Navigating the Beneficial Ownership Reporting Requirement

With an eye to deter money laundering and gain transparency about who owns or controls an entity, the United States Treasury’s Financial Crimes Enforcement Network (FinCEN) now requires business entities, including public accounting firms and many of their small-business clients, to report beneficial ownership information (BOI) as part of the Corporate Transparency Act (CTA).

In 2024 alone, FinCEN estimates that the rule will impact some 32.6 million companies. Yet, despite the reach of the CTA’s new mandate, many companies aren’t prepared for or even aware that the requirement exists.

“For something that’s impacting so many people, it’s the most misunderstood law I’ve seen in years,” said Roger Harris, president and COO of Padgett Business Services, during the AICPA/CIMA Tax Section Odyssey podcast episode, “Traversing the Beneficial Ownership Information Reporting Requirements.” “Most small businesses think most laws exempt small businesses—whereas this one targets them.”

What’s more, the consequences for not reporting BOI can be severe, with fines from about $600 per day to even penalties involving imprisonment. Therefore, it would be wise for certified public accountants (CPAs) to educate themselves—and their clients—on the requirement and take the necessary steps to ensure compliance. Here are some key things to know.

EXEMPTIONS AND DEADLINES

Per the CTA, all domestic and foreign entities formed or registered to do business in the U.S. must file the BOI report unless they meet conditions of exception. Twenty-three types of entities are exempt, mostly large companies and highly regulated businesses.

For companies that must report, the deadline to do so depends on when they were created. For example:

• Companies created before Jan. 1, 2024, have until Jan. 1, 2025, to report.
• Companies formed or registered during 2024 must report within 90 days of creation.
• Companies formed or registered on or after Jan. 1, 2025, must report within 30 days of creation.

Notably, the Illinois CPA Society joined the AICPA and many other accounting organizations in advocating for delayed implementation and reporting deadlines. To date, however, no movement on this goal has been met.

Additionally, on March 1, 2024, a federal district court for the Northern District of Alabama found the CTA to be unconstitutional. The court’s order puts the disposition of reporting requirements in flux pending a final appellate adjudication. According to a March 4 notice published on the FinCEN website, the agency is complying with the court’s order and won’t be initiating enforcement actions against the plaintiffs in the action. In the meantime, it’s recommended that CPAs and businesses required to report continue reporting pending final litigation on this issue.

NAVIGATING THE BOI MINUTIAE

The biggest wrinkle of liability for public accounting firms will likely involve the definition of a client’s “beneficial owner.” This means anyone in a client’s company who, directly or indirectly, has “substantial control” over a reporting company or owns or controls at least 25% of the “ownership interests” of the company.

Substantial control is when an individual:

• Is a senior officer.
• Has authority to appoint or remove certain officers or a majority of directors of the company.
• Is an important decision maker.
• Has any other form of substantial control over the company (a “catch-all” to ensure that innovative or flexible corporate restructures still report).

In addition, companies are required to identify all individuals who own or control at least 25% of the ownership interests of the company. Ownership interests may include equity; stock or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any instrument, contract, or other mechanism used to establish ownership.

Direct ways to exercise substantial control may include board representation, control of a majority of voting power, or voting rights or rights associated with financing or interest, among others. Indirect ways to exercise substantial control may include controlling one or more intermediary entities that have substantial control over a company, or through arrangements or financial or business relationships with other individuals or entities acting as nominees.

Notably, FinCEN says that every reporting company will be able to identify and report at least one beneficial owner. Small companies, for example, may have multiple beneficial owners. Each company must report the:

• Full legal name as well as any trade or DBA name.
• Current U.S. address of the principal place of business or the primary location in the U.S. where the company conducts business.
• State, tribal, or foreign jurisdiction of formation.
• IRS taxpayer identification number, including an employer identification number or a tax ID from a foreign jurisdiction and the name of the jurisdiction.

The information required for each beneficial owner and company applicant (i.e., whoever directly files or is primarily responsible for the filing of the document that creates or registers the company) includes:

• Full legal name, date of birth, and current residential street address.
• The unique identifying number from an issuing jurisdiction.
• An image from one of the following: a U.S. passport; state driver’s license; or ID issued by a state, local government, or tribe (if an individual has none of these, a foreign passport).

Bianca Lindau, a Boston-based associate for the law firm Caldwell, says companies should start gathering this information now: “They should consider adding to existing (or creating new) compliance policies to ensure that the information required is collected when an entity is created or as part of a checklist for sales or purchases of companies or ownership interests. Additionally, it’ll be important to include obligations to provide BOI in transaction documents, such as joint venture agreements and stock purchase agreements.”

Of course, entities will have to take account of all the various entities in their ownership structure and determine for each whether a BOI report must be filed or not. “For large organizations, this may be quite onerous and time-consuming,” Lindau warns.

THE DANGER OF OFF-THE-CUFF ADVICE

According to experts, CPAs and other accounting professionals have two primary tasks if their business clients approach them for advice about BOI reporting: watch the scope of help and thoroughly document it.

During the AICPA/CIMA podcast, Larry Gray, owner of Alfermann Gray & Co LLC, a CPA firm in Rolla, Mo., said one of his biggest concerns with clients approaching his firm is the “off-the-cuff advice” that one of his staff members might give without thinking through the consequences.

While as of press time no state bar has made the determination of whether it’s an unauthorized practice of law for non-attorneys to be providing advice in response to BOI questions, many experts warn accounting firms against providing unresearched advice. Other risks for firms providing BOI advice to consider include:

• Insurance issues if such advice should end up not being “professional services” by an accounting firm.
• Handling of personal client information that’s not routinely handled by an accounting firm.
• Bank underwriters asking CPAs to confirm clients’ CTA compliance.

When in doubt, Joshua D. Lowe, CPA, CFP, partner at West & Company LLC in Edwardsville, Ill., says it’s best for CPAs to advise their clients to seek legal guidance.

“Due to the legal nature of this new requirement, our firm’s stance is that we should raise awareness and advise our clients to seek counsel from their attorneys to ensure they’re able to maintain compliance with the CTA,” Lowe stresses. “The law firms in our market area are very aware of this new act, as it’s now become part of their initial required set-up process for new entities. Many times, however, accounting firms aren’t part of that initial legal formation process.”

MANAGING PROFESSIONAL LIABILITY RISKS

According to CNA Insurance, an individual who willfully files a false or fraudulent BOI report on a company’s behalf (e.g., a CPA) may be subject to the same civil and criminal penalties as the reporting company.

Melanie Lauridsen, AICPA and CIMA’s vice president of tax policy and advocacy, has a few recommendations for preventing such penalties: Accounting firms should confer with their attorneys, insurance carriers, and even state regulators before accepting any BOI engagements, and they should create distinct and separate engagement letters for all BOI work.

She further cautions that if you’re not taking the engagement, make sure there’s specific language in all other engagement letters stating you’re not doing BOI work on that engagement.

“We have to be really clear what we’re going to do,” Harris adds. “We’re trying to find a way to help our clients but protect ourselves.”

Another tactic is to offer strictly administrative assistance with no advice or interpretation. “With most clients, it’s not practicing law to say, ‘Fill in your name, address, and your driver’s license number,’” Gray says. “It’s when you get to that section of ‘substantial control’ [that] we pull the attorney in.”

Harris believes that clients will fall into a couple of buckets: 1) a straightforward single-member corporation or LLC and no other owner, or 2) one where someone is working in the background who has substantial control, and the firm will have to determine how this person’s situation fits into the law. “That’s when we’re stretching over into whether it’s practicing law or giving advice that we’re not qualified to give,” Harris cautions.

Overall, the BOI requirement is uncharted waters for all parties involved. As such, Harris encourages CPAs to be diligent about getting their clients up to speed: “Everybody in our industry has to spend the next few months informing people about the law, including the seriousness of it and the penalties for failing to comply, and asking for their patience while we try to figure out how to administer something that—while well intended—doesn’t really fit well into anyone’s business model.”

Related Content:

• Are You Ready for Beneficial Ownership Compliance Reporting? Small businesses, including CPA firms, will soon be required to report beneficial ownership information per the Corporate Transparency Act. Here’s what you need to know to prepare.
• Managing Risk in Tax Season and Beyond: Now more than ever, CPA firms need to be proactive—not reactive—to potential risks associated with their client relationships. Consider these risk management tips as another tax season nears.