BOI Reporting is Coming Soon
Learn about this new requirement and the tax professional's role in it
Effective January 1, 2024, the Corporate Transparency Act (CTA) will require most business entities to file an initial report with the Financial Crimes Enforcement Network (FinCEN) to disclose the entity's beneficial owners.
Entities that existed before January 1, 2024 have until January 1, 2025 to comply with the new law. The Treasury Department estimates that 32.6 million initial and 6.6 updated reports will be filed in 2024; in 2025 and forward, 5 million initial and 14.5 million updated reports will be filed yearly.
There has been much debate in the tax community as to the typical tax practice’s role in helping their small business clients navigate this new requirement. There is not one correct approach except that simply ignoring it is inadvisable. There will be an extensive discussion about this later in the article.
Each reporting company must submit a report to FinCEN identifying each beneficial owner of the reporting company and applicant with respect to the reporting company. The beneficial ownership information (BOI) to be reported consists of four pieces of information.
If you find value in Tom Talks Taxes, please become a free or paid subscriber today.
A domestic reporting company is any entity that is a corporation, a limited liability company (LLC), or created by filing a document with a secretary of state or any similar office under the law of a State or Indian tribe. A foreign reporting company is any entity that is a corporation, LLC, or other entity formed under the law of a foreign country, and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe. See 31 C.F.R. §1010.380(c)(1).
There are 23 exemptions from the reporting entity definition. Most exemptions apply to federally regulated entities, such as insurance companies and brokers or dealers in securities. There are four important exemptions tax professionals in practice working with small and medium-sized businesses need to know:
Accounting firm. Any public accounting firm registered in accordance with §102 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7212). See 31 C.F.R. §1010.380(c)(2)(xv).
Tax-exempt entity. Any §501(c) entity exempt from tax under §501(a), any §527(e)(1) political organization exempt from tax under §527(a), and any trust described in §4947(a)(1) or §4947(a)(2). See 31 C.F.R. §1010.380(c)(2)(xix).
Large operating company. Any entity that employs more than 20 full-time employees in the United States, has an operating presence at a physical office in the United States, and filed a federal income tax return for the previous year showing more than $5 million in gross receipts or sales (net of returns and allowances). See 31 C.F.R. §1010.380(c)(2)(xxi).
Inactive entity. Any entity that was in existence on or before January 1, 2020; is not engaged in active business; is not owned by a foreign person, whether directly or indirectly, wholly or partially; has not experienced any change in ownership in the preceding twelve-month period; has not sent or received any funds in an amount greater than $1,000 in the preceding twelve-month period; and does not otherwise hold any kind or type of assets, whether in the United States or abroad. See 31 C.F.R. §1010.380(c)(2)(xxiii).
A sole proprietorship is rarely a reporting company, if ever. According to FinCEN frequently asked question C.6:
Filing a document with a government agency to obtain (1) an IRS employer identification number, (2) a fictitious business name, or (3) a professional or occupational license does not create a new entity, and therefore does not make a sole proprietorship filing such a document a reporting company.
It is important to note that the business's federal tax classification is irrelevant to determining if it is a reporting company. For example, a business activity conducted within a single-member LLC reported as a sole proprietorship on the owner’s tax return is a reporting company, even though the LLC is disregarded for federal tax purposes.
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company. See 31 C.F.R. §1010.380(d).
There are no constructive ownership or attribution rules for spouses, children, or other relatives; the guidance does not address ownership interests held as community property under state law. If one spouse does not exercise substantial control but owns at least 25% under community property law, it is advisable to report that spouse as a beneficial owner.
An individual exercises substantial control over a reporting company if the individual serves as a senior officer of the reporting company; has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); directs, determines, or has substantial influence over important decisions made by the reporting company; or has any other form of substantial control over the reporting company. See 31 C.F.R. §1010.380(d)(1)(i).
A senior officer is any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function, regardless of official title. See 31 C.F.R. §1010.380(f)(8).
According to FinCEN frequently asked question D.2, the following criteria inform as to who is an important decision maker:
It is possible, but unlikely, for the reporting company’s accountant to be a beneficial owner under frequently asked question D.6:
Accountants and lawyers generally do not qualify as beneficial owners, but that may depend on the work being performed.
Accountants and lawyers who provide general accounting or legal services are not considered beneficial owners because ordinary, arms-length advisory or other third-party professional services to a reporting company are not considered to be “substantial control” (see Question D.2). In addition, a lawyer or accountant who is designated as an agent of the reporting company may qualify for the “nominee, intermediary, custodian, or agent” exception from the beneficial owner definition.
However, an individual who holds the position of general counsel in a reporting company is a “senior officer” of that company and is therefore a beneficial owner.
For most small businesses, identifying the beneficial owner(s) is straightforward and does not require material legal judgment. Asking the entity to identify its beneficial owners by providing information as to who falls into the definition avoids any appearance of the tax professional making legal determinations. In complex situations, it is advisable to retain the services of a qualified attorney to make beneficial owner determinations.
A company applicant is, for a domestic reporting company, the individual who directly files the document that creates it; for a foreign reporting company, the individual who directly files the document that first registers it; or for a domestic or foreign reporting company, the individual that is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document. See 31 C.F.R. §1010.380(e).
According to frequently asked question E.2, any entity created or registered before January 1, 2024 does not have to disclose its company applicants on its initial report.
A reporting company’s accountant or attorney may be a company applicant according to frequently asked question E.3:
An accountant or lawyer could be a company applicant, depending on their role in filing the document that creates or registers a reporting company. In many cases, company applicants may work for a business formation service or law firm.
An accountant or lawyer may be a company applicant if they directly filed the document that created or registered the reporting company. If more than one person is involved in the filing of the creation or registration document, an accountant or lawyer may be a company applicant if they are primarily responsible for directing or controlling the filing.
For example, an attorney at a law firm that offers business formation services may be primarily responsible for overseeing preparation and filing of a reporting company’s incorporation documents. A paralegal at the law firm may directly file the incorporation documents at the attorney’s request. Under those circumstances, the attorney and the paralegal are both company applicants for the reporting company.
The reporting company must provide its full legal name; trade name or “doing business as” (DBA) name; complete street address of the principal place of business in the U.S. or primary location in the U.S. where business is conducted; state, tribal, or foreign jurisdiction of formation (or state or tribal jurisdiction of registration if foreign); and IRS taxpayer identification number (or foreign jurisdiction tax identification number if no IRS number). See 31 C.F.R. §1010.380(b)(1)(i).
The beneficial owner or company applicant must provide the individual’s full legal name; date of birth; complete current address; and a unique identification number and issuing jurisdiction from a non-expired U.S. passport, state driver’s license, other state, local, or tribal identification document, or foreign passport if nothing else is available (along with an image of the document). See 31 C.F.R. §1010.380(b)(1)(ii).
Initial, Corrected, and Updated Report Deadlines
For a reporting company created before January 1, 2024, an initial report must be filed within one year, or January 1, 2025. Entities created during 2024 will have 90 days to file their initial report. Entities created on or after January 1, 2025 will have 30 days to file their initial report. See 31 C.F.R. §1010.380(a)(1).
An updated report must be filed within 30 days of the change to previously reported information about the reporting company itself or its beneficial owners, and a corrected report must be filed within 30 days of the reporting company becoming aware or having reason to know of an inaccuracy. See 31 C.F.R. §1010.380(a)(2), (3).
Frequently asked question H.2 outlines some of the common triggers of an updated report:
Any change to the information reported for the reporting company, such as registering a new business name.
A change in beneficial owners, such as a new CEO, or a sale that changes who meets the ownership interest threshold of 25 percent (see Question D.4 for more information about ownership interests).
Any change to a beneficial owner’s name, address, or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that includes a changed name, address, or identifying number, the reporting company also would have to file an updated beneficial ownership information report with FinCEN, including an image of the new identifying document.
Please note that current guidance does not require a new image of the document if there is simply a change in expiration date; the name, address, or identifying number must change to trigger an updated report requirement.
Any person who willfully provides, or attempts to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or fails to report complete or updated beneficial ownership information is liable for a civil penalty of no more than $500 per day ($10,000 maximum), no more than two years imprisonment, or both. See 31 U.S.C. §5336(h)(1).
The critical term is willful; an action is willful if it is the “voluntary, intentional violation of a known legal duty.” See U.S. v. Pompanio, 429 U.S. 10 (1976).
Concerning the willful FBAR penalty, Internal Revenue Manual 18.104.22.168.5.1 (06-24-2021) states that a willful violation is one in which a person knowingly violated a legal duty, recklessly violated a legal duty, or acted with "willful blindness" by making a conscious effort to avoid learning about a legal duty.
In the preamble to the final beneficial ownership information reporting requirements regulations, FinCEN stated the following with respect to penalties (emphasis added):
Any assessment as to whether false information was willfully filed would depend on all of the facts and circumstances surrounding the certification and reporting of the BOI, but as a general matter, FinCEN does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation.
The Tax Professional Role
BOI reporting is only tax-adjacent, similar to the FBAR; therefore, it should not be assumed that every tax practice will prepare these forms for business clients. However, as the primary advisor for many small businesses, the tax professional is essential in helping clients with BOI compliance.
A lot of information (perhaps even misinformation) propagated by insurance companies and social media has created an unwarranted panic about BOI reporting, harkening back to the repair and capitalization regulations when some vocal elements believed every taxpayer in the United States would have to file Form 3115, Application for Change in Accounting Method (hint: it never happened).
Like anything else in the tax law, tax professionals must determine the services to be provided (if any) as outlined in their service agreement and the cost of those services. For example, some tax professionals do not do IRS representation, some do a little of it, and some do a lot. BOI reporting services will likely be similar.
In frequently asked question B.7, FinCEN opined on the role of outside assistance in BOI reporting:
Is a reporting company required to use an attorney or a certified public accountant (CPA) to submit beneficial ownership information to FinCEN?
No. FinCEN expects that many, if not most, reporting companies will be able to submit their beneficial ownership information to FinCEN on their own using the guidance FinCEN has issued. Reporting companies that need help meeting their reporting obligations can consult with professional service providers such as lawyers or accountants.
Let’s get real: most small businesses will not know how to comply without assistance. Not helping business owners, hiding a disclaimer in an engagement letter, or simply saying “consult an attorney” without further information is a huge disservice.
There are four paths to helping our small business taxpayers with BOI compliance, and every tax practice should select one of these four options:
Provide education about the requirement. This is the minimum tax professionals should do; education should start in January 2024 and continue during the one-year compliance period.
Provide education and track client self-compliance. For large tax practices, this could require tracking thousands of entities.
Outsource preparation to a third-party firm. Many service providers will assist with BOI compliance; tax professionals can establish a referral relationship with one or more firms.
Prepare the required forms. A tax professional must consider the legal, financial, and operational consequences before offering this service.
Before a tax professional adds BOI reporting services to their service offerings, it is essential to consider the following three questions:
Does the state bar consider involvement the unauthorized practice of law (UPL)? In most cases, the answer will be no; no state bar has opined on this issue. The mere preparation of a form using the information provided by a client generally does not require making legal judgments and is not UPL; an easy way to avoid this issue is to have the reporting company generate the list of beneficial owners using the guidance provided by FinCEN.
Does professional liability insurance cover this work? The lack of coverage does not preclude offering this service; many tax professionals provided services during the COVID-19 pandemic that possibly were not covered (such as PPP loan application assistance). The financial reward must compensate for the additional risk if the services are not covered. Concerning penalty exposure, only willful actions risk noncompliance penalties; tax professionals working in good faith would only be subject to penalties in extraordinary situations.
What is the scope of the BOI reporting services? BOI reporting is not annual; it is done as needed. Therefore, it is inherently a year-round service and could challenge firms with limited interaction with clients outside of tax season.
Offering BOI reporting services is an opportunity to change how the tax practice works with business owners. If a tax practice only prepares the business tax returns and offers little in the advisory area, BOI reporting services could be bundled into a value-based service package at a significantly higher price point.
As small businesses face increased complexities, the tax professional is often the first stop for assistance. BOI reporting can help the tax professional pivot from only offering tax form completion to being a trusted business advisor.
Join the Conversation
As a paid subscriber, you can discuss this topic in the comments section. Please keep the discussion related to this edition’s topic.
Are you still looking for CPE/CE for the year? Learn about BOI reporting and more in my Individual and Business Tax Law Update (2023) courses with Compass Tax Educators. We also offer ethics for enrolled agents and much more!
If you want to work with me throughout the year on challenging tax issues and improving your tax practice, consider applying for the Inner Circle. There are several open spaces available starting January 1, 2024.