New FinCEN reporting requirements take effect in 2024 and will likely impact the clientele of most accountants. This article examines the new requirements found in the Corporate Transparency Act and the accountant's role in client compliance.
An overview of the Corporate Transparency Act
Background:
- The Corporate Transparency Act (CTA) of 2021 established uniform Beneficial Ownership Information (“BOI”) reporting requirements for certain types of corporations, limited liability companies (LLC), and other similar entities created in or registered to do business in the United States.
- The purpose is to help the government discover criminals and other bad actors who are hiding their identities by using shell companies to launder ill-gotten gains through the U.S. financial system.
- Prior to the CTA, few U.S. states or territories required the disclosure of individuals who owned or controlled companies which made it hard on law enforcement to investigate illegal activities.
- On September 30,2022 the US Treasury’s Financial Crimes Enforcement Network (FinCEN) issued final rules implementing the Beneficial Ownership reporting requirements.
- On March 24, 2023, FinCEN published its first set of guidance material.
- On September 27, 2023, FinCEN released proposed regulations that provide a reporting extension to new entities formed in 2024.
Companies required to report:
- Domestic reporting companies: This includes any corporation, LLC or other similar entity created by the filing of a document with a Secretary of State or similar office of a state or Indian Tribe.
- Foreign reporting companies: Any corporation, LLC or other entity formed under the laws of a foreign country and registered to do business in any US state or tribal jurisdiction by the filing of a document with a Secretary of State or Indian Tribe.
Exemptions from reporting:
- Large operating companies with at least 20 full-time employees, more than $5 million in gross recipts or sales and an operating presence with the physical office in the US.
- There are 22 categories, however, the one noted above is the most pertinent.
Observation:
This obviously means these rules will impact smaller clients. Usually, special disclosures like this apply to larger companies more often than smaller companies. However, the CTA is targeting terrorist financing and money laundering activities, and those tend to occur in small companies which have traditionally been afforded more privacy, so it makes sense that larger companies are exempted in this case.
Reporting dates within The Corporate Transparency Act
The final regulations issued September 22, 2022 provided that:
- For companies created on or after January 1, 2024 - Report within 30 days of when the company was created or registered (prposed regulations released September 27, 2023 amend this statement as explained below).
- For companies created before January 1, 2024 - Report no later than January 1, 2025. It's important to note that FinCEN will be prepared to accept the filing of all returns on January 1, 2024.
- For relevant changes - Report within 30 days of the change.
- For inaccuracies - Report within 30 days of becoming aware.
However, it will be important to watch for developments as proposed regulations released September 27, 2023 seek to provide an extension for new entities formed in 2024. This proposed amendment would extend that filing deadline from 30 days to 90 days for entities created or registered on or after January 1, 2024, and before January 1, 2025.
Observations
Because the penalties for late reporting could be in the thousands of dollars, it is important to be proactive by notifying clients before year-end. Otherwise, by next year, they may have already formed a new entity and missed the filing window.
Who to report: Beneficial owners and company applicants
A beneficial owner is someone who directly or indirectly exercises "substantial control" over the company or who directly or indirectly owns or controls 25 percent or more of the ownership interests.
- An individual is deemed to have substantial control if they direct, determine or exercise substantial influence over important company decisions. All senior officers are deemed to have substantial control and must be reported.
- A person could be a beneficial owner by 1) exercising control, e.g. being an officer and/or 2) owning 25 percent or more of the company.
If the company is formed on or after January 1, 2024, the company will have to report information about itself, the beneficial owners, and the company applicants. If the company was formed before 2024, the company only needs to report information about itself and the beneficial owners.
There can be up to two people who are treated as company applicants:
- `The person who directly files or first creates the new company.
- The person responsible for directing or controlling the original filing.
No reporting company will have more than two applicants, and for many, it could just be one.
Information that will have to be reported about the beneficial owners and company applicants:
- Name, date of birth and address
- A unique identification number which could be a non-expired:
- Driver's license
- ID issued by a US, state, or local government
- US passport
- Foreign passport
Reports will be filed electronically through a secure filing system available via FinCEN's website.
Concluding thoughts about The Corporate Transparency Act
Accountants will need to decide what level of service they will provide with these new reporting requirements. Are we simply going to let the clients know about these rules, or will we also prepare the returns? What do malpractice carriers have to say, and what type of suggested verbiage might they have in letters sent to our clients?
FinCEN aims to establish a contact center prior to January 1, 2024, to field questions about the BOI reporting requirements. Additionally, FinCEN continues to work actively to develop and issue guidance and educational materials such as FAQs, videos, infographics, and compliance guides. Becker will keep you informed of any new information through our monthly Federal Tax Update webcast.
Sources:
1. https://www.fincen.gov/boi
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