Navigating the Corporate Transparency Act
A crucial guide for CPAs and their clients
Art Werner | December 2023/January 2024 Footnote
Many CPAs are starting to express concern as to what their responsibilities are regarding the Corporate Transparency Act (CTA). Clients will soon be expressing their own concerns and frustrations, too — if they haven’t done so already. So, what compliance issues are on our client’s horizon and where does the CPA fit in?
This article delves into the key aspects of the CTA and offer guidance to CPAs on how to advise their clients in this new regulatory era.
What is the Corporate Transparency Act?
The CTA is a federal law that was passed by Congress as part of the National Defense Authorization Act of 2021 and 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 (FinCEN) in identifying entities that may be involved in money laundering, terrorism, tax evasion, organized crime or other illegal activities.
The effective date of the CTA is Jan. 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 Dec. 31, 2023, all business entities — again, with certain specific exceptions — in existence as of Dec. 31, 2023, will also need to comply with the CTA legislation. Both Congress and FinCEN are considering delaying the effective date of the CTA by up to one year. As of the publication of this article, no such regulation or legislation is in effect.
Breaking down the basics
The key components of the CTA are:
- Reporting requirements. Under the CTA, entities defined as “reporting companies” must submit beneficial ownership information to FinCEN.
- Beneficial ownership. 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.
- Reporting timeline. Reporting companies must file beneficial ownership information within one year of the CTA’s effective date of Jan. 1, 2024. Changes in beneficial ownership should be reported within 90 days.
- Privacy concerns. 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.
What other information needs to be provided?
In addition to beneficial ownership disclosures, the CTA legislation requires that certain information be provided to FinCEN regarding any person, including:
- Who files documents with a state agency (such as a Secretary of the State) to create a new entity or entities after the effective date (a “post-effective entity”).
- One other individual, to the extent applicable, 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).
It is important to remember that the stated objectives of the CTA include the collection of certain beneficial ownership interest information from entities to:
- Set a clear, federal standard for incorporation practices.
- Protect vital United States national security interests.
- Protect interstate and foreign commerce.
- Better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the
- financing of terrorism and other illicit activity.
- Bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.
What happens if an entity doesn’t comply?
To encourage compliance, and to discourage mishandling of sensitive personal data, the CTA includes the following
penalties:
- A mandatory $500/day penalty while a violation continues for willfully failing to report or willfully providing false information.
- A civil fine of up to $10,000 and up to two years in prison.
In addition, the penalty for an unauthorized disclosure or use of beneficial ownership data will be:
- A criminal fine of up to $250,000 or 5 years in prison or both, or
- A criminal fine of up to $500,000 and 10 years in prison, if the conduct occurred as part of other financial wrong doing.
Looking ahead: What CPAs need to know
The CTA has several implications both 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:
- Assessment of reporting obligations. 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 noncompliance.
- Data collection and verification. 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.
- Compliance planning. CPAs should develop a compliance plan tailored to their client’s specific situation, considering their reporting obligations, deadlines and the potential penalties for noncompliance. CPAs should also help clients establish internal controls and record-keeping procedure to facilitate compliance.
- Ongoing monitoring. 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.
- Data security. 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.
Staying informed to stay compliant
The CTA is a significant regulatory development that demands attention from both 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.
Art Werner, JD, MS (Taxation) is the president of Werner-Rocca Seminars, Ltd. He has provided more than 150 eight-hour CPE lectures per year for the past 30 years. You may reach him at art.werner@werner-rocca.com or 215-545-4181.
