Beneficial ownership information reporting: Right around the corner

Editor: Mark Heroux, J.D.

The Corporate Transparency Act (CTA), enacted by Congress on Jan. 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021, P.L. 116-283, introduces a filing requirement for many entities beginning in January 2024. The purpose of the CTA is to increase transparency about who owns or controls an entity. Congress believes that illicit actors use U.S. entities to launder money for various illegal activities. The CTA is designed to combat this and make it easier for law enforcement to track criminal activity by requiring certain types of entities to file a beneficial ownership information (BOI) report with Treasury’s Financial Crimes Enforcement Network (FinCEN).

All reporting companies will be held responsible for timely filing a BOI report unless they meet one of the stated exemptions. A reporting company is any domestic or foreign entity that has filed formation or registration documents with a U.S. state or Indian tribe. Types of entities affected include (but are not limited to):

• Limited liability partnerships;
• Limited liability limited partnerships;
• Business trusts;
• Most limited partnerships;
• Corporations; and
• Limited liability companies.

Several categories of entities are exempt from the filing requirements. Many of these exempt entities already disclose their BOI information to government regulators because they are subject to heavy federal regulation, such as publicly traded companies and financial institutions. Most companies that are exempt will be clients of large public accounting firms, while many of those required to file will be clients of smaller firms. A few of the notable types of exempt companies are issuers of securities registered with the SEC, regulated financial services companies, and large operating companies. A large operating company is any entity with 20 or more full-time U.S. employees, more than $5 million in U.S.-sourced revenue, and a physical operating presence at a physical office in the United States. The CTA filing requirements will fall mostly on smaller businesses.

What to report

Entities subject to CTA reporting requirements will need to report information on:

• The reporting company;
• All beneficial owners; and
• For companies created or registered after 2023, the company applicants (defined to mean up to two individuals who file, or direct or control the filing of, the documents that create or, in the case of a foreign entity, first register the entity to do business within the United States; often, this will include a professional with the entity’s law firm).

Information on the reporting company includes the entity’s full legal name, any trade name under which it does business, its current address, its state or tribal jurisdiction of formation or registration, and its federal taxpayer identification number. Information on all beneficial owners (and, for newly created entities, company applicants) includes, for each owner or applicant, full legal name; date of birth; address; and a unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., driver’s license or passport), along with an image of this document.

Beneficial owner

A beneficial owner is any individual who owns or controls at least 25% of the ownership interests or has substantial control over the reporting company. Substantial control is held by those who are senior officers, who hold authority over selection of senior officers, or who have substantial influence over decisions made by the reporting entity. Some exceptions apply to who qualifies as a beneficial owner — a beneficial owner is not a nominee, employee, future inheritor, creditor, or minor child. If a minor child is deemed to be a beneficial owner, then that minor’s parent or guardian would be listed as the beneficial owner until the minor reaches the age of majority.

When to file

The time for filing the BOI reports is approaching. The due date varies depending on when the entity was created or registered. An entity formed or registered on or after Jan. 1, 2024, will be required to file its initial BOI report within 30 calendar days [Editor’s note: FinCEN has proposed extending this to 90 days for companies formed or registered in 2024]; an entity formed or registered before Jan. 1, 2024, will have until Jan. 1, 2025, to file its initial BOI report. Some details on how and where to file are still being worked out. However, it has been determined that these reports will be filed electronically through FinCEN, which is developing an online portal to accept BOI submissions. FinCEN will accept no filings prior to Jan. 1, 2024. As filing due dates draw near, FinCEN will provide more information on where and how to file.

Concerns and unknowns

Taxpayers are well-advised to assume that information gathered by FinCEN will be shared with the IRS, because the CTA authorizes disclosure to the Department of the Treasury.

Filing the BOI reports accurately and in a timely manner is important. The penalties for filing false or incomplete information are significant if the violation is willful. Civil penalties are up to $500 a day; criminal penalties can include fines up to $10,000 and imprisonment up to two years.

Make sure that all beneficial owners are identified. Because the BOI report will require disclosure of all beneficial owners, those completing the report will need to do their due diligence to confirm that no individual is excluded. Determining who qualifies as a beneficial owner of a given entity can be difficult.

The term “substantial control,” with its importance in determining beneficial ownership, raises some concerns. This term is broadly defined and can be interpreted in several ways. Procedures will need to be put in place to appropriately determine who should be included on the filings. For entities that undergo frequent changes in control and ownership, filing the BOI report could become burdensome because, once the initial report is filed, it must be updated for any change in beneficial owners.

Some industries will have more challenges than others. Real estate is one such industry. In real estate, where entity ownership of single parcels of real estate is the norm, taxpayers will have to potentially data mine to determine who are the beneficial owners. Then, BOI reporters will have to figure out what will suffice as an “acceptable document” to prove the identity of the beneficial owner. Some entities might need considerable time to appropriately comply with these filing requirements; therefore, it is important to start discussing this with clients now.

At present, it is not entirely clear who will assist clients in filing the BOI reports. Because there is a concern that advising on the CTA may involve the unauthorized practice of law, several larger accounting firms are referring the work to the clients’ law firms. Conversations should be held with each client, as their situations are different and should be evaluated accordingly. Determine whether they will need assistance in reporting and, if so, who will perform the work. If the work will be done by your firm, prepare accordingly. As mentioned earlier, some clients will need abundant time to meet the filing requirements, along with your firm’s continued support to ascertain and report any changes in beneficial ownership.

Individual taxpayers also have certain concerns about the CTA, which include the worry that the IRS will use the legislation to circumvent the administration’s pledge to not increase audits of taxpayers making under $400,000 a year; many taxpayers affected by the CTA filing requirement make less than $400,000. The purpose of the CTA is to catch bad actors running large sums of money through U.S. entities (e.g., terrorists, human traffickers, drug runners).

Even with several matters not entirely resolved as of this writing — such as what the ultimate design of the filing system will be, what additional guidance will be set forth, and who will have access to the database of gathered BOI reports — it is important to start having conversations with your clients now. After all, the filing requirement will be here soon. Start informing your clients what the CTA is and what information will be required on the BOI report. They should start developing procedures and policies to comply with the new reporting requirement and begin to gather the data that will be necessary. Lastly, stay up to date with any additional information that is released related to the CTA, so you can appropriately advise your clients.

(For more information about the BOI reporting requirement, see “Beneficial Ownership Information Reporting: Frequently Asked Questions” on the FinCEN website. See also the CTA regulations.)

Editor Notes

Mark Heroux, J.D., is a tax principal in the Tax Advocacy and Controversy Services practice at Baker Tilly US, LLP in Chicago.

For additional information about these items, contact Heroux at mark.heroux@bakertilly.com.

Contributors are members of or associated with Baker Tilley US, LLP.