Watch your step!

CPAs must be very careful they don’t offer law advice when helping clients navigate beneficial ownership information (BOI) reporting under the Corporate Transparency Act.

The Corporate Transparency Act (CTA) was enacted Jan. 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act.

The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small- and medium-sized businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (FinCEN).

The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.

Below are some of the key CTA provisions and significant issues, critical unknowns, and potential risks facing accounting firms.

What entities are subject to the new CTA reporting requirements?

Entities required to comply with the CTA include corporations, limited liability companies (LLCs), and other types of companies created by a filing with a Secretary of State or equivalent official. The CTA also applies to non-U.S. companies registered to do business in the United States through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.

There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities.

Another notable exception is for “large operating companies,” defined as companies that meet all of the following requirements:

Employ at least 20 full-time employees in the U.S.
Gross revenue (or sales) over $5 million on the prior year’s tax return.

An operating presence at a physical office in the United States.

As currently promulgated, the CTA has an exemption for “any public accounting firm” registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002 (firms registered with the Public Company Accounting Oversight Board). However, other public accounting firms could be deemed reporting companies subject to compliance with the CTA.

Who is considered a “beneficial owner” of a reporting company?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of a reporting company’s ownership interests.

An individual exercises “substantial control” if the individual serves as a senior officer of the company; has authority over the appointment or removal of any senior officer or a majority of the board; or directs, determines or has substantial influence over important decisions made by the reporting company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.

In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.

CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.

Phase-in of reporting requirements

As currently promulgated, the CTA’s reporting requirements will be phased in in two stages:

All new reporting companies — those formed (or, in the case of non-U.S. companies, registered) on or after Jan. 1, 2024 — must report required information within 30 days after their formation or registration.
All existing reporting companies — those formed or registered before Jan.1, 2024 — must report required information no later than Jan. 1, 2025.

Penalties for noncompliance

Penalties for willfully violating CTA reporting requirements include civil penalties of up to $500 per day that a violation is not remedied, a criminal fine of up to $10,000, and/or imprisonment of up to two years. A safe harbor from the penalty is available to reporting companies that file corrected reports with FinCEN no later than 90 days after submission of an inaccurate report.

Considerations for entities

With the CTA introducing new and expansive reporting, entities should now assess the new rules’ implications on their organizations. As they begin this evaluation, they should consider the following (not all-inclusive) questions:

Is the entity subject to the CTA or does it qualify for exemptions?
If the company is not exempt, how should it calculate percentages of “ownership interests” to determine whether any owners meet the 25% ownership threshold? In many companies with simple capital structures, the answer will be obvious. It may be much less obvious, however, for companies with complicated capital structures (given the expansive definition of “ownership interest”), or companies in which some ownership interests are held indirectly — for example, through upper-tier investment entities, holding companies or trusts.
How should a company begin to assess and determine each person who exercises “substantial control” over it? There may well be multiple people who qualify, given the expansiveness (and vagueness) of the “substantial control” definition.

What new processes and procedures should a company put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must be provided to FinCEN (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier numbers from a non-expired passport, driver’s license, or state identification card (including an image of the unique-identifier documentation).
Caution: Keeping current with the information that needs to be provided to FinCEN will be a significant trap for reporting companies, as they will need to rely on beneficial owners to timely update them on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). Reporting companies must file updated or corrected reports within 30 days of reportable changes or discovery of inaccurate information in previously filed reports. As a result, a company’s operative documents may need to be revised to include provisions related to the CTA such as representations, covenants, indemnifications and consent clauses. For example, the operating agreement may require:
A representation by each shareholder, member or partner, as applicable, that it will be in compliance with or exempt from the CTA.
A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements.
An indemnification by each shareholder, member or partner, as applicable, to the company and its other shareholders, members or partners, as applicable, for its failure to comply with the CTA or for providing false information.
A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

Potential risks to the CPA helping clients prepare for the CTA

There has been much discussion and debate within the accounting community about whether CPAs are in a position to provide guidance and advice to their clients regarding whether an exemption applies or to ascertain whether legal relationships constitute beneficial ownership. The overarching concern is that CPAs and non-attorney tax professionals providing assistance to clients in this arena could be deemed engaging in the unauthorized practice of law (UPL). As each state has its own definitions of what services are considered UPL, this is an area of some risk to the accounting profession. As of the date of this writing, no state has yet to provide clarity as to whether providing advice to clients regarding the CTA would, or would not, be viewed as UPL.

From a risk management best practices perspective, CAMICO strongly encourages CPAs to tread carefully as it relates to advising clients regarding the CTA and the filing of beneficial ownership reporting, and instead, advise clients to seek guidance from qualified legal counsel.

For more information, read these BOI reporting risk management tips from CAMICO.

CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention Department at [email protected] or call our advice hotline at (800) 652-1772 and ask to speak with a loss prevention specialist. CAMICO is a preferred provider of the VSCPA.