Tax transparency advocates welcomed recently issued final regulations to require companies operating in the U.S. to disclose their beneficial owners, while some practitioners expressed concern over the regs’ scope and the potential burdens they impose, particularly on smaller businesses.
The regs (RIN 1506-AB49), which mandate creation of a database of so-called beneficial ownership information (BOI), were published in the Federal Register on September 30, a day after being announced by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The action implements part of the Corporate Transparency Act (CTA), which was enacted in 2021 after being merged with anti-money-laundering provisions of the National Defense Authorization Act. The regs will take effect January 1, 2024.
The Financial Accountability and Corporate Transparency (FACT) Coalition, an international transparency advocacy group, said it supported the regs and urged Treasury to “accelerate the remaining rulemaking processes to fully implement this groundbreaking anti-money-laundering reform.” The rulemaking “brings the U.S. one step closer to casting off its reputation as the world’s top financial secrecy jurisdiction,” FACT said in a September 29 statement, citing research released in May by the Tax Justice Network, a U.K.-based NGO. Both groups had encouraged the U.S. to apply the CTA against money laundering, particularly by setting reporting requirements for certain beneficial owners to curb the flow and concealment of illicit cash through anonymous shell companies.
Also welcoming the regs was Representative Carolyn Maloney, the New York Democrat who chairs the House Oversight and Reform Committee and was the CTA’s chief sponsor. The measures are “a great step forward in the fight to combat illicit financing, protect our national security, and provide much needed transparency in our financial system,” Maloney said in a September 29 statement. “‘Beneficial owners’ who profit from hiding their investments in the U.S. have been protected [by] a lack of reporting. With this rule, no longer will malicious actors who have been using shell corporations for years to protect beneficial owners hide behind a wall of secrecy.”
In February, the FACT Coalition had submitted detailed comments in support of FinCEN’s proposed regs on the BOI reporting database. That comment period drew more than 400 responses, including expressions of concern from practitioners that the proposals were too broad. They requested narrower definitions of who should be considered a beneficial owner and which kinds of entities should be required to report, lest their clients face undue compliance burdens and exposure to liability.
The final regs mandate that reporting companies formed or registered before January 1, 2024, have one year to file their initial reports, while those formed or registered on or after that date will have 30 days following formation or registration to submit initial reports. According to FinCEN, the compliance burden for businesses with simple structures would be about $85, with costs expected to vary by state. Most companies fall within this category—businesses with simple management and ownership structures with one or two beneficial owners, a Treasury official said. Echoing the CTA’s language, the final regs include 23 exemptions from the reporting requirement, such as one for large operating companies with 20 or more full-time U.S. employees, over $5 million in sales, and a physical operating presence in the U.S.
But Daniel Price, formerly of the Small Business/Self-Employed unit in the IRS Chief Counsel’s Office and now in private practice, questioned some of FinCEN’s assertions. He was among the tax professionals who commented on the proposed regs, writing in a February 6 letter that the compliance cost estimates were too low and that most small businesses would be forced to pay the high cost of hiring a certified public accountant or lawyer to prepare their initial beneficial-ownership report.
Speaking to Checkpoint, Price called the final regs “disappointing, because FinCEN refused to use its discretion to expand the exemptions to reporting companies. Given the Treasury unit’s “narrow interpretation of exemptions, FinCEN should have used its discretion to exempt more low-risk classes of entities from reporting,” he said.
“It appears that FinCEN is disconnected from the reality of compliance burdens,” Price told Checkpoint. “Especially for initial reports, the burden is grossly underestimated. Although FinCEN changed its methodology for estimating costs from its initial proposal, especially for simple structures, [it] still radically underestimates actual compliance costs. And given the potential monetary penalties that FinCEN may assert, I predict most reporting companies will use CPAs or attorneys to prepare and/or review filings.”
The former IRS lawyer said FinCEN had made “very clear that existing case law establishes what ‘willfulness’ means in the context of BOI reporting violations. Price pointed out that “willfulness” is a well-established legal concept and that FinCEN would consider all facts relevant to a determination of willfulness when deciding whether to pursue enforcement actions. As an example, he cited the government’s pursuit of willful violations in filing Foreign Bank and Financial Accounts Reports (FBAR). By “stretching the limits of willfulness in many FBAR cases to include conduct bordering on gross negligence,” Price said, the government has presented beneficial ownership reporting companies “valid concerns about mistakes, oversights, and negligence being reinterpreted by government agents eager to assert penalties as willful violations.”
Evan Davis, a veteran tax litigator with Hochman Salkin Toscher Perez PC, predicted that existing businesses, particularly limited liability companies, will find adhering to the beneficial ownership regs will be “a herculean task and will result in far less than 100% compliance.” He said many clients already fail to take the basic steps to maintain their LLCs in good standing and that the new reporting rules would only add to that burden. “Getting the word out to clients who don’t use CPAs and lawyers will also be a challenge,” Davis told Checkpoint.
As for compliance costs, he expects the “major burden” will be on existing LLCs between January 1 and December 31, 2024, when required reporting companies will need to gather information from multiple sources in different countries, often from clients reluctant to share information.
“I’m highly skeptical of the $85 estimate for the first year, but for new entities this will just be one more form to fill out when you create a new LLC,” Davis said. “Submitting updated information when the beneficial ownership changes will be a challenge, and I would expect very spotty compliance from all but the best organized owners of LLCs because this obligation won’t be at the front of mind for most LLC owners.”
A further criticism is that the final regs are “a massively underfunded effort, as Congress has handed FinCEN a $100 million task and to date hasn’t increased funding and is only talking about bumping funding by tens of millions of dollars,” Davis said. “How are they really going to know who didn’t file the forms when they barely have enough resources to manage the massive influx of data? And if the public sees that FinCEN isn’t up to the task, then compliance will suffer.”
Even by adding to the list of exemptions created in the CTA, Davis said the definition of what is a reporting company remains overly broad and “sweeps in the standard entities that offer anonymity, and anticipates that different states could produce new categories of entities that would still be covered by this reporting requirement.” He added, “There’s been tension between certain states that pride themselves on offering business entity anonymity and the feds’ aversion to anonymity, so I assume this broad language was written in part to ensure that a state couldn’t figure out a way to get around the beneficial ownership disclosure rules.”
In defining a “beneficial owner,” the final regs say the forthcoming database should include the full legal names, dates of birth, and addresses for all individuals who have “substantial control” over the reporting business or who own at least 25% of it. FinCEN has said the required reporting and the information registry would help deter those who attempt to obscure their holdings through various corporate structures.
But Davis said this definition, too, is “very broad and is weighted toward ensuring comprehensive data but at the expense of sweeping in a lot of people who probably wouldn’t consider themselves to be beneficial owners. The default advice to a client will be to file the disclosure to avoid trouble, so anyone who seeks advice will presumably file the form with broad disclosures if it’s a close call,” he said.
“The real question for whether the definition strikes the appropriate balance will come when the government starts enforcement actions against persons who didn’t file forms or who left off beneficial owners,” Davis added. “I would expect that the government won’t rush to criminal prosecutions and will start with a PR campaign, followed by warning letters, then move to civil penalties and only bring criminal cases after the government can credibly tell a jury that a defendant had ample warning of what the law required.”
The reporting requirement is one of three rulemakings with which FinCEN plans to implement the CTA. One of the remaining two is expected “in the near term,” a Treasury official said, and will seek to establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to ensure the data is secured and protected. The other rulemaking will revise FinCEN’s “customer due diligence” rule to align with CTA requirements.
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