US SMEs face stringent regulatory reporting requirements

Accounting firms will be the go-to for guidance and compliance services for businesses, presenting opportunity and risk. Mark Friedlich, ESQ, CPA VP, US Government Affairs, Wolters Kluwer Tax & Accounting comments.

An estimated 33 million businesses, primarily small companies, are now required to file complex and confusing new reports. Accounting firms best prepared will be positioned to significantly grow their advisory and compliance practices by expanding their current client engagements and growing their client bases. However, firms must be mindful of risks associated with providing these services. 

The Corporate Transparency Act (CTA), enacted by Congress in 2021, represents the most significant shift in US corporate transparency by requiring the reporting of beneficial ownership information (BOI). Beginning January 1, 2024, roughly 33 million businesses, primarily small companies, must file these complex and confusing new reports. The new legal and reporting requirements are part of U.S. anti-money laundering regulations included within the National Defense Authorization Act.

Mark Friedlich, ESQ, CPA VP, US Government Affairs, Wolters Kluwer Tax & Accounting

Significant penalties apply for inaccurate or untimely reporting 

Failure to accurately and timely file will result in significant penalties from the Treasury Department's Financial Crimes Enforcement Network (FinCEN), including $10,000 in civil fines and/or up to two years in prison.

What are BOI Reporting Requirements?

At its core, the CTA mandates reporting of individuals who ultimately own or control a reportable company. This information includes: 

  • Full legal name 
  • Date of birth 
  • Residential address 
  • Identifying information from a government ID (e.g., driver's license, passport) 
  • Image of the government ID with identifying information

This data is submitted to a confidential FinCEN database accessible only to law enforcement, authorised federal agencies, and certain others for national security and anti-money laundering investigations.

Who Needs to Report?

The CTA casts a wide net, encompassing a diverse range of entities under the umbrella of "reportable companies." This includes: 

  • Corporations, LLCs, and other business entities registered to do business in the US 
  • Foreign companies registered to do business in the US through a branch or subsidiary 
  • Certain trusts and other legal entities

Exemptions do exist for some, such as publicly traded companies, and certain types of investment funds, all of whom file similar information under other statutes and regulations.  

A company is exempt from being a reporting company if it exceeds $5 million in gross receipts and has 21 or more full-time employees. There are additional specific exemptions from BOI reporting. FinCEN's new reports require each reporting company to disclose information about the reporting company and any individual who acts as a beneficial owner, including those with substantial control or unique ownership interests.

Filing Deadlines and Consequences of Non-Compliance

  • Existing companies: Companies that were in existence before January 1, 2024, must file their initial reports by January 1, 2025. 
  • Newly formed companies: Companies created on or after January 1, 2025, must file their initial reports within 90 days of formation or registration. 
  • Updated information: Any changes in reported information require updates to be filed with FinCEN within 30 days.

Failure to comply can lead to significant penalties, including: 

  • Civil fines for BOI reporting violations and for the unauthorised disclosure or use of BOI are $591per day, effective January 25. 
  • Potential criminal charges and imprisonment may also apply. 
  • For companies choosing to file on their own, FinCEN provides a dedicated website to help with the reporting process.

Potential risks for firms and CPAs

There has been much discussion about whether CPAs should provide any CTA BOI services to clients. The primary concern is that CPAs and other nonattorneys providing these services could be deemed engaging in the unauthorised practice of law, or UPL. Each state in the US has its own definitions of what services are considered UPL, and to date no state has ruled as to whether providing CTA BOI advice or reporting services to clients is the practice of law. 

Alleviating some of this concern, the American Institute of CPAs' member insurance programme underwriter, CNA, recently announced that the professional liability insurance coverage of the 25,000 AICPA member firms that use the CNA program will include client services related to the CTA’s BOI reporting requirement. However, this coverage would cease from the date a state bar would rule that the provision of these services constitute UPL.

The Impact and Future of the CTA

The CTA represents a significant step towards enhancing corporate transparency and combating financial crime. However, it does place a significant new regulatory burden and expense on tens of millions of small businesses, not only initially, but on an ongoing basis. The necessity to continually track changes in ownership and other information requiring updating reports in addition to new FinCEN guidance is a necessity to remain compliant and avoid stringent civil and even criminal penalties.

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