The flurry of legal commentary on the Corporate Transparency Act (CTA) has focused mainly on the arcane rules and confusing exceptions. Because the CTA affects so many clients and the penalties for non-compliance are so severe, we’ll focus on practical action steps you might take to address the CTA.
Gear Up Now!
Failure to file can result in penalties of up to $500 per day (up to $10,000) and possible imprisonment for noncompliance. Rightly or wrongly, clients subject to penalties may blame their professionals. If you serve clients who are potentially subject to CTA reporting, consider these pragmatic options for mitigating your risk:
- You can’t ignore the CTA. Set a thoughtful policy as to what your firm will or won’t do. Even if you have a firm policy not to file FinCEN Reports, you won’t escape questions.
- Rather than preparing and filing CTA disclosures, you might only offer consulting services, so that the clients themselves prepare and file their own reports. Such activity isn’t without risk, and you should keep records of advice given to clients.
- Even when you agree to assist clients with their initial CTA reporting, you should disavow any responsibility for amending the CTA report on the occurrence of an event requiring such an update. Engagement letters could include specific language about the CTA filing requirements, disclaiming responsibility for preparing or advising the client about the CTA other than the information contained within the letter itself or as may be circulated by the firm, unless the client separately engages the firm for this work.1
- Smaller firms might designate one or two professionals within their practice to handle CTA reporting questions and filings. Larger firms might want to create a CTA committee. The firm should afford any such designated CTA professional with the time and resources to immerse themself in the voluminous regulations and stay current on future Internal Revenue Service pronouncements.
- Handle CTA issues uniformly and consistently.
Third-Party Filing Services
Reporting companies are required under the CTA to supplement a filing within 30 days of the occurrence of common events, such as when the driver’s license of a beneficial owner 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, particularly if the beneficial owner isn’t 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 outsource significant CTA filing responsibilities to third-party professional reporting services that can remind them of certain required amendments and help them satisfy the unique reporting obligations under the CTA. Professionals should carefully vet any such services prior to recommending them.
Over-Communicate
Drip information in client communications about the CTA on a regular basis beyond the language in the engagement letter. Consider sending notifications to clients as part of a newsletter and/or possibly footers or attachments to bills. Standard client communications should address CTA requirements any time a new entity is formed. Even snippets of new ideas or reminders may help clients understand this very different new reporting regime.
Advice on CTA Filings
Different clients will contact different advisors for help.
Wealth advisors, who often have the most ongoing contact with clients, should likely educate clients of the existence of the CTA, even if they recommend that the client contact their CPA or attorney.
Clients may be inclined to reach out to their CPA rather than their attorney for advice on CTA reporting, given the similarity between a CTA report and tax returns regularly prepared and filed on their behalf. Tax preparers likely already have experience filing foreign bank account (FBAR) reports, which, like the CTA, are also filed with FinCEN, the Financial Crimes Enforcement Network, a bureau of the U.S. Department of Treasury. Attorneys who don’t regularly file income tax returns and FBAR reports may not have practical experience or the necessary software to file reports with FinCEN.
However, CTA reporting differs materially from the FBAR. While an FBAR has become part of a taxpayer’s regular, annual tax filings, filing deadlines of reports required under the CTA don’t match the typical tax calendar. Clients required to report information generally must do so within 30-to-90 days of the occurrence of an event or a particular date. Additionally, the Internal Revenue Service enforces FBAR compliance, but it doesn’t enforce the CTA.
It’s not clear whether CPAs even have authority to interpret CTA reporting requirements under the same grant of 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 on CTA may rise to the practice of law.” As a result, accounting firms may have already determined that they shouldn’t provide guidance to clients about the CTA, even though clients will almost assuredly contact their CPAs for guidance. It’s hard to square this conclusion against the reality that tax preparers are often required to review and interpret legal documents, such as trust instruments and entity operating agreements, to prepare tax returns.
Perhaps accounting firms might respond to client inquiries by suggesting that even though the question of whether to report under the CTA appears to be a legal decision for their attorney to sort out, most CTA filings are quite simple. The pragmatic approach for many clients may be filing a report under the CTA that includes every conceivable beneficial owner.
Require FinCEN IDs
To satisfy the CTA reporting requirements, an entity needs to obtain personal information about each beneficial owner. This process could be time- consuming and difficult, particularly when the individuals involved are reluctant to provide such confidential information to the reporting entity. Entities subject to the CTA may be rightly concerned with the onerous requirements to amend whenever beneficial owner information changes.
Practitioners might consider recommending as a default that all reporting companies collect a FinCEN Identifier (FinCEN ID) from each beneficial owner. When beneficial owners obtain and maintain their own FinCEN ID, their private information isn’t accessible to anyone else. The entity won’t need additional information nor will the entity be required to update the CTA report when the information for that owner changes.
Review Existing Status
Encourage clients to review the status of existing entities and trusts as soon as possible. You might warn them that waiting until the end of 2024 could make it impractical for them to obtain information necessary to satisfy CTA reporting requirements.
Entities that aren’t needed might be merged or liquidated before the first CTA filing is made to avoid the need to file.
Consider whether to modify trusts to remove designated persons in various roles, such as loan officers or investment advisors, who may not have been required to act on behalf of the trust. In some cases, clients may have named 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 could be awkward to request Social Security numbers and obtain copies of drivers licenses from these individuals, which might delay efforts to complete CTA reports in advance of the Jan. 1, 2025 deadline.
You may be able to avoid the issue altogether and simplify CTA reporting requirements by helping clients modify or decant existing trusts to remove powerholders not expected to be needed for the foreseeable future.
Trust Strategy for 2024 and Beyond
When establishing new trusts in 2024 and beyond, incorporate CTA reporting considerations.
Any individual identified as a potential fiduciary could be required to provide a FinCEN ID, so the trust might list that number as part of a standard trust signature block. You might suggest that clients not name as trustee, trust protector or loan holder, any individual who can’t or won’t 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 might identify one trust protector with the power to appoint additional fiduciaries, non- fiduciaries and powerholders in the future. When the trust needs someone to serve in one of those positions, the trust protector could then appoint the individuals and obtain a FinCEN ID at that time.
When in Doubt, File!
Even after navigating the CTA and reviewing all of the relevant instruments, it may still be uncertain as to whether a particular person is a beneficial owner required to report.
It’s not always clear whether individuals involved with a business might be considered a “substantial control person” for the purposes of the CTA. Rather than incurring the expense of engaging attorneys to determine whether someone is required to file, businesses might cast a wider net and just file a report treating most, if not all, employees as beneficial owners for CTA reporting purposes. To entice reluctant employees to submit beneficial owner information or obtain their own FinCEN ID, smaller firms might find it less expensive to provide a $1,000 bonus to each potential “substantial control person.” And consider, it may not even be feasible for counsel to make a clear determination, given the myriad of ambiguities in the guidance provided.
Fortunately, there appears to be no penalty or other negative consequences to filing when there’s no requirement. Penalties arise only when someone fails to file when required. So, as stated above, the default answer may be “just file.”
Weathering the Storm
The CTA is upon us, and you need to be certain that you and your clients are prepared to deal with the new reporting regime. Setting a firm policy, confirming that malpractice coverage will apply, designating firm members to handle these matters, ensuring client communications, making changes in legal and administrative documentation and taking other practical steps may help you weather the CTA storm.
Martin M. Shenkman is a partner at the law firm of Martin M. Shenkman P.C. in Fort Lee, N.J. and New York City, and Joy Matak is a partner at Avelino Law, LLP in Morristown, N.J.