A crucial guide for you and your clients.
By Art Werner
Werner-Rocca Ltd.
Concern is starting to be expressed by many CPAs as to what their responsibilities are regarding the Corporate Transparency Act. Clients, if they haven’t done so already, will be expressing their own concerns and frustrations.
What compliance issues are on our client’s horizon, and where does the CPA fit in regarding the CTA? CPAs and tax professionals need to know how to advise their clients in this new regulatory era of the CTA.
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The Corporate Transparency Act mandates that a business entity must disclose who the beneficial owners of the business entity are. Corporations, partnerships, Professional Corporations, and Limited Liability Entities are all subject to the CTA. The purpose of the CTA legislation is to assist the Financial Crimes Enforcement Network in identifying entities that may be involved in money laundering, terrorism, tax evasion, organized crime, and/or other illegal activities.
The CTA is a federal law that was passed by Congress as part of the National Defense Authorization Act of 2021. The effective date of the CTA is January 1, 2024. As of the effective date, all new business entities (with certain specific exceptions) will be required to immediately follow disclosure duties outlined within the legislation. Also, prior to or on December 31, 2024, all business entities (again, with certain specific exceptions), in existence as of December 31, 2023, will also need to comply with the CTA legislation.
In addition to beneficial ownership disclosures, the CTA legislation requires that certain information be provided to FinCEN regarding any person:
(a) Who files documents with a state agency (such as a Secretary of State) to create a new entity or entities after the Effective Date (a “Post-Effective Entity”); and
(b) To the extent applicable, one other individual who either directs or controls such filings, such as an individual equity owner or officer of such an entity or even possibly a lawyer who advised the Post-Effective Entity with respect to its formation (an “Applicant”).
The stated objectives of the CTA include the collection of certain beneficial ownership interest information from entities to:
(a) Set a clear, Federal standard for incorporation practices;
(b) Protect vital United States national security interests;
(c) Protect interstate and foreign commerce;
(d) Better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity; and
(e) Bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.
The key components of the CTA are as follows:
1. Reporting Requirements:
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- Under the CTA, entities defined as “reporting companies” must submit beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN).
2. Beneficial Ownership:
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- The act defines beneficial owners as individuals who directly or indirectly exercise substantial control over a reporting company or own 25% or more of its equity interests. CPAs should help their clients identify these beneficial owners, a task that may involve scrutinizing complex ownership structures.
3. Reporting Timeline:
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- Reporting companies must file beneficial ownership information within one year of the CTA’s effective date (January 1, 2022). Changes in beneficial ownership should be reported within 90 days.
4. Privacy Concerns:
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- Confidential information submitted to FinCEN will not be publicly disclosed, protecting individual privacy. CPAs should emphasize the importance of data security and proper handling of sensitive information to their clients.
The Corporate Transparency Act
The CTA has several implications for CPAs and their clients, and proactive guidance is essential to ensure compliance and minimize risks. Here is how CPAs can assist their clients in navigating this new regulatory landscape:
1. Assessment of Reporting Obligations:
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- CPAs should work with their clients to determine if they fall under the reporting company definition. They should assess their corporate structure and ownership to identify beneficial owners, and they should advise their clients on whether they need to report. And, of course, the CPA should ensure that their clients are aware of the potential consequences of non-compliance.
2. Data Collection and Verification:
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- CPAs should assist their clients in gathering accurate and complete beneficial ownership information. They should also implement robust verification processes to ensure the accuracy of the data submitted to FinCEN.
3. Compliance Planning:
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- CPAs should develop a compliance plan tailored to their client’s specific situation, considering their reporting obligations, deadlines, and potential penalties for non-compliance. CPAs should also help clients establish internal controls and record-keeping procedures to facilitate compliance.
4. Ongoing Monitoring:
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- CPAs should emphasize the importance of continuous monitoring for changes in beneficial ownership, as clients must report such changes within the stipulated timeframe. CPAs should also keep abreast of evolving guidance from FinCEN to ensure ongoing compliance.
5. Data Security:
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- CPAs must stress the significance of safeguarding sensitive information and advise their clients on best practices for data security. They must also encourage their clients to seek legal counsel for any privacy concerns or questions about data protection.
The CTA is a significant regulatory development that demands attention from CPAs and their clients. By understanding the key aspects of the act and providing proactive guidance, CPAs can help their clients navigate compliance challenges, mitigate risks, and adapt to the evolving regulatory environment. As a CPA, your role in ensuring transparency and financial integrity has never been more critical, and the CTA underscores the importance of our profession in safeguarding the financial system.
