The flurry of legal commentary on the Corporate Transparency Act (CTA) has largely focused on arcane rules and confusing exemptions. Because CTAs affect so many customers and the penalties for non-compliance are so severe, we'll focus on practical action steps you can take to address CTAs.
Prepare now!
Failure to file can result in fines of up to $500 per day (up to $10,000) and possible imprisonment for non-compliance. Rightly or wrongly, clients subject to fines can blame their professionals. If you serve customers who are potentially subject to CTA reporting, consider these pragmatic options for mitigating your risk:
- You can't ignore CTA. Establish a thoughtful policy about what your firm will or will not do. Even if you have a strong policy of not filing FinCEN Reports, you won't escape questions.
- Instead of preparing and submitting CTA disclosures, you can only provide consulting services so that clients can prepare and submit their own reports. Such activity is not without risk and you should keep records of the advice given to clients.
- Even when you agree to assist customers with their initial CTA reporting, you must disclaim any responsibility for changing the CTA report upon the occurrence of an event requiring such updating. Engagement letters may include specific language regarding CTA filing requirements, disclaiming responsibility for preparing or advising the client with respect to the CTA, other than information contained in the letter itself or as may be circulated by the firm, unless the client engages the firm separately for this. work.1
- Smaller firms may designate one or two professionals within their practice to handle CTA reporting inquiries and filings. Larger firms may wish to establish a CTA committee. The firm should allow each such designated CTA professional the time and resources to immerse themselves in the voluminous regulations and stay current on future Internal Revenue Service filings.
- Handle CTA matters uniformly and consistently.
Third-Party File Services
Reporting companies are required under the CTA to complete a filing within 30 days of the occurrence of common events, such as when a beneficial owner's driver's license expires or when a minor beneficiary of a trust turns 18. A firm may not know or be able to react to such an event, especially if the beneficial owner is not the same individual who works directly with the firm on behalf of the entity.
It may be prudent for larger reporting companies and their beneficial owners to delegate significant CTA filing responsibilities to professional third-party reporting services that can remind them of certain required changes and assist them they meet unique reporting obligations under the CTA. Professionals should check any such services carefully before recommending them.
Communicate too much
Drip information into client communications about the CTA on a regular basis beyond the language in the engagement letter. Consider sending customer notices as part of a newsletter and/or perhaps invoice footers or attachments. Standard client communications should address CTA requirements whenever a new entity is formed. Even snippets of new ideas or reminders can help clients understand this new, very different reporting regime.
Tips for CTA files
Different clients will contact different advisors for help.
Wealth advisors, who often have the most ongoing contact with clients, are likely to educate clients about the existence of CTAs, even if they recommend that the client contact their CPA or attorney.
Clients may be inclined to turn to their CPA rather than their attorney for advice on CTA reporting, given the similarity between a CTA report and the tax returns regularly prepared and filed on their behalf . Tax preparers likely already have experience filing Foreign Bank Account Reports (FBARs), which, like CTAs, are also filed with FinCEN, the Financial Crimes Enforcement Network, an office of the U.S. Department of the Treasury. Attorneys who do not regularly file income tax returns and FBAR reports may not have the practical experience or software necessary to file reports with FinCEN.
However, CTA reporting differs materially from FBAR. While an FBAR has become part of a taxpayer's regular annual tax filing, the reporting deadlines required under the CTA do not align with the typical tax calendar. Customers who are required to report information generally must do so within 30-90 days of the occurrence of an event or date. Additionally, the Internal Revenue Service enforces FBAR compliance but does not enforce the CTA.
It is not clear whether CPAs have authority to interpret CTA reporting requirements under the same authority to advise on federal tax matters under Treasury Circular 230. According to the American Institute of Certified Public Accountants, “providing technical or interpretive advice to CTA may be raised in the practice of law. As a result, accounting firms may have already decided that they should not provide guidance to clients regarding CTAs, even though clients will almost certainly contact their CPAs for guidance. It is difficult to reconcile this conclusion with the reality that tax preparers are often required to review and interpret legal documents, such as trust instruments and operating agreements of entities, to prepare tax returns.
Perhaps accounting firms could respond to client requests by suggesting that although the question of whether to report under the CTA appears to be a legal decision for their counsel to resolve, most CTA filings are fairly straightforward. The pragmatic approach for many clients may be to file a report under the CTA that includes every potential beneficial owner.
Request a FinCEN ID
To comply with the reporting requirements of the CTA, an entity must obtain personal information about each beneficial owner. This process can be time-consuming and difficult, especially when the individuals involved are reluctant to provide such confidential information to the reporting entity. Entities subject to the CTA may rightly be concerned with the onerous requirements to amend whenever beneficial owner information changes.
Practitioners may consider recommending as a default that all reporting companies collect a FinCEN Identifier (FinCEN ID) from each beneficial owner. When beneficial owners receive and maintain their FinCEN ID, their private information is not accessible to anyone else. The entity will not need additional information, nor will the entity be required to update the CTA report when information about that owner changes.
Review existing status
Encourage clients to review the status of existing entities and trusts as soon as possible. You can warn them that waiting until the end of 2024 may make it impractical for them to obtain the information needed to meet the CTA's reporting requirements.
Entities that are not needed can be merged or liquidated before the first CTA registration is made to avoid the need to file.
Consider whether to modify trusts to remove certain persons in various roles, such as loan officers or investment advisers, who may not have been asked to act on behalf of the trust. In some cases, clients may have appointed individuals to serve in these positions without informing them because these individuals may not have been required to sign the trust instrument when it was originally executed. It may be difficult to request Social Security numbers and obtain copies of driver's licenses from these individuals, which may delay efforts to complete CTA reports before the January 1, 2025 deadline.
You may be able to avoid the problem entirely and simplify CTA reporting requirements by helping clients modify or decant existing trusts to remove power holders not expected to be needed for the foreseeable future.
Trust Strategy for 2024 and beyond
When creating new trusts in 2024 and beyond, include CTA reporting considerations.
Any individual identified as a potential fiduciary may be required to provide a FinCEN ID, so the trust can list that number as part of a standard trust signature block. You may suggest that customers do not appoint as trustee, trustee or loan holder any individual who cannot or will not obtain a FinCEN ID.
To simplify CTA filing requirements, consider moving away from naming different individuals to serve under the trust agreement. Instead, a trust agreement may identify a trustee with the power to appoint fiduciaries, non-fiduciaries and additional power holders in the future. When the trust needs someone to serve in one of those positions, the trust guardian can then nominate the individuals and obtain a FinCEN ID at that time.
When in doubt, archive!
Even after navigating the CTA and reviewing all relevant instruments, it may still be uncertain whether a particular person is a reporting beneficial owner.
It is not always clear whether individuals involved in a business can be considered a “significant control person” for the purposes of the CTA. Instead of going to the expense of hiring attorneys to determine if someone is required to file, businesses can cast a wider net and simply file a report treating most, if not all, employees as beneficial owners for tax purposes. CTA reporting. To entice reluctant employees to submit beneficial owner information or obtain their FinCEN ID, smaller firms may find it less costly to offer a $1,000 bonus for each “substantial control person.” And mind you, it may not even be feasible for the attorney to make a clear determination, given the multitude of ambiguities in the guidance provided.
Fortunately, there appear to be no penalties or other negative consequences for filing unsolicited. Penalties only arise when someone fails to file when required. So, as said above, the default response might be “file only”.
Weathering the storm
The CTA is upon us and you need to be sure you and your customers are prepared to deal with the new reporting regime. Establishing a strong policy, confirming that malpractice coverage will apply, assigning members of the firm to handle these issues, ensuring communication with clients, making changes to legal and administrative documentation, and taking other practical steps can 'help you weather the CTA storm.
Martin M. Shenkman is a partner at the law firm of Martin M. Shenkman PC in Fort Lee, NJ and New York City, and Joy Matak is a partner at Avelino Law, LLP in Morristown, NJ