FinCEN: The Compliance Requirement Almost No One Has Heard About
- Amber Langston
- Nov 23, 2023
- 3 min read
What is FinCEN?
In an effort to combat money laundering, financing of terrorism, and other illegal activities, on January 1, 2021, Congress passed the Corporate Transparency Act (CTA). Effective January 1,2024, the Financial Crimes Enforcement Network (FinCEN) will require most U.S. entities to report information on their beneficial owners, otherwise known as a beneficial ownership requirement (BOI). It is not part of the tax code; it is part of the Bank Secrecy Act. Because of that, failure to meet the filing requirement can result in large penalties and even imprisonment.
What Companies Need to File?
Under the CTA, all domestic and foreign entities that were formed or registered in the US will need to file a BOI with FinCEN. Fortunately, companies that were formed before January 1, 2024 will have until January 1, 2025 to file. However, entities formed after January 1, 2024 must file a BOI within 30 days, which is concerning since most tax agencies don’t have any controls to prevent people from forming a business without consulting a lawyer or CPA. There are a number of entities that will not have to file the BOI, including:
Securities reporting issuer
Governmental authority
Bank or Credit Union
Money service business
Broker or dealer in securities
Investment Company or investment advisor
Venture Capital Fund Advisor
Insurance Company
Accounting Firm
Public Utility
Tax-exempt entity
Inactive Entity
Large Operating Company - A large operating company must meet the following criteria:
- Employ more than 20 people
- Have gross revenue of over $5 million on the prior year return
- Have a physical office in the US
What information will need to be provided?
Each company will need to report the full business name as well as any trade names or DBAs. They will also need to report the business address, state of registration, and federal identification number. They will also need to report information on any individual who, directly or indirectly, either exercises substantial control over a company, or owns or controls at least 25% of the company. Information that will need to be included on any person who meets that criteria will be name, date of birth, address, and unique identifying number. FinCEN has said they will provide an online tool to file these reports, but since they are not accepting any reports until after January 1, 2024, there is not a lot of information about what the website will look like.
What are the concerns?
While the form sounds fairly straightforward, there has been some debate about whether or not the BOI is considered a legal document. Since it’s an enacted law that isn’t part of the tax code, your tax preparer may not be able to prepare this document and you may need to contact a lawyer. Filing the form yourself is not recommended, since failure to file or making an incorrect filing can result in civil and criminal penalties. If a business owner fails to file the report, civil penalties can be up the $500 per day that a violation continues, and criminal penalties can include a $10,000 fine and/or up to two years in prison. Because the penalties are so high, professional liability providers are hesitant to provide coverage for CPAs to file the form.
Because there is not a lot of clarity about the Corporate Transparency Act, no one is able to advise on it yet. Fortunately, for entities that are already established, there is still plenty of time to get more information and make sure business owners maintain compliance. The big issue is since there are not any preventative measures to keep individuals from registering a new business, someone may form a new business and be totally unaware that they need to also file a BOI within 30 days. We do want to emphasize that, even though setting up an LLC is something you can do online, you should still consult a tax professional and a lawyer when you start a new company. Access to information has in some ways cheapened the value that these professionals provide, but seeking out their expertise can prevent issues in the future.
For example, I have people who come to me all the time who formed an LLC online and didn’t realize the state gave them a sales tax ID until they get a notice from the state saying they owe thousands of dollars in taxes. Usually, I can get the sales tax returns caught up and request an abatement from the state for forgiveness of the late penalties and interest since they truly did not know and they can get relief from that. In some ways, tax law and tax code can be forgiving, but since this is not part of the tax code, there is no transparency on whether or not there will be any grace. Right now, I think it’s important to put it on everyone’s radar so no one gets an unpleasant surprise down the road.
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