Disclosure of Many Companies’ Owners is Required Under New Law

By Stanley Rose January 28, 2021

While most accountants and attorneys were busy trying to digest the nearly 5,600-page Consolidated Appropriations Act that unleashed a number of tax and pandemic relief changes, another piece of legislation slipped in the back door nearly unnoticed, but it created a pervasive new reporting requirement that will be turned loose in coming months on small businesses.

Buried in January 1, 2021’s National Defense Authorization Act for Fiscal Year 2021 is a section described as the Corporate Transparency Act (the Act). It is not in effect yet, but when it is, it will require a number of new and existing entities to provide a list of names and related information of their beneficial owners and certain other key players to a division of the Treasury Department known as the Financial Crimes Enforcement Network (FinCEN). Some readers will recognize FinCEN as the division that annually collects reports listing foreign bank accounts and related information. Now this agency is about to become familiar to a much wider swath of U.S. taxpayers.

Why is this happening?

The legislation itself states that its purpose includes protection of U.S. security interests and interstate and foreign commerce, strengthening law enforcement efforts to fight terrorism and money laundering, and bringing U.S. protocol in line with similar rules of other nations. This information will not be available to the public, but instead is limited to the authorities (including state, local, and even foreign governments), primarily for the purposes described above. Those with access to these records can face stiff penalties (described later) if they misuse this data.

Who is subject to these rules?

The new requirements are imposed on so-called “reporting companies,” which generally includes “a corporation, limited liability company, or other similar entity” created by the filing of a document with a secretary of state or its foreign counterpart for foreign entities registered to do business in the U.S.

Many exceptions exist, though, and the criteria seem to suggest that the rules are targeting small entities that are somewhat “off the grid,” and giving a pass to larger entities and those that already leave a regulatory footprint. For instance, banks, credit unions, brokers, registered investment companies and advisors, insurance companies, public accounting firms, tax-exempt 501(c)(3) organizations, and publicly-traded companies are exempt. Also exempt are companies that have a physical presence in the U.S. that generate more than $5 million in gross receipts and employ more than 20 employees. Finally, any entity owned by one of the exempt entities listed above is itself also exempt.

Observation: The law includes an LLC “or similar entity” in its definition of reporting companies. This somewhat vague terminology appears to include partnerships and single member LLCs operated as sole proprietorships. But does it exclude sole proprietorships that are not formed as LLCs, assuming no paperwork is filed with the state to formalize the formation? This is not entirely clear. The Treasury Department is required to issue regulations expounding on the new law, and those rules and perhaps legal counsel should be consulted if it is unclear whether or not a business is included in the definition of a “reporting company.”

What has to be reported?

Each reporting company that is not exempt as described above must provide detailed information for each “beneficial owner.” That term is defined very specifically in the Act; it includes any individual who owns at least 25% of the entity. But it also includes anyone who “exercises substantial control over the entity,” and that is not defined very well at all, other than its exclusion of employees and fiduciaries, whose control in that capacity will not pull them into this dragnet.

Observation: As noted above, the Treasury Department is expected to issue regulations elaborating on these rules. Presumably these regulations will explain what constitutes “substantial control.” The law itself also does not appear to address constructive ownership/family attribution (i.e. what if a father/daughter separately each own 24%, which is under the threshold, but when combined is 48% and well over it?).

Once each “beneficial owner” is identified, the data to be provided to FinCEN includes that person’s name, date of birth, residential or business street address, and a government-issued identification number, such as a driver’s license or passport number. (A filer appears to have the ability to request, and then provide, a unique “FinCEN identifier” number in lieu of one of these other forms of identification.)

How and when do I report this information (and what happens if I don’t)?

The exact means and protocol of filing are not yet known. The Treasury Department is required to provide regulations supporting this new law no later than January 1, 2022, and presumably will create a new form for use fulfilling these requirements. It may not necessarily wait that long to issue regulations, though, and once it does, any newly-formed entity that is subject to the rules will need to provide the required information as part of its formation steps. Existing entities are also subject to the rules, and the release of Treasury regulations starts a two-year window during which those reporting companies must provide the information as well.

This is not an annual reporting requirement. Once each reporting company has filed this information, it does not need to do so again unless its ownership changes. If ownership does change, it must be reported on a new filing. Under current rules, it must do so within a year of the change, but the law allows that window to be narrowed at the whim of the Treasury.

The Act prescribes penalties of $500 per day, up to a maximum of $10,000, for those who are required to file but willfully fail to submit the required information. It also provides violators the potential of up to 2 years behind bars to reflect upon their mistakes. In the interest of protecting that data, it also prescribes much larger penalties – up to $500,000 – for parties who have access to someone else’s information and misuse it. Those violators risk up to 10 years of imprisonment.

Conclusion

Entities that meet the definition of “reporting companies” pursuant to new rules created by the National Defense Authorization Act for Fiscal Year 2021 should be on the lookout for forthcoming Treasury Regulations. Once those regulations are issued (which will be no later than New Year’s Day 2022), both new and existing entities may need to report confidential data of their owners to the government, and update it following any subsequent ownership changes.

For more information, please contact your BNN tax service provider at 800.244.7444.