The Corporate Transparency Act's beneficial ownership information filing requirements, although new this year, have been on the books for several years. While most accounting professionals are aware of them, the majority of business owners who may be affected are likely to be, at best, dimly aware of their applicability. And most accountants have unanswered questions regarding the rules.
Under the CTA, corporations, LLCs, and other entities formed under state law (domestic reporting companies), and similar entities formed under foreign law and registered to do business in the U.S. (foreign reporting companies) must report their beneficial ownership to FinCEN — the Treasury Department's Financial Crimes Enforcement Network. The reason is that "bad actors" have used complex corporate structures to hide and launder the proceeds of their corrupt activities.
Starting Jan. 1, 2024, disclosure was required for a beneficial owner, who is any individual who directly or indirectly exercises substantial control over the reporting company, or who directly or indirectly owns or controls 25% or more of the ownership interests of the company.
Companies already in existence at the beginning of 2024 have until year-end to file, but new companies, those formed in 2024, have 90 days. And while there is normally a small-business exception, in this case the exception is for large companies, such as publicly traded companies, since they already know who you are. But small businesses that are used to being exempt from such requirements may be caught unaware of the obligation to file.
"If they don't have routine interaction with professionals and haven't heard of the Corporate Transparency Act, they will miss their obligation almost from the beginning," said Niles Elber, a member at law firm Caplin & Drysdale.
Roger Harris, president of Padgett Business Services, agreed. "Where startups don't use an attorney or CPA to set up their company, they could be faced with massive penalties," he said. "Many feel it doesn't apply to them because they're small. Large entities are exempt because they already know who you are, but small companies, such as an electrician with an LLC, could be caught unaware."
A potential problem could occur when an individual accrues control gradually. For example, if an individual gradually acquires banking authority and the ability to fire the chief executive, in essence they can be running the company, but not be on the books as an owner. When they cross over that threshold, they have 30 days to report, even if they aren't aware of it.
Questions for accountants
Or what if a preparer sees the client once a year, and was told in December that the client brought in two 25% shareholders back in June? "Are there procedures for filing late and not reporting the penalty when you don't have a relationship that allows you to know this in real time?" he asked. "The guidance that is already out is, for the most part, what we will get, so people in our profession are wrestling with what we should do. There are potential criminal penalties and $10,000 fines, and we don't know if our insurance will cover an engagement that deals with this."
One issue is what standard to use in charging a client. The form itself takes 15 or 20 minutes to fill out, Harris observed: "But what that fails to consider is how long it took to gather information, so you can't measure it by how long it takes to fill out the form. We're faced with the question of how to advise or service customers with minimum risk to ourselves, and can we make business sense to take on that risk."
An overriding issue is whether filling out the form by a tax professional who is not an attorney constitutes the practice of law without a license. So far, the answer is that it may vary by jurisdiction. Attorney Jonathan Ziss believes that it does amount to the unauthorized practice of law.
"The preamble says nothing about accounting or the Tax Code," he said. "It's not about how to make money, but who is making money. It doesn't give guidance about ownership or control structure, which means that someone has to be reading and interpreting and taking a position based on what the legal document says. It's not an accounting function."
"Simply stated, there is a lot of money to be made in compliance. If everything goes right and the entity is registered and FinCEN never comes back, no harm, no foul," he added. "But if it is a problem regarding the accuracy of the reporting, that could be seen as filing a false report. If an accountant is involved, bad things could happen. There would be enough blame to go around, including bad advice when engaged in the unauthorized practice of law."
But an FAQ on FinCEN's website indicates that FinCEN has no problem with accountants serving as a "service provider" for a reporting company: "B. 7. Is a reporting company required to use an attorney or a certified public accountant (CPA) to submit beneficial ownership information to FinCEN? No. FinCEN expects that many, if not most, reporting companies will be able to submit their beneficial ownership information to FinCEN on their own using the
A reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective, according to FinCEN. But that is only for the remainder of 2024. A reporting company created or registered on or after Jan. 1, 2025, will have 30 calendar days to file after receiving actual or public notice that its creation or registration is effective.
"My fear is that the client may know enough to be dangerous," said Stephen Mankowski, tax chair at the National Conference of CPA Practitioners. "For example, they know how to file their tax return, but they have no regular communication with a lawyer or CPA. They are the ones that will know nothing about the filing requirement, or the severe penalties they may be subject to if they fail to file timely. I'm telling clients and colleagues not to file for existing entities until the fourth quarter of this year. They need to provide a driver's license or passport as proof of identity, and both of those have expiration dates. FinCEN will not send you a reminder to renew your documentation."
"The majority of people I've explained this to understand the purpose of the beneficial ownership rules," he added. "But the ones who will get burned will be a husband and wife who buy rental property and put it into an LLC. By the time they realize their obligation to file, they may have maxed out the penalty. It's not big news until it becomes big news — but by then, it's too late for them to learn from their mistake."
