Complex Beneficial Ownership Reporting Rules Require Preparation

We know business owners work tirelessly to keep their businesses going, and filing requirements that get enacted with little awareness pose more challenges, especially for small businesses. This is the case with the impending beneficial ownership information reporting requirement, which will increase the reporting frequency and have steeper than normal taxpayer penalties, making awareness even more critical.

The BOI reporting requirement is imposed under the Corporate Transparency Act, or CTA, that was enacted as part of the National Defense Act for Fiscal Year 2021. The CTA is not part of the tax code but instead part of the Bank Secrecy Act—a set of federal laws that require record-keeping and report filings on certain types of financial transactions. Under the CTA, millions of entities will need to report their BOI to the Financial Crimes Enforcement Network, another agency of the Department of Treasury.

According to FinCEN, this reporting requirement will enhance its ability, and the ability of other agencies, “to protect US national security and the US financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies; state, local, and Tribal officials; and financial institutions to help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States.”

In other words, when illicit actors frequently use shell companies as a front to hide their identities or launder money, the BOI filings will provide transparency into who the ultimate beneficial owners are for these companies and help combat illegal money laundering.

It’s important to note that most small corporations, limited liability companies, and partnerships likely will be required to comply with this filing requirement. FinCEN anticipates that there will be 32.6 million filings in its first year of implementation, with another 5 to 6 million every year thereafter.

A key factor in determining if your company needs to report the BOI is if you had to file a document with your state’s secretary to form your company. There are some exceptions, such as an entity with more than 20 employees and gross revenue of over $5 million, or a publicly traded company registered under Section 102 of Sarbanes-Oxley. But most companies won’t qualify for exemption.

Understanding when you need to comply with this filing obligation is the precarious part about the BOI reporting requirement. Existing entities, entities formed through Dec. 31, 2023, must file between Jan. 1, 2024 to Jan. 1, 2025.

However, entities formed starting Jan. 1, 2024 or existing entities with a change in owner information (including tangential changes such as home address or telephone number) will have 30 days to file. The 30-day time frame will prove particularly difficult given all the activities most business owners have to undertake when they create their business or when business changes occur.

For the tax professional, this could mean additional monthly tracking requirements to keep up with client information changes.

Additionally, certain information isn’t straightforward. For example, who is a beneficial owner? If someone owns or controls at least 25 percent of the ownership interest of a reporting company, then that person is a beneficial owner. Also, if an individual—such as a senior officer of an entity—can direct, determine, or exercise substantial influence over important decisions, then they, too, are considered a beneficial owner.

For the tax professional who is advising clients on the requirements of the CTA or the BOI reporting form, there is some debate about whether the advice they provide is considered unauthorized practice of law. Non-attorney practitioners may wish to contact their state regulators, insurance carriers, and/or legal counsel to further discuss their engagement with clients in their respective states.

Most concerning are the steep penalties on the taxpayer for willful noncompliance with this filing requirement. Civil penalties are up to $500 per day for as long as a violation continues, and criminal penalties include a $10,000 fine and/or up to two years of imprisonment. “Willfully” is a legal concept that is established in case law as “if done voluntarily and intentionally and with the specific intent to do something the law forbids.”

There is no requirement that the government show evil intent on the part of the defendant in order to prove that the act was done willfully. The severity of the penalties leaves much to be desired in terms of comfort for a taxpayer who is innocently unaware of this filing requirement and, as a result, noncompliance.

Given the complexities that will be associated with meeting this filing requirement, it’s critical that businesses and their financial advisers are aware. While we expect most tax professionals to understand this requirement, we hope that taxpayers will take the time to recognize their obligation and feel confident that their tax professional can guide them.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Melanie Lauridsen is a director of the tax practice and ethics division of the AICPA in Washington, D.C. She helps with the strategic direction for resources, education, and materials necessary for CPAs.

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