The provisions of the Corporate Transparency Act affect virtually every LLC in the United States. Yet many small- to medium-sized businesses remain unaware of the CTA or its new reporting requirements.
The CTA is administered by the Financial Crimes Enforcement Network and it is through FinCEN that businesses will report their beneficial ownership information. Beneficial ownership information includes the name, birth date, address and a copy of a government issued photo ID (e.g., driver’s license or passport) of every direct or indirect beneficial owner of the entity. The CTA defines a beneficial owner as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”
According to FinCEN’s website, “The CTA and its implementing regulations will provide essential information to law enforcement, national security agencies, and others to help prevent criminals, terrorists, proliferators, and corrupt oligarchs from hiding illicit money or other property in the United States.”
In a January 2023 article on the CTA, Forbes contributor Matthew Erskine noted: “Although FinCEN has dismissed the time and cost of collecting, confirming and filing the information, saying that the compliance cost is as little as $85, the quite substantial penalties for failure to comply ($500 a day up to $10,000, and up to 2 years in jail) makes it likely that business owners will use lawyers or accountants to file this information and keep it current, at a much higher rate than FinCEN anticipates.” Erskin recommended that business owners start looking for professional advisors who were learning about the new regulations and whose offices were preparing for the additional workload.
The CTA was enacted on Jan. 1, 2021, but many tax professionals are only now becoming aware of the law and its requirements. Since earlier this year, FinCEN and the IRS have been increasing their efforts to make tax professionals aware of the CTA to ensure taxpayers who own small businesses are prepared to meet their compliance burden. Indeed, most tax industry conferences this summer have included continuing professional education on the CTA’s provisions. Specifically, the CTA requires existing entities to submit their initial beneficial ownership information reports within one year of the effective date of the final rule—Jan. 1, 2024. This means that companies (and their tax professionals) will have until Jan. 1, 2025 to file the initial reports.
Despite what would seem like a large amount of lead time, the deadline is potentially problematic for those in the tax industry. Jane Ryder, EA, CPA, and owner of Brass Tax Ryder Professional Group, in San Diego, California, has serious concerns with the new reporting requirements and their deadline. Ryder notes many tax and accounting professionals have most (possibly all) of the information needed to prepare and file the initial beneficial owner information report in their business tax software. Nevertheless, the due date falls during the time that the IRS e-filing system is normally shut down every year (typically from mid-November to mid-January of the following year).
In contrast, the deadline for filing a Foreign Bank Account Report with FinCEN coincides with the deadline for filing individual tax returns (April 15 with an automatic six-month extension). Electronic filing of FBARs became mandatory in 2013 and it took a few years for professional tax software providers and the big tax preparation chains to add e-filing of FBARs to their product and service offerings. Once added, however, it became relatively straightforward for tax professionals to prepare and electronically file FBARs for their tax clients at the same time they filed the tax returns.
The CTA’s Jan. 1, 2025 deadline for existing companies to file their reports makes it difficult for tax professionals to use their software to e-file beneficial ownership information reports for their clients—even if the providers of professional tax software could ensure that the software could prepare the reports. Indeed, the only way timely professional e-filing could be implemented is if the tax software providers ensure software for the 2024 filing season includes the necessary functionality. If CTA reporting is included with 2024 software packages, tax professionals could file the CTA reports with their business clients’ 2023 tax returns during the 2024 filing season.
According to Ryder, in the absence of this added functionality, there will be an “enormous amount of labor” required of either taxpayers (many of whom will be navigating the FinCEN reporting system for the first time) or of staff members in tax offices all across the country. In either case, unless professional tax software has the ability to e-file the necessary reports, someone will have to manually enter all of the necessary data into the FinCEN website. Ryder says that this seems like a potentially error prone waste of effort when the majority of the data already exists in most tax professionals’ business tax software and “could easily be submitted” using the software’s FBAR e-filing feature.
The CTA deadlines are problematic for new companies as well. Reporting companies formed after Jan. 1, 2024 will have 30 days to file their initial beneficial ownership information reports. Again, even assuming providers of professional tax software are able to immediately add the necessary functionality, this will not help tax professionals or businesses if the filing deadline falls during the regularly scheduled e-filing shutdown.
In the absence of specific solutions to the problem (e.g., one uniform deadline that falls inside the IRS’ annual e-filing window) taxpayers should seek out tax professionals who have educated themselves on the provisions of the new law and who are committed to becoming familiar with the FinCEN website reporting system. Taxpayers should also be aware that their tax professionals will most likely be adding additional charges for this additional level of effort.
Further Reading: The Impact Of The Corporate Transparency And Enablers Acts On U.S. Family Offices And Beyond: Key Compliance Shifts To Watch (forbes.com)