Beneficial Ownership Information Reporting

The Corporate Transparency Act (CTA), enacted in 2021, has significant implications for many businesses in the United States. Effective January 2024, CTA introduced a new filing requirement for certain business entities  to file reports with the Financial Crimes Enforcement Network (FinCEN) disclosing detailed information concerning their beneficial owners. To ensure compliance and avoid potential penalties, it is crucial to understand the reporting requirements and potential challenges.

What is Beneficial Ownership Information Reporting?

The Corporate Transparency Act mandates reporting the identities of individuals who ultimately own or control a business, even if they do not directly hold the ownership documents. This includes reporting individual’s names, addresses, dates of birth, and pertinent identification numbers.

Why is it required?

The goal of this Act is to combat money laundering and other financial crimes by increasing transparency regarding those who truly control businesses entities. FinCEN may then use this information to identify suspicious activity and deter criminals from exploiting U.S. entities.

Which businesses are affected?

A wide range of businesses are subject to the CTA, including corporations, LLCs, and similar entities. While certain trusts and financial institutions may be exempt, numerous businesses will be required to comply with the Act.

When to File

Cue date varies depending on when the entity was created or registered. While business entities  formed or registered on or after January 1, 2024, are required to file initial Business Ownership Information (BOI) reports within 30 calendar days of conception, this deadline may be extended. Entities formed or registered before January 1, 2024, will have until January 1, 2025, to file their initial BOI reports.

Key considerations and potential challenges

• Tax implications: While not explicitly stated, taxpayers should be aware information collected by FinCEN may be shared with the IRS due to the CTA’s authorization of disclosure to the Department of Treasury.
• Penalties: Accurate and timely reporting is crucial. Penalties for filing false or incomplete information, especially if intentional, are significant, including hefty fines and potential imprisonment. Civil penalties are up to $500 a day; criminal penalties may include fines up to $10,000 and imprisonment up to two years.
• Identifying beneficial owners: Due diligence is necessary to ensure all owners are identified, as excluding someone can lead to penalties. Determining who qualifies as a beneficial owner can be complex.
• “Substantial Control”: This term, crucial in defining beneficial ownership, is broadly defined and open to interpretation. Businesses need clear guidelines to determine who must be included in the reports.
• Frequent changes: For entities with frequent ownership changes, reporting becomes burdensome, as updates are required for any change in beneficial ownership after the initial filing.
• Industry-specific challenges: Industries such as real estate, where entities often own single parcels, face data mining challenges to identify beneficial owners and navigate acceptable identification documentation.

What to do now?

Start early: The sooner a business initiates compliance discussions, due diligence, and compliance the better!

Seek professional guidance: The complexity of the regulations and potential pitfalls make it advisable to consult legal and tax professionals for tailored advice.

Stay informed: Regularly monitor updates and clarifications from FinCEN and the IRS to ensure compliance remains accurate.

By understanding the requirements, potential challenges, and taxpayer concerns surrounding the CTA, businesses can navigate this new reporting requirement effectively and minimize the risk of penalties. Remember, the CTA aims to deter criminal activity, and responsible transparent compliance benefits everyone.

The qualified tax attorneys at RJS LAW are available to discuss your specific circumstances and concerns regarding the new Business Ownership Information reporting requirements.  Please contact us on the web or by calling 619-595-1655 for a free consultation.

Written by Andrea Cisneros Valdez, Esq., LL.M.