Starting January 1, 2024, a significant number of businesses were required to comply with the Corporate Transparency Act (“CTA”). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The BOI reporting requirement intends to help U.S. law enforcement combat money laundering, the financing of terrorism and other illicit activity. To learn more about the CTA, listen to this audio blog by Matt Richardson, a senior tax accountant at CK.

Transcript:

My name is Matt Richardson. I’m a senior tax accountant at Cray Kaiser.

So the Corporate Transparency Act is a piece of legislation that went into effect in 2024. And it requires certain companies to report their beneficial ownership information, also known as BOI. And this is a report that goes not to the IRS, but to the FinCEN, which is the Financial Crimes Enforcement network, which is the law enforcement arm of the US Treasury Department. Information that needs to be reported for the business includes the full legal name and any DBA names ortrade names, a business address and the state or jurisdiction of formation, and an IRS taxpayer ID number. Additionally, information has to be reported for each beneficial owner, including a name, address, and an ID number from a valid ID like a passport or a driver’s license. With a few exceptions, the filing is required for any domestic corporations, limited liability companies, or other entities that are formed by a filing with a secretary of state or a similar office to do business under a state or a tribal jurisdiction. Foreign-incorporated entities are also required to file if they’re registered with a state or tribal jurisdiction to do business, and domestic entities that are not created by filing with a secretary of state, like an unincorporated sole proprietorship, are not required to file this reporting.

So a beneficial owner under the CTA is any individual who has substantial control over the company, either directly or indirectly. It can also include anyone who controls at least 25% of ownership. And this is important to note because it’s not only ownership, but it’s also control. So a non-owner officer who has decision-making power can also be considered a beneficial owner under the legislation. The purpose of the BOI is to aid law enforcement and enforcement of financial crimes like fraud, money laundering, sanctions evasion, and the financing of other crimes like terrorism or drug trafficking. And this disclosure of corporate ownership is intended to make it harder for criminals to use shell companies to cover up the financial aspects of their criminal activities. So the BOI reporting requirement has exceptions for certain categories of companies, as well as what it calls large operating entities. The specific categories of companies are highly regulated areas like banking and publicly traded companies and non-profit entities. A large operating entity is defined as any company that has 20 or more employees, five million dollars in gross sales or more, and a physical presence in the United States.

Many are confused about why large companies are exempt from reporting rather than small companies. Since so many government reporting requirements do exempt small companies. But this is because in general these larger companies are going to be visible to law enforcement and regulators through other types of tax and payroll banking reports. Whereas the purpose of the legislation is to make these smaller companies more visible, I mean, easier to track ownership for law enforcement.

So there are different filing requirements for the BOI report depending on when the entity was formed. New entities created in 2024 have 90 days after their creation to file the report. New entities created starting January 1st, 2025 have 30 days to file the report and existing entities created before January 1^st, 2024 have until January 1^st, 2025 to file the report. And then any companies that have a change in their ownership information or have a correction of an error to report have 30 days from the discovery of the error or from the change in information to file an updated report.

Penalties for willful non-compliance are steep, so the risk involved in shirking the requirements are serious. Consequences can include civil penalties of over $500 per day that the report has filed late, and those can escalate to up to $10,000 in criminal fines or up to two years in jail time. These requirements are generally covered by the Treasury Department’s criminal enforcement arm, which is different than the tax law and IRS matters that CPAs are generally authorized to address. And there are some legal complexities in determining who is a beneficial owner and who is subject to the requirement that need the expertise of a lawyer.