Each year, people form millions of business entities across the U.S. Until recently, the ownership of some of these entities was opaque. Delaware, Nevada, New Mexico and Wyoming, for example, have touted the privacy they offered to limited liability companies, while most states required the owners' and manager's information.
The Corporate Transparency Act brought a significant change this year. Anonymous LLCs and other entities are now unable to shield the identities of their owners from government and law enforcement. Congress passed the CTA in January 2021 in a purported effort to combat money laundering and create more financial accountability among corporations. Many entities now must file detailed information in a Beneficial Ownership Information Report to the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCEN.
Reporting requirements under the CTA took effect Jan. 1, 2024, and include determining whether the entity is a "reporting company" under the act.
The government is targeting small businesses with this legislation. Entities that are already under significant government regulation — such as public companies, banks, public accounting firms registered under Section 102 of the Sarbanes-Oxley Act of 2002, public utilities, certain tax-exempt entities such as those granted exemption under Section 501(c) of the Tax Code, and many others — are exempt, as are those with more than 20 full-time employees and previous tax filings above $5 million in gross receipts.
That leaves the smallest businesses, single-member LLCs, and family partnerships primarily to comply. And chances are good that most of your clients meet this threshold. FinCEN estimates that 32 million entities will be required to report new information this year and keep it current or face penalties. It expects 5 million more to report in each of the next nine years.
It's also important to recognize that the exemptions are highly nuanced, and some entities within a seemingly exempt large corporation may be required to report. For example, holding companies, sister companies and joint ventures may be necessary to meet the criteria independent of the parent company.
Under the act, entities must report their full legal name and any DBA names, the address of the principal place of business, the jurisdiction of formation, TIN, or EIN. These new regulations require names, birth dates, addresses, passport or I.D. numbers (such as a driver's license), and an ID document image. A beneficial owner is any person who exercises substantial control (including CEOs and other executives) or owns more than 25% of the entity.
Entities formed before Jan. 1, 2024, will have until Jan. 1, 2025, to file their BOI reports. Entities created between Jan. 1, 2024, and Jan. 1, 2025, will have 90 days from receipt of their formation documents to file. Entities formed after Jan. 1, 2025, must file 30 days after receipt of formation documents.
Failure to comply with the CTA involves severe penalties, including fines of $500 per day, up to $10,000, and up to two years in prison. These penalties can be applied to the senior officers of the entity.
The tricky part is: Who is responsible for helping clients with this?
The role of accountants
The attorneys who set up new entities will likely handle the initial registration for their clients or alert them to the need to do so. Yet most existing businesses covered by the CTA don't have sophisticated internal financial or legal departments, and only have consultations with their outside attorneys if they are dealing with a specific legal issue. Furthermore, many of your clients likely formed the entity themselves and may not be aware of the new CTA requirements. That means accounting firms will likely play a significant role in compliance.
This can be an opportunity for accountants to expand their advisory services to include specific guidance on the CTA requirements. However, it's essential to plan carefully. Maintaining compliance will require detailed processes and procedures for staying current on the legal changes and changes within clients' entities.
Accounting firms also should check with their professional liability insurance provider. Some insurance companies advise that a CPA filing a BOI on behalf of a client would be considered an unauthorized practice of law. If that's the case, a firm may need to have a multidisciplinary practice with a paralegal who works under the supervision of an attorney dedicated to this work.
CPAs and tax advisory firms should take the following five steps to help clients adjust to the new law:
Step 1: Communicate proactively with clients. Don't wait for your clients to come to you. Many will need to be updated on the new law and its requirements.
Since the reporting rules commenced on Jan. 1, it is imperative to communicate with existing clients to begin a CTA review of their entities. You can also use the CTA to proactively reach potential clients, educate them about the issue, and share your firm's advisory services.
Step 2: Ensure company records are current with your firm and the FinCEN database. To make this more complicated, the CTA isn't a one-and-done requirement. Any time an entity undergoes a material change, such as new executive management or changes in ownership among owners with at least 25% of the entity, it must amend the disclosure within 30 days.
As you work with clients, you'll want to communicate this requirement to them. It's also essential to implement a schedule for periodic reviews to ensure you capture changes and make the necessary updates with FinCEN. An owner moving to a new home is enough to trigger the reporting requirement.
Step 3: Increase due diligence and risk assessment activities. The penalties for failing to comply with the CTA are severe. You'll want to consider this when assessing any client's risk. Clients are only sometimes forthcoming with information about changes to their business, so clearly outline the scope of your advisory services as they relate to the CTA within your engagement agreements.
You and your clients also need to be on the lookout for CTA-related scams. FinCEN has warned that fraudsters are using the new requirements to trick people into sharing their personal data or financial information. These phishing attempts may look like official correspondence from FinCEN and include dangerous links or QR codes.
Step 4: Develop strategies to manage and mitigate privacy concerns. FinCEN has said it will hold the massive amount of private information collected through the CTA requirements under rigorous security and only share it with authorized users. Still, you and your clients should remain diligent about data privacy and security. Ensure you have developed and consistently use secure processes for collecting and handling sensitive information within your firm.
In addition, beneficial owners can apply for a FinCEN Identifier, which they can use in place of the required personal information. It's not a way to avoid transparency — FinCEN will only issue the identifier after you have provided all the private information — but it can help keep personal information more secure.
Step 5: Stay current. The CTA is a new and complex set of requirements, so we'll likely see changes to the law and how FinCEN implements it. The deadlines for filing have already gone through revisions, and the BOI e-filing system is brand new. Staying current on changes and guidance related to these new rules will be essential. FinCEN has been building out the resource section of its website, and accounting and tax research services are monitoring the topic.
