In June 2019, the Senate introduced the Corporate Transparency Act, legislation aimed at combatting the fraudulent use of corporations in the United States. The Act intends to prevent criminals from deceptively creating and exploiting corporations for personal gain, a long-standing concern among international allies of the U.S. as well as U.S. politicians from both parties.
Although the Act specifically aims to prevent financial crimes, legitimately-run small businesses are likely to bear the brunt of the burden due to an increase in filing requirements. To prepare for the potential changes ahead, here is an overview of the Corporate Transparency Act and what small businesses can expect to see if the bill is signed into law.
The current process for creating a corporation in the United States leaves significant room for criminals to conduct their activities anonymously. Currently, U.S. states do not require all corporations to provide the identities of those funding or benefiting from their operations. Unfortunately, criminals and fictitious organizations can easily take advantage of this shortcoming by anonymously creating fake businesses, or “shell” businesses, to disguise their illegal activities. Although shell entities are not directly unlawful, criminals can use them to conduct tax evasion, money laundering, terrorist financing, and other financial crimes. The Corporate Transparency Act hopes to combat this trend by requiring all limited liability companies (LLCs) and S Corporations (S Corps) to disclose the true identities of the business owners or other business beneficiaries.
The Act’s Potential Requirements
If passed, corporations will be required to provide the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) with the identity of each person benefiting from the business. The name, date of birth, current address, and driver’s license or passport number of each shareholder or beneficial party must be provided at the time of formation and updated annually to reflect any updates or additional owners. A “beneficial party” is considered anyone with considerable ownership (25% or more), substantial control over the company, or anyone who receives significant benefits from the assets of the company. Failure to comply with these reporting requirements could result in fines up to $10,000 or up to 3 years in prison.
Certain entities would be exempt from this ownership reporting requirement, including banks, insurance companies, and companies exceeding 20 full-time employees and $5 million gross revenues. However, these entities would still be required to file information with FinCEN to prove their eligibility for their filing exemption.
Growing Privacy Concerns
Following the introduction of the Act, widespread concerns over privacy and data verification have been raised. Many critics have questioned whether FinCEN has the proper resources and security to handle the influx of data that the Act would intrinsically create. Furthermore, the bill ambiguously states that “appropriate protocols” will be used by local law enforcement agencies to obtain the required beneficiary data — a vague statement that has caused some to wonder whether protocols have been considered. Additionally, if FinCEN houses the data, the documents would be available to law enforcement upon request. Further security measures may be demanded to ensure FinCEN prevents criminals from electronically breaching the system or impersonating law enforcement agencies. Future amendments to the Act may address these issues, in the meantime, it is important for businesses to be aware of the privacy risks at hand.
What Small Businesses Can Do to Prepare
The filing itself is not intended to be difficult, nor is it expected to take an unusually long time to complete. However, any increase in filing requirements will consequently impact smaller companies that already struggle to meet numerous other preexisting filing obligations and deadlines.
Because the Act carries hefty consequences for those failing to comply with the requirements, it’s a good idea for small businesses to ask their tax practitioner if initial and ongoing filings can be added to their annual tax return preparation services. Many FinCEN filings are already prepared by tax practitioners (such as foreign bank account reporting) and the filings required by the new Act are likely to follow a similar process. Adding these filings to your current services package can help eliminate unnecessary stress and ensure that your business is meeting its compliance obligations.
Article by Scott Anderson, CPA, Audit Partner, Sensiba San Filippo