On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled the Corporate Transparency Act (along with the beneficial ownership information reporting mandate it established) unconstitutional — and further confusing both the small businesses it affects, and the professionals who are trying to guide them through it.
The holding by Judge Liles Burke was specified to only apply to the 65,000 members of the plaintiff organization, the National Small Business Association.
Similar lawsuits have been filed in other jurisdictions:
- Ohio (was filed before the Alabama case);
- Alabama (ruled unconstitutional);
- Michigan (a copycat of Alabama case); and,
- Maine (a copycat of Alabama case).
Although the ruling only applies to plaintiffs in the case, the government, as expected, has appealed the decision, which would put the issue on a fast track to the Supreme Court.
"With cases already in progress that question the constitutionality of the CTA, I expect a good number of other cases will be filed," said Lauren White, co-chair of the business planning and tax practice group at Haynes Boone.
"People forget that this was bipartisan legislation designed to bring the U.S. to where other countries are," she said. "If the CTA is ultimately deemed unconstitutional, then I expect Congress will step in and tweak it to address any constitutional concerns. In the meantime, i recommend affected companies to file initial reports toward the end of the year. For pre-2024 entities, businesses have to decide how long they are willing to wait. For companies that have complex structures or have third-party owners that need to collect information from various sources, it will be very hard for them to spend the time and resources on this now. If there are more long-term adjustments to the rule, it will be a matter of timing and effort at this point."
"The penalties are $500 a day, or $591 adjusted for inflation, and two years in jail," she cautioned. "It's a good thing that there is a wilful standard involved, so that FinCEN will not aggressively impose penalties on companies that are trying to comply. At this point I don't believe it will be an audit feature during this initial period where people are getting up to speed."
"I would be surprised if similar cases aren't spawned throughout the country," agreed Jonathan Storper, a partner at law firm Hanson Bridgett. "Expect more cases. It's a federal law, not bound by state jurisdictions. But the determination of whether someone is practicing law without a license is made at the state level."
Among the people who will be caught might be those who got downsized during COVID and started an LLC, noted Stephen Mankowski, tax chair at the National Conference of CPA Practitioners.
"It would have been nice if the judge in Alabama had said that the holding covers everybody, not just members of the plaintiff association and therefore parties to the lawsuit," he said. "The entire country would have breathed a sigh of relief."
Can accountants do it?
Among those who can't breathe that sigh are accountants, whose small-business clients may be looking to them for help — and who can't be sure if assisting with things like BOI filings will constitute the "unauthorized practice of law," which might end up being beyond their the scope of their malpractice coverage.
CNA, the underwriter for the American Institute of CPAs' professional liability program, has answered numerous questions about its coverage of CPAs with the following letter:
"Accounting firms have raised questions regarding potential coverage for services delivered to clients related to the Corporate Transparency Act. Please note, CNA can only make a coverage determination after considering the specific facts of the individual claim, the express terms and conditions of the policy, and the legal requirements of the jurisdiction in which the claim is brought. Nonetheless, the following is designed to provide some general guidance regarding how CNA's accountants professional liability policies might respond to these questions.
"Is coverage available for services related to the CTA? CNA's accountants professional liability policies generally will cover professional services associated with the CTA by an insured accounting firm, subject to other applicable policy terms, conditions, and exclusions. However, two issues presented by the CTA may raise additional converge implications. First, some commentators have speculated that certain activities that may be performed by accounting firms in order to assist a client with their compliance with the CTA could involve the practice of law. In many jurisdictions, practicing law without a license is considered a criminal offense. Second, FinCEN's frequently asked questions regarding beneficial ownership information reporting, specifically FAQ K.3111, states that "an individual who willfully files a false or fraudulent beneficial ownership information report on a company's behalf may be subject to the same civil and criminal penalties as the reporting company." As these two issues involve an accountant's dishonest, fraudulent, criminal, and/or illegal activity, coverage may be limited or unavailable if one of these issues is the subject of a claim.
"What happens if it is determined at a later date that assisting a client with the CTA is the unauthorized practice of law? For example, the insured assists their client with CTA compliance in 2024. In 2025, the applicable state determines that such assistance is UPL. If at the time the service was rendered it was considered professional services, CNA will continue to consider it professional services. However, if fraudulent, criminal and/or illegal conduct is alleged, the same coverage limitations would apply as noted in the next question.
"To what extent is coverage provided if dishonest, fraudulent, criminal and/or illegal activity is alleged against the insured? The policies work the same in this regard as they would with any other claim and are not CTA-specific. State laws typically prohibit insurance companies from providing insurance for an insured's own fraud or criminal activity, and the CNA policies contain exclusions for both."
Beyond BOI
The unsettled legal status of the act and its requirements has left companies weighing when they should take steps to comply with CTA regulations, according to Jennifer Wioncek, who leads the tax and private wealth practice at law firm Bilzin Sumberg — and BOI reporting is only the start.
New rules have been proposed for residential real estate transfers under the Geographic Targeting Order program, which requires title insurance companies to file reports identifying the beneficial owners of legal entities that make certain non-financed (all cash) purchases of residential real estate in select jurisdictions in the Treasury Department's Financial Crimes Enforcement Network. The new reporting requirements would pertain to real estate professionals, triggered when a real estate purchase meets certain conditions under the Bank Secrecy Act.
Moreover, Wioncek remarked, investment advisors face changes to anti-money laundering and countering financing of terrorism requirements: "FinCEN has introduced new rules intended to keep criminals and foreign adversaries from exploiting the U.S. financial system and assets through investment advisors. The proposed rule would require certain investment advisors to apply AML/CFT requirements pursuant to the Bank Secrecy Act, including implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements."
