By Abe Livchitz, CPA, Senior Manager, Tax & Advisory
ASL Tax Group
In 2021, Congress enacted the Corporate Transparency Act in an effort to provide law enforcement agencies with the ownership information of business entities doing business in the U.S. This information is to be used to help prevent money laundering, the use of shell companies, and other financial crimes. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN, the same agency that administers the foreign bank account reporting rules) was charged with running this program often called “Beneficial Ownership Information Reporting” (BOI). The program’s rules apply very broadly so nearly all privately held businesses will be required to comply beginning January 1, 2024. FinCEN expects over 32 million entities will be filing their initial reporting in 2024. The program was designed to help prevent financial crimes but the compliance burden is falling on privately held businesses across the U.S. and according to recent surveys, most business owners are completely unaware of this new program. FinCEN has created a guide, Small Entity Compliance Guide, FAQs, and informational videos to help businesses understand and comply with these new rules.
Which Entities Does This Apply To?
- Domestic entities (including but not limited to corporations, LLCs and partnerships) created by filing a document with the Secretary of State or similar office. Under this rule, most entities formed in the U.S. are required to comply with the BOI reporting rules.
- Foreign entities formed under the laws of a foreign country and registered to do business in a state by filing a document with the Secretary of State or similar office.
Any Exceptions?
There are 23 exceptions and all but two are very narrow in scope, mainly applying to financial businesses that are subject to government regulation. The two broad exceptions that apply to entities are:
- Tax-exempt entities or an entity owned by a tax-exempt entity.
- Large operating companies, defined as having more than 20 full-time employees in the U.S., having filed a federal income tax return in the prior year reporting over $5 million in gross receipts (exceptions may apply) and operating from a physical office in the U.S.
- Entities formed in 2024 will not qualify as they cannot meet the prior year gross receipts test.
What Must Be Reported?
Ownership information must be reported for “beneficial owners” of the entity. There is no cap on the number of reportable beneficial owners so all qualifying individuals must be reported. A beneficial owner is an individual who directly or indirectly:
- Owns or controls at least 25% of the ownership interests of the entity OR
- Exercises “substantial control” over the entity. This would include:
- Senior officers of the entity.
- Individuals having substantial influence over the entity’s important decisions.
- For tiered ownership structures, individuals having “substantial control” over entities that have “substantial control” over the reporting entity.
For each “beneficial owner” the entity must disclose:
- Legal name
- Date of birth
- Home or business street address
- Unique identifying number and issuing jurisdiction (ex: driver’s license, state issued ID card or passport)
- Image of the document containing the identifying number
Entities created after January 1, 2024 must also report the above information for the person that filed the registration/entity creation documents.
In lieu of obtaining the above information from “beneficial owners” an entity may encourage the “beneficial owners” to report their information directly to FinCEN and obtain a unique FinCEN Identifier. The entity will then simply report that individual’s Identifier. As a result, the burden to provide updated information will be shifted to the individual rather than the entity.
When is Reporting Due
Entities created or registered prior to January 1, 2024 must file their initial report no later than January 1, 2025. Entities created or registered in 2024 have 90 days from formation to file their report. Annual reporting is not required, however, an updated report must be filed within 30 days if previously reported information changes (ex: new owners or beneficial owners, previously reported owners cease to be reportable owners, new addresses, expired identification documents).
Reports will be filed using a new online portal being developed by FinCEN. The data being reported will not be publicly available but will be available to federal, state and local law enforcement agencies.
Penalties
To encourage compliance, FinCEN may impose civil penalties of $500 per day for noncompliance and criminal penalties of up to 2 years in jail and a $10,000 fine.
Scams
FinCEN has recently warned that entities may receive written or email correspondence entitled “Important Compliance Notice” that seeks information and asks the recipient to go to a website or scan a QR code. This correspondence is fraudulent as FinCEN does not send unsolicited requests for information.
Summary
The BOI requirements can be very complex and burdensome to comply with and noncompliance can subject an entity to significant penalties. Every eligible business needs to make sure it timely complies with the initial reporting requirements and updates as needed. The reporting requirements begin January 1, 2024 but it is not too early to start compiling the needed information now and developing systems to track and report any changes.
Since compliance may involve the legal interpretation of the Corporate Transparency Act and guidance issued by FinCEN, we suggest working with legal counsel to ensure your entity will be in compliance.