How Can Taxpayers Prepare for New Corporate Transparency Act Reporting? by Joel G. Young, JD, LLM
Posted on January 04, 2023
In late 2022, the U.S. Treasury issued final requirements that certain corporations, LLCs, partnerships, business trusts and similar entities will need to begin reporting under the Corporate Transparency Act (CTA). While the CTA aims to bolster the country’s anti-money laundering policies and unmask the identities of the true owners behind shell companies and other opaque structures that bad actors commonly use to hide illicit financial activity, many legitimate companies will be pulled into the reporting requirements. According to the Treasury, an estimated 32 million entities will need to begin the reporting process in 2023 to meet the Jan. 1, 2024, deadline. Here is the information you need to get prepared.
What is the CTA?
Congress introduced the Corporate Transparency Act in 2021 to enhance honesty and openness in the U.S.’s financial system and create a repository of information containing the beneficial owners of business and financial accounts. Under the law, reporting companies must provide the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) with detailed statements containing all their domestic and foreign beneficial owners’ names, addresses and other personal identifying information.
A reporting company is defined as any domestic entity formed via a filing with a U.S. state (i.e., a corporation, LLC and some partnerships) or a foreign entity registered to do business in a state. Beneficial owners refer to the individuals who, directly or indirectly, have substantial control over the reporting company or who own 25 percent or more of the reporting company. These individuals may include senior officers, persons with the power to appoint or remove senior officers, or persons who can direct or substantially influence important company decisions, such as the disposal of company assets, reorganizations or dissolutions, major expenditures and compensation of senior officers.
What are the Reporting Requirements?
A reporting company must provide FinCEN with its legal name and any of its d/b/a names, its employer identification number (EIN), and its physical business address and jurisdiction. They must also report their beneficial owners’ legal names, dates of birth, residential addresses, passport numbers and photographic copies of their state-issued identification (i.e., driver’s license). Affected entities must file this information on FinCEN’s Beneficial Ownership Secure System (BOSS), which the government is still setting up.
Reporting companies also have an additional requirement to submit this information to a company applicant, or the person who files the documents creating the reporting company and/or is responsible for directing such filings to be made.
Applicable companies formed after January 1, 2024, have 30 days to file their initial report, while those already in existence as of January 1, 2024, have until Jan. 1, 2025. If there are changes to a company’s beneficial owners or their reported information, it will have 30 days to file an updated report with FinCEN.
Can I Qualify for a Reporting Exemption?
There are 23 types of entities that are exempt from the reporting company definition. They include financial services companies that already have a requirement to register with a regulatory body, such as banks registered with the FDIC, venture capital fund advisers registered with the SEC, and accounting firms regulated by the PCAOB.
Also exempt from CTA reporting are large operating companies with a physical presence in the U.S., at least 20 full-time U.S. employees, and more than $5 million in gross receipts or sales from U.S. sources as reported on their prior-year tax returns. Subsidiary companies controlled or wholly owned, directly or indirectly, by another exempt company may also be excluded from CTA reporting responsibilities, as are certain inactive entities that existed before January 1, 2020, provided they are not foreign-owned, they hold no assets, they do not engage in business activities, and they have not had any ownership changes or significant asset transfers in the prior 12 months.
What are the Penalties for Noncompliance?
The willful filing of an inaccurate report or failure to file can result in civil penalties of as much as $500 per day for each day the violation continues unremedied, as well as criminal penalties that can include a $10,000 fine, up to two years in prison, or both. In addition, penalties can be assessed for the unauthorized disclosure or use of beneficial owner information obtained through a report submitted to FinCEN or a disclosure made by FinCEN to a law enforcement agency.
How Can I Begin Preparing for CTA Compliance?
Although FinCEN still has a significant amount of work to do before the CTA reporting requirements go into effect on January 1, 2024, it is not too early for businesses to determine whether they are affected by the law and begin the process of gathering the information required for reporting. Given the expansive reach of the CTA, both in terms of the number of companies required to report and the sensitivity of the information they must disclose, we recommend that our business clients reach out to their attorneys and/or corporate service providers during the first quarter of 2023 to begin what will become a lengthy process of meeting their compliance requirements.
About the Author: Joel G. Young, JD, LLM, provides tax consulting, income and estate tax planning and compliance services for high-net-worth families and closely held businesses with international operations. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or firstname.lastname@example.org.