Corporate Transparency Act: Watch Out for Scams

How reporting companies can avoid scammers and comply with the new requirement

Scammers are already trying to take advantage of businesses and taxpayers by sending out fraudulent letters claiming to be from a government agency collecting information under the Corporate Transparency Act (CTA). The fraudulent correspondence may be titled “Important Compliance Notice” and contain a web link or QR code which are an attempt to gather an individual’s personal information. These letters should be reported to the Better Business Bureau (BBB) Scam Tracker and ignored. FinCEN is not sending out any letters to solicit information related to the CTA.

Following is a general discussion of the CTA and what companies can expect with this new compliance requirement:

What is it?

In 2021, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act of 2021 (NDAA), which is intended to help the US Government enhance financial transparency in order to combat money laundering activities and other financial crimes often conducted through shell companies. The Financial Crimes Enforcement Network (FinCEN), a division of the US Treasury, will be in charge of collecting the data as required under CTA.

Who is impacted?

Under the Corporate Transparency Act, “reporting companies” will need to report personal information for each “beneficial owner” and “company applicant”. A reporting company is defined as any domestic entity that is created by the filing of a document with a US State or Indian Tribe or any foreign entity formed under the laws of a foreign country and registered to do business in any US State (by the filing of a document with a US state or Indian Tribe). This definition means that corporations (S and C corporations), Limited Liability Companies, and Limited Partnerships are subject to reporting.

Note: There are certain exempt entities which include: publicly traded companies, banks/credit unions, investment advisors, insurance companies, public accounting firms, public utilities, charities and supporting organizations, inactive entities and certain subsidiaries of exempt entities.

The “company applicant” is the individual who registered the entity when it was originally formed and if that individual is not the supervising person or the person who manages the consulting service relationship, that person is also to be reported. Only reporting companies created/registered January 1, 2024, and after are required to include information for the company applicants in their filings.

A “beneficial owner” is defined as an individual who directly, or indirectly, exercises substantial control or owns or controls more than 25% ownership interest of the reporting company.

Any individual has substantial control if they do any of the following: 1) serve as a senior officer, 2) have the authority to appoint or removed officers or a majority of directors, 3) are an important decision maker or 4) have any other form of substantial control as described in the Small Entity Compliance Guide.

An ownership interest is generally an arrangement that establishes ownership rights in the reporting company and typically includes ownership by equity, stock or similar instrument, capital or profits interest, or any other mechanism of ownership described in the Small Entity Compliance Guide. Other mechanisms may include structures (generally debt) convertible into ownership as well as puts, calls, straddles or options to buy or sell. It is also important to consider trusts as trustees and beneficiaries with a current distribution right as well as grantors with the right to revoke assets are included in the definition of beneficial owner.

What is required to be reported?

A reporting company’s filing will provide the full legal name of the company (and DBA if applicable), complete address, state of formation and IRS Taxpayer Identification Number. Additionally, the reporting company must provide the following information for all company applicants and beneficial owners: full legal name, date of birth, residential address and both the image and unique identifying number of either their current US passport, state driver’s license or other acceptable form of identification provided by a state.

Company applicants and beneficial owners can apply to get a FinCEN Identifier (unique identifying number) which they can then provide to reporting companies in lieu of having to provide personal information and current documentation. It is highly recommended that both applicants and owners use the FinCEN identifier to protect confidential information that is required to be reported by the reporting company.

This new reporting requirement is very extensive and will require time and likely consultation with your legal and financial advisors.  Please do not wait until late in 2024 to comply.

When must the information be reported?

If your company was in existence before January 1, 2024, the initial application must be filed by January 1, 2025. If your company is created on or after January 1, 2024, the company must file its initial report within 90 days of formation. FinCEN’s website indicates the secure electronic filing system will be available before the reporting company is required to file a report and that no reports of beneficial ownership will be accepted before January 1, 2024.

Additionally, updates to information provided about the company or any of the beneficial owners must be provided within 30 days of such change. This could prove to be the most challenging requirement of all.

Where is the information reported?

Beneficial ownership information can be submitted through a secure filing system on FinCEN’s website. Applications will not be accepted prior to January 1, 2024.

Who is responsible for this reporting requirement?

Each company is required to comply with the requested information and file with FinCEN directly. This is not an income tax filing requirement and, as such, Keiter will not prepare nor submit any of the filings. We, as part of your advisory team and along with your legal counsel, can help advise you on how to comply, what information to gather and what procedures to put in place to ensure ongoing compliance and timely filings.

Note: None of the FINCEN reporting for the CTA will occur before January 1, 2024.

Additional Resources

Access the BBB article that provides additional details on how to respond to CTA fraud attempts.

• Overview of the Corporate Transparency Act
• Financial Crimes Enforcement Network website  (Refer to this site frequently for updates and new guidance.)