How BOI reporting combats tax fraud

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In an effort to fight financial crimes like tax fraud and money laundering, a new federal law designed to increase transparency in the ownership of certain business entities is now in effect. Are your clients aware of the change and their obligations?

This is a question that accounting firms must consider as the Corporate Transparency Act (CTA) is now effective, as of Jan. 1, 2024.

While financial crimes are far from new, proactive efforts to curb such crimes and hold bad actors accountable are heating up. Take for instance actions taken by the criminal investigative arm of the IRS to help close the tax gap, which it estimates could result in approximately $7 trillion in lost tax revenue over the next decade.

According to the IRS Criminal Investigation (CI) FY23 Annual Report, CI dedicates 70% of its direct investigative time to tax investigations. Overall, in FY23, CI initiated more than 2,676 criminal investigations, and identified over $37.1 billion from tax and financial crimes.

Now, many business clients, including small business owners, are facing new Beneficial Ownership Information (BOI) reporting requirements under the CTA.

To help accountants further strengthen their roles as trusted advisors, this article explores how the new BOI reporting requirements tackle tax fraud and evasion and how accountants can help their clients ensure compliance.

Recap of the Corporate Transparency Act

In 2021, the bipartisan Corporate Transparency Act was passed to improve business activity transparency through the reporting of beneficial ownership information. It particularly targets smaller businesses.

It was enacted to curb illicit finance — like tax fraud, money laundering and other illegal activities — and aims to capture more information about the individuals who ultimately own or control specific entities operating in or accessing the U.S. market.

Under the new requirement, reporting companies that were created or registered to do business in the U.S. before Jan. 1, 2024 must file the report to the Financial Crimes Enforcement Network (FinCEN) by Jan. 1, 2025.

Those reporting companies created or registered to do business in the U.S. in 2024 have 90 calendar days to file after receiving actual or public notice that their company’s creation or registration is effective.

Those reporting companies created or registered on or after Jan. 1, 2025, will have only 30 calendar days from actual or public notice that the company’s creation or registration is effective to file the report with FinCEN.

The report needs to be submitted only once and is not an annual reporting requirement (unless the filer needs to update or correct information).

As outlined by FinCEN, there are four pieces of information about each beneficial owner that reporting companies must typically provide. The information includes:

• Name 
• Date of birth 
• Address 
• The identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport can be used. An image of the document must also be submitted.

The company must also submit certain information about itself like name(s) and address. In addition, reporting companies created on or after Jan. 1, 2024, are required to submit information about the individuals who formed the company, in other words the “company applicants.”

Is BOI reporting on hold?

The new BOI reporting requirement has raised a few eyebrows and, in light of a recent ruling in a federal district court, some may be wondering if BOI reporting is on hold. The short answer: it depends.

On March 1, 2024, a federal district court in the Northern District of Alabama ruled in National Small Business United v. Yellen that the Corporate Transparency Act is unconstitutional. The ruling essentially placed the BOI reporting requirement on hold for the plaintiffs in the case.

In a prepared statement, FinCEN said it is complying with the court’s order and “is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”

In light of the developments, some non-plaintiff business clients established before Jan. 1, 2024, with the required BOI reporting date of Jan. 1, 2025, may opt to take a wait-and-see approach on BOI reporting.

The court decision is being appealed and some industry sources believe that, at the end of the day, CTA and the BOI reporting requirement will be ruled constitutional. 

“Ultimately, in my opinion, I feel like it will be ruled constitutional. If it’s ultimately ruled unconstitutional in a higher court, I think Congress will just alter the language of the statute to make it constitutional because other countries have these types of laws, and the U.S. has been so behind in this and they want to catch up,” said Shaun Hunley, Tax and Accounting Executive Editor at Thomson Reuters. “Though it does burden a lot of small businesses, it has a positive intent to try to combat a lot of illegal activity.”

How does BOI reporting help fight tax fraud?

There are several ways in which BOI reporting can help fight tax fraud and evasion tactics like underreporting income, misuse of shell companies, and money laundering.

It should be noted that the U.S. Department of Treasury is listed as an authorized governmental agency. This means the IRS can access beneficial owner information of flow-through entities and obtain their tax records to see if an individual is reporting income from the flow-through entity. If the IRS finds a discrepancy, they can launch an audit of that individual.

Book Whether you are defending a client on tax fraud charges or advising a client on exposure to tax fraud, this reference has the answers and advice you will need: Tax Fraud & Evasion: Offenses, Trials, Civil Penalties.

Decreasing the misuse of shell companies 

Those bad actors who are looking to avoid paying taxes may use corporate structures like shell companies to cloud their identities, making it easier for them to launder money or conceal assets. The misuse of shell companies not only threatens U.S. economic prosperity but can also undermine U.S. national security.

As Hunley explained, “What people have done in the past is they would set up a shell company. These companies have, historically, been Limited Liability Companies (LLCs) formed in the United States. The owners of the LLC would be another LLC, and then that one would be owned by another LLC, or a foreign equivalent of an LLC, so from a different jurisdiction. It would be this long chain of entities and, because each entity is owned by another entity and the countries had a lack of transparency when it came to the beneficial owners of the top entity, … that was a successful way for these individuals to avoid paying tax on any financial assets, or money income, or whatever it was that was being funneled by these chains of companies.”

Related to such activity is the underreporting of income. In these instances, bad actors may pay taxes; however, they use shell companies to move assets, typically liquid assets, offshore to avoid or significantly reduce income tax obligations.

By enhancing transparency in entity structures and ownership through BOI reporting, enforcement officials are hoping to curb the misuse of shell companies and prosecute those who evade taxes and hide their illicit wealth.

“The ones who are using [shell companies] for evasion and fraud-type purposes, I think they are going to think twice because, under this law, now I’m going to know the ultimate owner’s name and personal information. Because that’s so readily available in a big database and available to other governmental entities, including foreign entities, I think people will think twice before setting it up,” Hunley said.

Transparency in the age of digital currency

BOI reporting will also help shed light and crack down on the anonymity of digital currency, which has made it easier for criminals to commit financial crimes such as ransom attacks or money laundering. 

As Hunley explained, the anonymity of digital currency, as well as the misuse of shell companies to funnel digital currency from one entity to another, have enabled criminals to stay under the radar.

“It is not going to be as anonymous as it once was. I think, with the beneficial ownership information database, the government will be able to get the ultimate information of the beneficial owner and be able to trace, through the blockchain and some of those transactions, what has happened and whether they have actually reported that income on a tax return because many times they won’t,” Hunley said.

Furthermore, it is likely that the beneficial owner information will be available to other countries, such as the Netherlands and the UK, that share information on digital currency transactions used for criminal activity.

How accountants can help clients with BOI reporting

As trusted advisors, it is important that accountants help clients, especially smaller business owners, gain awareness of the Corporate Transparency Act and the new BOI reporting requirements, understand why it is important, and how FinCEN is using BOI reporting to fight tax fraud.

While accounting firms may not handle the filing of the BOI report (which could fall under the practice of law), it is an opportunity for accounting professionals to strengthen client relationships.

Take action today and ensure your small business clients are aware of the new BOI reporting requirements. To learn more, read our recent white paper on how the Corporate Transparency Act reveals a new opportunity for accounting professionals.

Report New report: US Beneficial Ownership Rules: Reporting, compliance & access.

Blog Act now to manage FinCEN CTA requirements for your clients.