Corporate Transparency Act reveals new opportunity for accounting professionals

In 2021, the U.S. enacted the Corporate Transparency Act (CTA). Ultimately, it is designed to capture more information about the ownership of specific entities conducting business in, or accessing, the U.S. market. At the time, it was largely ignored by accounting professionals because it relates to reporting on the ownership information of an entity and there is no financial or tax reporting involved. The CTA went into effect on January 1, 2024. People are starting to panic. Companies are looking for more information on the CTA, how it affects their operations, and what the details of the reporting requirements are. This has presented a unique opportunity for accounting firms and tax professionals to enhance their revenue streams by diversifying their service offerings to include more advisory services.

The CTA was developed in response to the use of shell companies and front companies to conceal the identities of illicit actors who are using these companies to conceal illegal activity and shelter money and assets obtained through illegal means from the U.S. government. The CTA has been developing for over 10 years with several different acts related to beneficial ownership reporting being introduced. Recent global events highlighted the need for action sooner than later. The rise of digital currency raises concerns about corporate activity, transparency, and unregulated markets where transactions can be conducted anonymously.

The war between Russia and Ukraine revealed numerous complications in economic and political relationships as shell companies are being utilized by state-owned enterprises, oligarchs, and organized crime to avoid sanctions on Russia. There is also global cooperation on coordinating tax policies to address tax avoidance and evasion using offshore shell companies and front companies. All these events have reinforced the need for beneficial ownership reporting.

According to Himamauli Das, Acting FinCEN Director, “for too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States. This final rule is a significant step forward in our efforts to support national security, intelligence, and law enforcement agencies in their work to curb illicit activities. The final rule will also play an important role in protecting American taxpayers and businesses who play by the rules but are repeatedly hurt by criminals that use companies for illegal reasons.”

Where the U.S. government is taking aim at money laundering and illegal activity at a corporate level, accounting professionals are finding themselves caught in the crossfire. The result is increasing regulatory and compliance frameworks requiring more comprehensive due diligence and an explosion of inquiries by clients on navigating these.

Moving beyond standard tax and audit services, the introduction of new software and systems can support the transition to advisory services that provide increased value to clients and additional revenue to accounting firms. Taking a proactive approach will help accounting firms stay relevant and profitable.

Understanding the Corporate Transparency Act

Small and medium-sized enterprises (SMEs) have always been the backbone of the American economy. As of March 2023, according to the Small Business Administration, there were 33,185,550 small businesses in the U.S. Approximately 81.7% of them were considered non-employer firms with zero employees.

That is 27,104,006 small businesses that don’t require employees to work there.

The CTA is designed to improve business activity transparency through the reporting of beneficial ownership information (BOI) and is particularly targeted to these smaller businesses. Historically, these types of laws have had exemptions for smaller firms, but with the CTA the exemptions are for much larger companies as their activities are much more evident.

Beyond the direct benefits to law enforcement and other authorized users, the collection of BOI will help shed light on criminals who evade taxes, hide their illicit wealth, defraud employees and customers, and hurt honest U.S. businesses through the misuse of shell companies.

The CTA falls under the Anti-Money Laundering Act of 2020. In September 2022, final regulations implementing the CTA were issued, which went into effect on January 1, 2024. No beneficial ownership information will be accepted before this date. However, it is important to be prepared. There are three elements to the rule — who must file a BOI report, what information is to be included, and when the report is due. The CTA will be administered by the Financial Crimes Enforcement Network (FinCEN). FinCEN is part of the U.S. Treasury Department and is responsible for administering reporting on foreign banks and financial accounts.

Who needs to file?

Not all companies are considered reporting companies. Reporting companies are identified as either domestic or foreign. Domestic reporting companies are corporations, limited liability companies (LLCs), or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Sole proprietorships that do not operate within an entity are not considered a reporting company. 

In addition to corporations and LLCs, reporting companies will typically include: 

• Limited liability partnerships 
• Limited liability limited partnerships 
• Business trusts
• Most limited partnerships, where these entities are generally created by a filing with a secretary of state or similar office

Exemptions include: 

• Securities issuers 
• Domestic governmental authorities 
• Banks 
• Domestic credit unions 
• Depository institution holding companies 
• Money transmitting businesses 
• Brokers or dealers in securities 
• Securities exchange or clearing agencies 
• Other entities registered under the Securities Exchange Act of 1934 
• Registered investment companies and advisers 
• Venture capital fund advisers 
• Insurance companies 
• State-licensed insurance producers 
• Entities registered under the Commodity Exchange Act 
• Public accounting firms 
• Public utilities 
• Financial market utilities 
• Pooled investment vehicles 
• Tax exempt entities 
• Entities assisting tax-exempt entities 
• Subsidiaries of certain exempt entities, and inactive businesses 

The list of exempt entities also includes: 

1. Entities that are otherwise subject to a federal regulatory regime. 
2. Any business concern that employs more than 20 employees on a full-time basis in the United States, files income tax returns demonstrating more than $5 million in gross receipts or sales and has an operating presence at a physical office in the United States, known as a large operating company.
3. Any corporation or limited liability company formed and owned by an entity that is otherwise identified as an entity not subject to the reporting requirements of the 2019 Transparency Proposal.
4. Other business concerns designated as exempt entities by the Secretary of the Treasury and the attorney general of the United States.

Who is considered a beneficial owner?

A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:

1. Exercises substantial control over a reporting company
2. Owns or controls at least 25% of the ownership interests of a reporting company 

Having two categories is designed to close any loopholes and ensure all individuals involved in any ownership capacity are identified. The key difference is that beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company, including equity, convertible through voting rights, or the ability to direct a company but independent of financial implications.

There are five exemptions regarding who may be considered a beneficial owner. They include, “a minor child, provided that a parent or guardian’s information is reported; an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; an individual acting solely as an employee of a reporting company in specified circumstances; an individual whose only interest in a reporting company is in future interest through rights of inheritance, and a creditor reporting company.”

What information must be provided by the beneficial owners?

The beneficial owners must report to FinCEN their name, date of birth, address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document. These include non-expired passports issued by the United States Government, a nonexpired identification document issued to the individual by a state, local government, or Indian tribe to identify the individual, a non-expired driver’s license issued to the individual by a State, or a non-expired passport issued by a foreign government to the individual.

If an individual decides to file their information to FinCEN directly, they may be issued a FinCEN identifier which can be provided on a BOI report instead of the required information.

Where an accounting professional has helped set up the entity, they also fall under the rule and must file as a company applicant. Company applicants must provide the same information as beneficial owners, but only if the reporting company is formed or registered after 2023.

Who are company applicants?

Company applicants can only be:

1. The individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States.
2. The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

This responsibility may fall under the scope of advisory services for an accounting professional. However, the report does not require information on the company applicant for reporting companies existing or registered at the time of the rule’s effective date. This is an important consideration when defining the scope of engagement for advisory services with a client.

When do reports need to be filed? H3

The CTA went into effect on January 1, 2024. Reporting companies that are in existence on the effective date must file their initial reports within one year, on or before January 1, 2025. Reporting companies created after the effective date have 30 days after receiving notice of their creation or registration. Reports must be updated within 30 days of a change to the beneficial ownership — such as through the sale of a business, merger, acquisition, or death — or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.

Regardless of whether accounting professionals are involved as company applicants, the responsibility of report accuracy and updating lies with the reporting company. However, beneficial owners and company applicants can be subject to civil and criminal penalties for failing to provide information — or providing false information — to the reporting company.

Impact on tax and accounting professionals

The CTA was largely ignored since its announcement. With the effective date approaching, accounting firms and professionals will be receiving calls from clients on how to navigate the CTA. While the establishment of a new business is typically done through a legal professional, there are instances where an accounting firm may have helped set up a new company, and since the CTA is related to anti-laundering initiatives and financial accountability, many companies will instinctively turn to their accounting professionals for assistance. This offers an opportunity for accounting professionals to explore and expand the scope of their advisory services offered.

There will be an increase in administrative work to ensure company records are current with the accounting firm and in the FinCEN database. Particular attention needs to be paid to when changes occur, or inaccuracies are uncovered. This requires an increase in the due diligence and risk assessment activities executed by accounting firms on behalf of their clients. With high penalties and potential imprisonment, this is an area that should be closely monitored.

FinCEN anticipates a cost of $85.14 for the preparation and submission of an initial BOI report of a simple structure. Complex ownership structures are anticipated to cost an average of $2,600 with an estimated $2,000 of that allocated for professional fees. Accounting professionals may want to consider project or value-based pricing over an hourly rate for work related to the preparation and submission of BOI reports. In most cases, there will be several updates and changes required throughout the lifetime of the entity including the potential of a purchase or merger.

Ensuring information is current and accurate with updates or changes requires additional resources and administrative time, on top of time spent preparing and filing reports. Staying compliant will also require frequent monitoring of changes and updates to the CTA. Keeping on top of updates like these and other local, state, and federal changes is made easy through accounting and tax research tools like CoCounsel Tax.

These new types of accounting software include automatic updates to help ease the administrative burden. These programs are becoming a critical component in the expansion of advisory services as accounting firms focus on more strategic, high-value, advisory services that require accurate, relevant, up-to-date information to ensure compliance and avoid penalties.

Compliance with multiple local, state, and federal regulations is always a major factor in merger and acquisition due diligence. The CTA is no exception. In these cases, not only must the acquiring company be compliant with the CTA, but any businesses it is acquiring must be compliant as well. Note that under FinCEN’s regulations, companies, as well as beneficial owners and senior officers of the company, can be held liable for willful violations of the CTA. As such, it is imperative that due diligence checklists are updated, and accounting professionals ensure they are checking on whether a reporting company’s BOI reports are filed, current, and any fines or penalties have been settled.

Implementation and compliance challenges

Non-compliance can result in high penalties and possible imprisonment. The escalating fines range from $500 to $10,000 per violation and jail time up to two years. The American Bar Association points out that the fines accrue. If an initial report was not filed, and several report changes would have been made if that report was on file, aggregated fines may be well more than $10,000, even before the reporting company receives a notice of violation from FinCEN. With steep penalties such as these, reporting companies and their beneficial owners and senior officers want to ensure they comply.

Accounting professionals should evaluate several areas of their practice as they begin advising clients on the CTA. Before gathering more information, they must assess current information management systems, processes, and operational tools. Some key questions to ask might include:

1. Are they effective?
2. Will they support the increased administrative work and research required to support advisory services?
3. Will they make your team more efficient?

Putting the right systems and high-quality tools in place should be considered a risk management best practice and part of a compliance governance framework. With the right systems in place, utilizing a more comprehensive due diligence checklist — above and beyond the general one — helps ensure the correct information is on file. With high penalties for non-compliance, this area needs to be regularly revisited and scrutinized.

Preparing for client engagement on beneficial ownership information and due diligence should include the following:

• Taking a proactive approach. Being unprepared to answer questions when clients call makes it difficult to engage them in future advisory services. Take a proactive approach now to have the knowledge and information to respond to client inquiries quickly.
• Reaching out to clients. By asking them if they are prepared for and comply with the requirements of the CTA, you are building trust and demonstrating an interest in providing them with more services. Advise clients on what is required and when.
• Defining your advisory service scope of engagement. Consulting and strategic work should be clearly defined and separate from other engagements with specific deliverables. This definition is particularly important when addressing compliance concerns with steep penalties for non-compliance.
• Preparing a checklist. This checklist should include all the information required for CTA compliance reporting, including all pertinent information about the beneficial ownership interests and those with substantial control. This checklist expands on the general due-diligence checklist.
• Implementing an organizing system. Put in place all the systems and processes needed to accelerate service offerings and revenue.

In preparation for tax returns, ownership information is typically included. With the implementation of the CTA, more details about the owners will be required, such as date of birth, social security numbers, and non-expired proof of identity from a U.S. government department — or a unique ID from FinCEN.

Since the CTA reporting is required by entities that are — or should be already — reporting to the Secretary of State, and the reports are submitted to FinCEN under the Beneficial Ownership Secure System (BOSS), their privacy policies will apply. Where accounting firms have to modify their organizers, leveraging a service like Practice Forward provides tax accounting professionals with a system that also incorporates privacy protection.

It is vital to communicate to clients that the collection of data by the accounting firm is for verification purposes only. Professionals need to emphasize that it does not imply that the firm is in any way responsible for the ownership information, nor is it the responsibility of the accounting firm to ensure the entity has fulfilled its compliance reporting requirements to FinCEN.

Opportunities and benefits

Reaching out and introducing clients to the CTA and other advisory services is a great way to build and strengthen client relations. By helping clients address current concerns and anticipate and prepare for future risks, accounting advisors are helping clients avoid and minimize potential issues. This translates into building a good reputation and earning stakeholder confidence.

For the client, the ability to provide accurate financial reporting and demonstrate a compliance management framework supported by a trusted accounting advisory firm helps safeguard their credibility. This paves the way for a better reputation, and potentially, more business for their accounting advisory firm from referrals.

Accounting services already cover a range of areas carrying risk, such as financial reporting, tax compliance, mergers and acquisitions, and internal controls. Now they can add compliance with beneficial ownership information reporting. Equipped with the best research and reporting tools, accounting professionals will be able to address client concerns efficiently and effectively, including any concerns, changes, or updates to the CTA. They can also charge a premium for these services. This expanded revenue stream helps to offset the loss of any traditional tax revenue to cloud-based systems and applications.

The BOI reporting rule is one of three rules established by FinCEN for implementing the CTA. The second rule involves access to BOI, specifically addressing who may access BOI, for what purposes, and the safeguards required to ensure information is secure and protected. Finally, the third rule regards revising FinCEN’s customer due diligence rule following the promulgation of the BOI reporting final rule. FinCEN is also committed to developing the infrastructure to administer these requirements including the BOSS. FinCEN will also continue to develop compliance and guidance documents to help reporting companies comply with the CTA, including a Small Entity Compliance Guide informing small entities about their responsibilities under the rule.

Professionals leveraging the power of CoCounsel Tax will have access to the latest information on regulatory requirements like the CTA with the touch of a button, allowing them to do more with less. Drawing from accelerated research capabilities and enhanced document analysis features, CoCounsel Tax makes research and staying up to date on compliance requirements easy and fast with access to knowledge sources. These sources include trusted Checkpoint content, client data, and proprietary firm insights. Armed with these tools, professionals can take a proactive approach to compliance changes and updates like the CTA.

With the effective date of the CTA having arrived on January 1, 2024, the current focus is on taking a proactive approach, reaching out to clients to inform them of the reporting requirements, timelines, fines, and penalties for non-compliance. This presents an opportunity to introduce and expand scalable revenue streams from strategic, high-value advisory services. Even without an active outreach campaign, accounting professionals can expect to receive inquiries from clients related to their roles and responsibilities in becoming compliant with the CTA.

Investing in quality tools like CoCounsel Tax can help prepare for the transition and reinforce professional advisory services with the most current information at your fingertips. Building a strong reputation attracts a higher caliber of clients as referrals are made to people looking for experts. These clients tend to be more willing to pay a premium for these services and more likely to engage in more services.

Since most of the businesses being targeted in the U.S. by the CTA are small businesses, many of which are considered non-employer firms, there is an opportunity to provide even more value. Firms can do this by offering advisory services and the administration of reporting and compliance monitoring. Take the administrative burden from small businesses and incorporate it into an advisory package. Of course, this requires ongoing education and training to effectively navigate compliance challenges and leverage the opportunities presented by enhanced transparency.

Enhancing transparency is not only good for the government and the economy but helps level the playing field for smaller firms. In keeping with this theme, accounting professionals can provide valuable advisory services to their clients to support improved transparency and integrity within the accounting profession.

The future is looking clearer through rules like the Corporate Transparency Act. Accounting firms wanting to survive and thrive have been delivered an opportunity to expand their services and add advisors to their titles. Already a growing trend, it diversifies revenue streams, gets more steady revenue throughout the year, and protects against the automation of daily accounting. Leveraging a tool like CoCounsel Tax is the perfect way to tune in to the most accurate data on tax and compliance regulations across multiple jurisdictions.

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