Beneficial Ownership Information Reporting

It’s halftime at the Rose Bowl game. Did you forget to tell FinCEN something?

December 4, 2024 by Kim & Rosado LLP

With New Year’s Day 2025 being right around the corner, it is becoming commonplace for commentators to assume the role of Cassandra in warning of the dangers of ignoring the Corporate Transparency Act filing deadline of January 1st for affected entities. And we feel no less obligated to jump on the bandwagon to remind advisors and principals of such entities over the need to disclose detailed information concerning their beneficial ownership to the Financial Crimes Enforcement Network (FinCEN).

Repeatedly, it is heard from practitioners that many clients bask in blissful ignorance of the law as applying to them; it only applies to those big companies, right? The reality is not quite that way at all as many large public corporations are, in fact, exempt.

Let’s mention one group that is chronically ignorant of regulatory niceties: Nonprofits. The law currently provides Exemption #19 for a “Tax-exempt entity,” which is one described in I.R.C. § 501(c), whether or not it has applied for tax-exempt status; one described in I.R.C. § 501(c) but which lost its tax-exempt status less than 180 days before; one exempt under I.R.C. § 527(a); or a trust described in I.R.C. § 4947(a)(1) or (2). A common belief of the people behind nonprofit organizations is that the good Lord will take care of them, and no need exists to contend with Caesar’s troublesome paperwork. Now, it is generous (and a little surprising) that under the CTA provisions, the purported tax-exempt entity need not have filed a Form 1023 or Form 1023-EZ. Nonetheless, nonprofit organizations should undertake an objective internal review to ensure that they, in fact, meet the requirements of the famous code section.

And otherwise, any corporation, limited liability company, partnership, S-corporation, or another entity created by the filing of a document with a secretary of state or any similar office in the U.S. may be required to report information about its beneficial owners. Futher, trusts registered with a state may be so required. Reporting requirements even extend to a foreign company formed under the law of a foreign country that is registered to do business in the U.S. by the filing of a document with a secretary of state or any similar office.

Still unsure or scared? We recommend that you work with qualified attorneys to meet your beneficial ownership information filing requirements. Experienced counsel at Kim & Rosado LLP can assist you meet these new filing requirements: Request a Consultation.

(N.B. On March 1st, 2024, the U.S. District Court for the Northern District of Alabama held that the CTA unconstitutional for exceeding the Constitution’s limits on Congress’s power. Nat’l Small Bus. United v. Yellen. The ruling permanently enjoined FinCEN from enforcing the CTA against the plaintiffs, the National Small Business Association (NSBA), a group that represents over 65,000 businesses and entrepreneurs in all 50 states. FinCEN filed an appeal to the 11th Circuit Court of Appeals, which appeal is still pending as of this writing, and announced it would continue enforcement of the CTA but that the named plaintiffs and members of the NSBA would not be required to report beneficial ownership under the CTA at this time.)

U.S. District Court Deems Corporate Transparency Act Unconstitutional: Implications and Future Challenges

December 4, 2024 by Kim & Rosado LLP

On March 1, 2024, the U.S. District Court for the Northern District of Alabama held that “the Corporate Transparency Act (CTA) is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.” The ruling permanently enjoined the U.S. Treasury Department and Financial Crimes Enforcement Network (FinCEN) from enforcing the CTA against the plaintiffs, the National Small Business Association (NSBA), a group that represents over 65,000 businesses and entrepreneurs in all 50 states. While the court’s ruling provides relief to the plaintiffs, the broader implications of the judgment and the likelihood of appeal warrant careful consideration. Who is not covered by the Court’s ruling? In the regulatory analysis section of a Notice of Proposed Rulemaking issued December 8, 2021, FinCEN estimated a population of at least 25 million “reporting companies” required to report BOI and that are not exempt.

What is the CTA?

Congress enacted the CTA in 2021 to combat money laundering, terrorist financing, and other financial crimes. The legislation tasked FinCEN with the responsibility to implement a mechanism requiring companies to disclose information about their beneficial owners, senior officers, and control persons to the Federal Government. FinCEN’s initial regulations, effective as of January 1, 2024, provided guidelines on reporting entities, required information, and deadlines.

Legal Challenge and Court Decision:

In response to the CTA’s disclosure requirements, the plaintiffs filed a lawsuit against the Treasury Department in November 2022. The plaintiffs asserted that the CTA’s mandatory disclosure requirements exceed Congress’s authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments.

The Government argued that the CTA was authorized under the foreign affairs powers, the Commerce Clause, and taxing powers. However, the court held that the CTA exceeded the Constitutional limits on Congress’s power and dismissed these arguments. It held that the CTA lacked authorization under foreign affairs powers, highlighting that incorporation falls within state jurisdiction as an internal affair. Next, the court held that the CTA regulation on non-commercial activities like incorporation, did not fall within the purview of the Commerce Clause. Lastly, the court held that the CTA did not draw authority from Congress’s taxing powers, underscoring that its utility for tax collection alone was insufficient to invoke such powers.

How does the court’s decision affect you?

If you were part of the NSBA prior to March 1, 2024, you don’t have the file a Beneficial Owners Information (BOI) report for now… Shortly after the ruling, FinCEN released a statement, stating “FinCEN is complying with the court’s order and will continue to comply with the court’s order for as long as it remains in effect.” (emphasis added). This signals that the U.S. Treasury Department will likely appeal the district court’s decision and request a stay of judgement.

If you were not part of the NSBA, then the CTA still applies, and you may have to file a BOI report. While the court’s decision deals a significant blow to the CTA, its ultimate fate remains uncertain. This ruling is likely to serve as a precedent, sparking similar legal challenges to the CTA.

The deadline to file the BOI report is fast approaching. It will be prudent to prepare sooner rather than later.

Our Recommendations for Complying with The Corporate Transparency Act

December 4, 2024 by Kim & Rosado LLP

Kim & Rosado LLP recommends that all businesses take the following steps:

1. Determine if your entity is a reporting company that is required to file a Beneficial Ownership Information Report.

2. Determine whether your entity is one of the 23 types of entities excepted from beneficial ownership information reporting.

3. Determine who the beneficial owners of the business are.

4. Consider amending your business’s governance documents to require all beneficial owners to comply with the beneficial ownership information reporting process (and provide remedies for noncompliance).

5. Ensure that each beneficial owner has an acceptable, non-expired identification document.

6. Encourage each beneficial owner to apply for a FinCEN identifier as soon possible.

7. Develop an internal beneficial ownership information reporting program to ensure that the company stays in compliance and files timely updated beneficial ownership information reports.

8. Dissolve any inactive entities to avoid the ongoing costs of beneficial ownership information reporting.

Lastly, we recommend that you work with qualified attorneys to meet your beneficial ownership information filing requirements.

By the Numbers: The Corporate Transparency Act and the Probable Impact to IRS Global High Wealth Taxpayer Audits Beginning in 2024

December 4, 2024 by Kim & Rosado LLP

Back in 2009, the IRS formed the Global High Wealth (GHW) unit focusing on taxpayers who had elevated income and a complexity in their financials that warranted a “holistic approach.” From 2009 through 2022, our wise partner Tony Kim served as one of five IRS attorneys working to support this new unit. He found that understanding how a web of partnerships, domestic and foreign trusts, offshore accounts and corporations linked to reveal a GHW taxpayer’s true taxable income was no easy task. But, the IRS first had to find these dots to connect them.

The IRS’s Data Book shows that the agency struggled with GHW audits. IRS Data Book Table 17. As of fiscal year 2010, 13,322 tax returns were filed by taxpayers who had total positive income of $10,000,000 or more – that’s the range to fall within this GHW population. IRM 4.52.1.2. From that number, 21.5% of the returns were audited with an average recommended adjustment of $610,397. Fast forward to fiscal year 2019, where the number of GHW tax returns filed grew to 24,457, resulting in just 10.2% audit coverage with an average recommended adjustment of $49,805. If the GHW division was a stock, we’d probably sell and take a loss. Before we do, let’s look under the hood for a moment.

In building a GHW case, the IRS prepares a review a “yK-1 analysis” for each taxpayer to gain an overview of the taxpayer enterprise that includes the taxpayer’s Form 1040 and all related entities. From this interactive link analysis of the GHW taxpayer and all of their web of entities, the IRS could then review the entire enterprise and consider how to build the case. IRM 4.52.1.1.5(1); IRM 4.52.1.3. The trouble with building this yK-1 analysis is that the IRS needs information on a GHW taxpayer’s web of entities. And, a GHW taxpayer’s ownership information in various entities is elusive.

The GHW unit’s audit results may increase dramatically in the coming years due to the recently enacted Corporate Transparency Act (CTA). Congress added the CTA section, 31 U.S.C. § 5336, to the Bank Secrecy Act to address the broader objectives of beneficial ownership transparency. The CTA requires certain types of domestic and foreign entities, called “reporting companies,” to submit specified beneficial ownership information (BOI) reports to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, that is charged with safeguarding the U.S. financial system from money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence. All of the information that connects GHW taxpayers to their holdings so critical to a yK-1 analysis will soon become available to the IRS beginning in 2024 when taxpayers are required to file BOI reports with FinCEN. The CTA provides, “[b]eneficial ownership information shall be accessible for inspection or disclosure to officers and employees of the Department of the Treasury . . . .” Couple the CTA with the additional funding provided by Congress in the Inflation Reduction Act that will lead to the hiring of more revenue agents and you have the stage set for quite a dramatic change to the landscape of GHW taxpayer audits beginning in 2024.

Beneficial Ownership Information Reporting: Updates and Corrections

January 22, 2024 by Kim & Rosado LLP

Understanding Beneficial Ownership Information Reports

Beneficial Ownership Information Reporting: Updates and Corrections

When to update a beneficial ownership information report: After a reporting company files an initial beneficial ownership report, the reporting company must file an amended report within 30 calendar days after the date on which such change occurs to reflect any change in information previously reported to FinCEN, including any change with respect to who is a beneficial owner or information reporting for any particularly beneficial owner.
When to correct a beneficial ownership information report: If a reporting company files an initial beneficial ownership report or any subsequent amendment and determines that either report was inaccurate when filed and remains inaccurate the reporting company must file a corrected report within 30 calendar days after the date on which the reporting company becomes aware of or has reason to know if the inaccuracy.

Understanding the Need for Updated Beneficial Ownership Information Reports

When to File an Updated Report: Reporting companies are required to file updated beneficial ownership information reports within 30 days of any change in their beneficial ownership information. Updated reports are required if there are any changes to reported information about the reporting company or its beneficial owners. Remember, required information on a beneficial ownership information report includes, in part, a reporting company’s name and address and a beneficial owner’s name, address, and identifying number from an acceptable identification form. Any change to any of these items can trigger the legal obligation to file an updated beneficial ownership information report. Reporting companies are not required to provide updated information about company applicants.

Action Steps for Reporting Companies:

Identify Changes: Regularly review your company’s beneficial ownership structure to identify any changes that may trigger the need for an updated beneficial ownership information report.
Gather Information: Require all beneficial owners to always update their beneficial ownership information, ensuring accuracy in names, addresses, and unique identifying numbers.
File Promptly: Prepare and submit the updated beneficial ownership information report within the 30-day window to avoid noncompliance.

Addressing the Need for Corrected Beneficial Ownership Information Reports

When to File a Corrected Report: In the event that a reporting company discovers an error or omission in a previously filed beneficial ownership information report, a corrected report must be filed within 30 days. This ensures that the information on record with FinCEN is accurate.

Action Steps for Reporting Companies:

Review and Identify Errors: Conduct thorough reviews of your beneficial ownership information reports to verify the accuracy of the information provided.
Prepare the Correction: Assemble all necessary information to correct any error or omission, ensuring that the new report is complete and precise.
File Without Delay: Submit the corrected beneficial ownership information report promptly to avoid any penalties that FinCEN could impose.

Our Role in Your Reporting Obligations

At Kim & Rosado LLP, we understand that maintaining compliance with evolving regulations can be challenging. Our partners stand ready to assist you in fulfilling your beneficial ownership information reporting obligations with precision and authority.

Should you require assistance in preparing updated or corrected beneficial ownership information reports, or if you have any questions regarding these processes, we invite you to reach out to us. Our direct involvement and hands-on approach ensure that you receive the expert advocacy and support needed to navigate these intricate regulatory requirements.

FinCEN Identifier: A Simplified Compliance Tool

January 21, 2024 by Kim & Rosado LLP

Understanding Beneficial Ownership Information Reports

FinCEN Identifier: A Simplified Compliance Tool

Beginning in 2024, millions of U.S. entities will need to file beneficial ownership information reports. These reports are subject to complicated rules. Recognizing the burdens this new reporting regime imposes, the Corporate Transparency Act created a process to simplify reporting—the FinCEN identifier.

What is the FinCEN Identifier?

The FinCEN identifier is a unique number assigned to reporting companies who file their beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). The FinCEN identifier is not generated automatically; reporting companies must request it when they submit their beneficial ownership information reports. The FinCEN identifier helps to streamline updated or corrected beneficial ownership information reports. As a consistent reference for subsequent filings, the FinCEN identifier reduces the repetitive submission of data.

Individual Application Process for Beneficial Owners and Company Applicants

Not just for reporting companies, beneficial owners and company applicants can also individually apply for FinCEN identifiers. Once obtained, this identifier can be shared with the reporting company to be used in lieu of detailed personal information typically required in beneficial ownership information reports. The application process is straightforward: individuals must access the Beneficial Ownership Secure System (BOSS) and select the ‘Create a FinCEN ID (optional)’ option. Applicants must include the same information as would have to be provided on a beneficial ownership information report: full legal name, date of birth, residential address, a unique identifying number from an acceptable identification document, and an image of that identification document. After submitting that information, FinCEN will provide the applicant’s unique FinCEN identifier.

Protecting Personal Information

The FinCEN identifier serves a dual purpose: streamlining compliance and securing privacy. With a singular, reusable identifier, there is less need to distribute sensitive information repeatedly. For individuals involved with multiple entities, this is advantageous, as it allows for a single identifier to be employed across various reports and filings, enhancing both security and convenience.

The Ongoing Obligation to Update Beneficial Ownership Information

A reporting company is obligated to update a beneficial ownership information report within 30 days after a change to any beneficial ownership information. A reporting company is also obligated to correct a beneficial ownership information report within 30 days of discovering that there is incorrect information on a previously-filed beneficial ownership report. When an individual beneficial owner obtains a FinCEN identifier, the reporting company can use that identifier instead of providing the required beneficial ownership information. But by obtaining a FinCEN identifier, the individual rather than the reporting company becomes responsible for updating or correcting that owner’s beneficial ownership information. The individual must update or correct any information previously submitted to FinCEN in the application for the FinCEN identifier within 30 days after the date on which any change occurs or error is discovered.

Remember, the required information about a beneficial owner on a beneficial ownership report includes the beneficial owner’s full legal name, date of birth, residential address, a unique identifying number from an acceptable identification document, and an image of that identification document. If any of those items change, the beneficial owner who obtained the FinCEN identifier is responsible for updating that information. Similarly, if any of those items were entered incorrectly on the application for the FinCEN identifier, the beneficial owner must make a correction.

Electronic Submission Through BOSS

Obtaining a FinCEN identifier must be done electronically via FinCEN’s secure filing system, BOSS. This is FinCEN’s electronic filing system implemented to collect and maintain beneficial ownership information. A reporting company can obtain a FinCEN identifier while electronically filing a beneficial ownership information report through BOSS. And the BOSS system allows individuals to apply for and receive a FinCEN Identifier that they can supply to the reporting companies with which they have filing obligations – whether that is as a beneficial owner or a company applicant.

Kim & Rosado LLP: Your Compliance Partners

At Kim & Rosado LLP, our experienced partners are equipped to help you understand these new procedures and integrate them into your existing compliance framework. For assistance in obtaining your FinCEN identifier or for any questions about the BOI reporting process, please reach out to us. We are here to provide the guidance you need.