Quietly tucked into an already-forgotten bill passed in 2020 is one the most paradigm-shifting pieces of legislation relevant to both U.S and foreign companies in recent history: the Corporate Transparency Act (“CTA”). The statutory provisions within the CTA require virtually all corporations, LLCs, and partnerships formed or operating within the United States to disclose the identity of their individual owner(s) to the Financial Crimes Enforcement Network, or FinCEN– which is a separate entity from the IRS- beginning January 1, 2024.
The CTA was inconspicuously passed within the Anti-Money Laundering Act of 2020 to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.” The highly confidential information required to be reported pursuant to the CTA will be shared by “reporting companies” with FinCEN through a yet-to-be-released “Beneficial Ownership Information Report” (or “BOI Report”).
Considering the magnitude of the estimated number of new filing obligations (estimated at over 30 million companies), and the steep civil and criminal penalties for non-filing (up to $10,000 in penalties and imprisonment for 2-years), it’s both confusing and unsettling that this new regime change is less than a year away with very little public awareness. As the Act’s notoriety slowly spreads over the remainder of 2023, it is certain to cause significant panic and alarm for a wide variety of business owners and managers. The scope of responsibility for this new law will span from Mom-and-Pop business owners to multinational corporations to multi-LLC asset protection structures, with only a very narrow and limited pool of “excepted” filers.
Historically, the U.S. government has been notoriously inept at raising awareness of new Federal tax reporting and other regulatory requirements. With Federal agencies limited on funding and, let’s face it, typically on the more dysfunctional side, U.S. companies have always largely relied on CPAs, lawyers, and their inner circle of company and non-company contacts, to stay abreast of new law changes and filing requirements. However, to date, there has been very limited chatter in the tax and legal communities on the CTA and a surprising number of CPAs and lawyers are still unaware of the law. Consequently, the vast majority of business owners have no idea this is coming…
FinCEN is a bureau within the U.S. Department of the Treasury and its mission is to “safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.” In simpler terms, FinCEN exists to prevent, deter, and detect money laundering, often with a primary objective of “anti-terrorism.” In short, they exist to prevent financial crimes, with anti-terrorism and money laundering highest on their list.
Not many American citizens are familiar with or have had filing requirements with FinCEN. Ever wonder why your CPA or TurboTax asks you whether you have any foreign bank accounts? The most commonly known FinCEN filing requirement is something called the “Foreign Bank Account Report” (also referred to as an “FBAR” or Form 114). From 2001 to 2021, the number of FBAR filings has grown more than 1,300% from just over 100,000 to 1.4 million, only a mere fraction of the estimated number of year-one BOI Reports that will be required. (https://www.aaro.org/fbar/897-fbar-filing-data-by-year)
The FBAR is generally required to be filed by U.S. individuals or companies with $10,000 or more held in offshore accounts. This rule has quietly been around since the 1980s, and most filers find out about FBAR filings through their tax advisors based on corollary disclosure requirements found on their income tax returns called a Statement of Foreign Financial Assets (Form 8938).
While the FBAR has been around since the 1980s, enforcement and overall compliance was limited. In the early 2000s, FinCEN introduced a new penalty for “non-willful” violations at a flat $10,000 per form. Then in 2011, FinCEN introduced a new category of filers that had never previously had a filing responsibility: “signature authority but no financial interest in a foreign account.”
This new rule suddenly brought in millions of potential new filers, including corporate executives with multinational operations, trustees and fiduciaries, and many other indirect owners or signatories categories.
When FinCEN attempted a full-scale rollout of this “newer age FBAR,” it repeatedly became apparent that (i) the new rules weren’t widely publicized enough and (ii) the available regulations and guidance were either too limited or too complex. As a result, what was intended to be a change effective to the 2010 reporting year was a significantly extended and modified change that still involves extensions for certain categories of previously excepted filers to this date. In fact, on December 9, 2022, FinCEN extended certain types of filers until April 15, 2024, over fourteen years after the originally intended deadline.
It remains to be seen whether the new BOI Reporting regime will bear similarities to the FBAR regime. However, It is without a doubt that, at a minimum, the CTA requirements will catch many companies off-guard. It’s quite possible that FinCEN could make changes or modifications to the anticipated timing and framework of the proposed BOI Reporting. As such, it would be wise to assume that the current deadlines beginning in 2024 will stand their ground.
Prior to the effective date of the CTA, the vast majority of ownership “disclosure” requirements to the U.S. Federal government for companies are reported directly to the Internal Revenue Service (IRS), most of which are within or attached to individual or company income tax returns. For example, corporations and partnerships are required to disclose material controlling direct and indirect shareholders or partners on Schedule G or B of their Form 1120 or 1065, respectively. While many individually-owned, single-member LLCs are identified in Schedules C of their Form 1040. Therefore, from the U.S. Federal reporting perspective, third-party CPAs or other tax professionals have generally assisted companies and their owners with satisfying all Federally mandated ownership disclosure requirements.
From a U.S. state perspective, some states, including Delaware, Wyoming, Nevada, and Florida, do not require ownership disclosures to the respective State department of company or commerce, either when a company or entity is formed or on a periodic basis. However, the majority of states require their owners to be disclosed (though many companies use intermediate entity owners to mask their ultimate owners). Regardless of whether a state requires ownership information to be disclosed, all states require companies that are either formed within their state or conduct minimum company activities in their state to file periodic annual reports or statements (typically on an annual basis). The names of these period reports vary, but most states refer to them as “annual reports.”
Only a small minority of CPAs and tax professionals are willing to assist their clients with annual reports. For one, these reports are not true “tax” filings. Second, they are not filed with the IRS or a state or local taxing authority. Many also regard these filings to be more “legal” in nature, and the often-neurotic CPA is quite paranoid of toeing the line of “unauthorized practice of law.”
State annual reports are also often fairly basic with respect to the information they report, usually limited to details on the address, registered agent, officers/managers, and owners, where applicable. Due to the simplicity of these forms and the fact that the company owner is the primary gatekeeper of the information required on the form, most annual reports are filed by company owners, with no third-party paid preparer involved.
Some company owners choose to enlist the services of a third party to assist with the filing, typically either because they are uncomfortable filing the forms on their own or because they wish to utilize their time better, particularly when multiple entities are involved. Although, in many cases, an annual report can take 10 minutes or less to complete, yet can cost owners at least $500 per filing. The usual suspects for third-party preparers of annual reports are either a “company filing service” or an attorney. Typically, a third-party filing service (think LegalZoom or RocketLawyer) will be limited to “self-help” and is very proactive in announcing that they cannot provide legal advice. On the other hand, while an attorney certainly can provide legal advice, the cost is typically prohibitive or unnecessary for most companies considering the simplicity of most annual reports.
Hence, today virtually all Federal forms required to be filed with the IRS are handled by an income tax professional, while State forms are filed either directly by a company owner or through a company filing platform or non-tax advisor (i.e., attorney).
The anticipated BOI report differs greatly from current Federal and state disclosures:
The BOI Report is NOT a tax return and does not contain any information related to income, deductions, gains, or losses.
The BOI Report is NOT filed with the Internal Revenue Service, nor is it filed with a state division of corporations or commerce.
The BOI Report is NOT required by every company operating in the U.S., but the field of excluded employers is typically limited to companies with over $5 million in revenues and more than 25 employees.
The BOI Report may require a technical analysis on if and when a company must file, as well as which “beneficial owners” must be reported.
Failure to file can result in a penalty of up to $500 a day, capped at $10,000. It can also result in imprisonment of up to 2 years. Considering the penalty risk and complexity of the BOI Report, it is not likely to be a great candidate for the current self-service filing services that disclaim any and all ability to provide legal advice.
Similar to annual reports, the BOI Reports are also not so complex that they necessarily require the exclusive attention of an attorney, particularly with their high hourly rates and commonplace lack of process, common sense, and technology behind their services.
This means the door remains open and unfilled as to where the 30 million-plus companies and their owners will go to seek assistance with BOI Filings.
It’s possible, but don’t count on it. CPAs are constantly challenged (and usually underwater) with staying up to date with new laws and changes within the Internal Revenue Code, or IRC. They are also juggling new forms and modifications to existing forms required by the IRS to make sure they are in the best position to accurately and completely satisfy their client tax filing obligations.
The CTA is not a part of the Internal Revenue Code and, frankly, is not a law in tax or accounting principles. For the same reason your CPA often shudders when asked to deal with corporate formations and other compliance, they are unlikely to be eager about the idea of handling their clients’ BOI Reports. Many CPAs will consider the CTA reporting to be better left to the attorneys or other filing companies. With the increasing press around CPA and accounting shortages, it is unlikely that already-stretched CPAs are likely to be eager to pull CTA compliance into their repertoire.
It’s also important to note that many types of U.S LLCs are not required to file any tax returns with the IRS and may not even be reported on their owner’s income tax returns. These so-called “disregarded entities” are most commonly found with single-owner LLCs that don’t make an affirmative election to be treated as a corporation. For example, many real estate holding structures utilized separate LLCs for each property (often referred to as a “propco”). These structures aren’t just utilized by the ultra-wealthy or institutional investment structures. Your average local AirBNB owner is likely utilizing a single-owner LLC either for the ownership or management of their investment.
Ultimately, the question of whether a BOI Report must be filed and which individuals must be reported on the form is a question of law. That being said, the overwhelming majority of companies need not run off to a corporate attorney to resolve any uncertainty. The reality is that if a company does not meet one of three main categories of an excepted company (see below), they are very likely to have a filing obligation, and there will certainly be no penalty for the rare case where a company chooses to file proactively, but may not have had an obligation.
The three main categories of “excepted companies” are as follows:
Highly Regulated – Companies in highly regulated industries (think banking, investment management, insurance, etc.),
Large Companies – So-called “large companies” with both $5 million more in revenues or 25 employees, or
Dormant Companies – Companies that are completely inactive/dormant.
Arguably, a fourth category of companies, those that have their BOI Reporting requirements satisfied by another company (typically a parent company), may be excluded. However, those companies are technically still part of the “reporting company” group.
The best place to start evaluating your BOI Reporting status is with FileForms. FileForms was created by highly experienced lawyers and accountants and provides company owners with a calculated balance of technology-based support, with a back-end team of live, credentialed professionals to ensure the technical soundness and accuracy of your BOI Report filings. FileForms pricing model adapts to the complexity of your filing position, as well as your filing.
Start by using our step-by-step “BOI Filing Wizard” today.
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