Introduction:
The Financial Crimes Enforcement Network (FinCEN) has introduced a new requirement for Beneficial Ownership Information (BOI) Reporting. The Corporate Transparency Act (CTA) was enacted on January 1, 2021, as a measure to increase transparency regarding the ownership and control of U.S. entities. This act was introduced to combat money laundering activities and make it easier for law enforcement to trace illegal activities. With the new BOI reporting requirement set to take effect on January 1, 2024, it’s crucial for small business owners and closely held companies to be aware of the implications and penalties associated with non-compliance.
Table of Contents:
- Background of the CTA
- Entities Affected
- Filing Deadlines
- What to Report
- Penalties for Non-compliance
- Concerns and Unknowns
- Conclusion
Background of the CTA
The CTA was introduced as a part of the National Defense Authorization Act for Fiscal Year 2021. Its primary goal is to shed light on the beneficial owners of U.S. entities, thereby making it harder for illicit actors to use these entities for money laundering and other illegal activities. The act mandates the reporting of BOI to the FinCEN.
Entities Affected
The CTA affects a wide range of entities, including but not limited to:
- Limited liability partnerships
- Business trusts
- Corporations
- Limited liability companies
However, several entities are exempt from these requirements, primarily because they already disclose their BOI information due to heavy federal regulations. Examples include large operating companies, publicly traded companies, and financial institutions.
Filing Deadlines
Entities formed or registered on or after January 1, 2024, must file their initial BOI report within 30 days (may be extended to 90 days). Those registered before this date have until January 1, 2025. The exact details of how and where to file are still being finalized, but it’s confirmed that electronic submissions will be through FinCEN.
What to Report
Entities will need to provide:
- Information about the reporting company
- Details of all beneficial owners
This information includes legal names, addresses, federal taxpayer identification numbers, and more. For beneficial owners, details like legal name, date of birth, address, unique identification numbers (ex SSN), and images of identification documents are required. This means a copy of a drivers license or passport for all beneficial owners may need to be submitted with the BOI report.
Penalties for Non-compliance
The consequences of not adhering to the CTA’s requirements are severe. Civil penalties can reach up to $500 per day, while criminal penalties can include fines up to $10,000 and imprisonment for up to two years.
Concerns and Unknowns
With the new requirements come concerns and uncertainties. The broad definition of “substantial control” can lead to confusion, and there are worries about the IRS using the CTA to increase audits.
In the realm of real estate, where it’s standard for single parcels of real estate to be owned by specific entities, challenges arise. Taxpayers may find themselves delving deep, potentially data mining, to pinpoint the actual beneficial owners. Once identified, BOI reporters are then tasked with determining what qualifies as an “acceptable document” to verify the identity of these beneficial owners. For some entities, especially those with intricate ownership structures, the process of compliance might be time-consuming and demanding.
Despite these uncertainties and challenges, it’s essential to start preparing now.
Conclusion
The introduction of the CTA and the upcoming BOI reporting requirement is a significant change for many U.S. entities. It’s crucial to understand the implications, prepare in advance, and ensure compliance to avoid hefty penalties. Stay informed and consult with professionals to navigate these new waters. If you are interested in learning more about how to prepare your business for this requirement and for Tax compliance requirements, contact us today.
