Corporate Transparency Act reveals new opportunity for accounting professionals

Corporate Transparency Act reveals new opportunity for accounting professionals

In 2021, the U.S. enacted the Corporate Transparency Act (CTA). Ultimately, it captures 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 effective date of the CTA is fast approaching on January 1, 2024. People are starting to panic. Companies are looking for more information on the CTA, how it affects their operations, and the reporting requirements’ details. This has presented a unique opportunity for accounting firms and tax accounting professionals to enhance their revenue streams by diversifying their service offerings to include more advisory services.

Congress developed the CTA in response to the use of shell companies and front companies to conceal the identities of “illicit actors” 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 introduced. Recent global events highlighted the need for action sooner rather 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 state-owned enterprises, oligarchs, and organized crime are using shell companies to avoid sanctions on Russia. Global cooperation also exists in 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.

“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.” - Acting FinCEN Director Himamauli Das

Where the U.S. government is taking aim at money laundering and illegal activity at a corporate level, accounting professionals are caught in the crossfire of increasing regulatory and compliance frameworks requiring more comprehensive due diligence and an explosion of inquiries by clients on how to navigate these. Moving beyond standard tax and audit services, introducing 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 by reporting beneficial ownership information (BOI) and is mainly targeting 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 BOI collection will help shed light on criminals who evade taxes, hide their illicit wealth, defraud employees and customers, and hurt honest U.S. businesses by misusing shell companies.

The CTA falls under the Anti-Money Laundering Act of 2020. In September 2022, final regulations implementing the CTA were issued, which will go 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 will be included in the report, and when the report is due. The Financial Crimes Enforcement Network (FinCEN) will administer the CTA. 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, LLCs, or any other entity created by filing a document with a secretary of state or any similar office under the law of a state or Native American 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 filing 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 entities that are:

i) Otherwise subject to a Federal regulatory regime.

ii) 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 $5,000,000 in gross receipts or sales, and has an operating presence at a physical office in the United States —  known as a “large operating company.”

iii) Any corporation or limited liability company formed and owned by an entity otherwise identified as not subject to the reporting requirements of the 2019 Transparency Proposal.

iv) 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 exercises substantial control over a reporting company, or 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 that 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 four exemptions to 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 non-expired identification document issued to the individual by a state, local government, or Native American 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?

The CTA comes into effect on January 1, 2024. Reporting companies existing 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 — for example, 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

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

There will be an increase in administrative work to ensure the company records are current with the accounting firm and in the FinCEN database. Particular attention must be paid to when changes occur or inaccuracies are uncovered. This necessity will require 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, firms should closely monitor this area.

FinCEN anticipates a cost of $85.14 to prepare and submit 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 amount 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, several updates and changes will be required throughout the entity's lifetime, including the potential of a purchase or merger.

Accounting professionals will want to ensure their information is current, accurate, and congruent with the updates or changes made, resulting in additional resources and administrative time spent in addition to any time spent preparing and filing reports. Staying compliant will also require frequent monitoring for 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 such as Checkpoint Edge.

These new types of accounting software include automatic updates to help ease the administrative burden. These programs are becoming critical in expanding advisory services as accounting firms focus on more strategic, high-value advisory services that require accurate, relevant, and 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, the acquiring company must comply with the CTA, and any businesses it is acquiring must also be compliant. Under FinCEN’s regulations, note that companies, as well as beneficial owners and senior officers, can be held liable for willful violations of the CTA. As such, it is imperative that due diligence checklists are updated. Accounting professionals must check whether a reporting company’s BOI reports are filed and 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 were 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 will want to ensure they comply.

Accounting professionals will want to evaluate several areas of their practice to prepare for the implementation of 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 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, preparing a more comprehensive due diligence checklist — above and beyond the general one — will help 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 will make it difficult to engage them in advisory services in the future. 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 the January 1, 2024 implementation, 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. The checklist will expand on general due diligence checklists.
•  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 Corporate Transparency Act, 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 will be 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 this data by the accounting firm 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 and that the collection of this information is for verification purposes only.

Opportunities and benefits

Taking a proactive approach to reaching out and introducing clients and potential 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 assistance translates into building a good reputation and earning stakeholder confidence.

For the client, providing accurate financial reporting and demonstrating a compliance management framework supported by a trusted accounting advisory firm helps safeguard their credibility. This, in turn, paves the way for a better reputation and potentially more business for their accounting advisory firm based on referrals.

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

The BOI reporting rule is one step of three for FinCEN’s implementation of the CTA. The second rule involves access to BOI, specifically addressing who may access BOI, for what purposes, and the safeguards that will be required to ensure that information is secure and protected. The third rule is to revise 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 Beneficial Ownership Secure System. 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.

Accounting professionals who leverage the power of a research tool such as Checkpoint Edge will have access to the latest information with the touch of a button, allowing them to do more with less. Drawing from sophisticated AI-powered algorithms enhanced with more extensive sources of human-created data, Checkpoint Edge makes research and staying up to date on compliance requirements across a wide geography of jurisdictions easy and fast with dialogue-based research capability and suggested markers on concepts related to searches.

With the effective date of the CTA approaching on January 1, 2024, the current focus should be on taking a proactive approach, reaching out to clients to inform them of the reporting requirements, timelines, and fines and penalties for non-compliance. This approach offers an opportunity to introduce and expand on 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 research tools like Checkpoint Edge will help prepare for the transition and reinforce professional advisory services with the most current information at your fingertips. Building a strong reputation attracts higher-caliber clients as referrals are made to people looking for experts. These clients tend to be more willing to pay a premium and more likely to engage in more services. 

Since most of the businesses 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 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 will require ongoing education and training to effectively navigate compliance challenges and leverage the opportunities presented by enhanced transparency. The enhanced 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 that would like to survive and thrive have 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 research tool like Checkpoint Edge is the perfect way to tune in to the most accurate data on tax and compliance regulations across multiple jurisdictions.

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