising clients they cannot provide guidance regarding the filing of these reports, if this is their conclusion.

Sources:

NPRM (RIN 1506-AB62) (Sept 28, 2023).

FinCEN Final Rule, Sep. 30, 2022.

FinCEN Notice of Proposed Rulemaking, Part I, Executive Summary. Dec. 16, 2022.

Risk Alert: Navigating Corporate Transparency At/Beneficial Ownership Reporting. Oct. 17, 2023. Aon Insurance. [www.cpai.com/Education-Resources/my-firm/Tax-Services/What-accounting-firms-need-to-know-about-CTA]. Accessed on Nov. 13, 2023.