With the increasing importance of transparency and accountability in both private and governmental settings, the U.S. government has introduced the Corporate Transparency Act (CTA). Set to go into effect on January 1, 2024, the CTA aims to tackle financial issues such as money laundering.
As the deadline approaches, now is the time to identify which entities will be affected by the Corporate Transparency Act and how Certified Public Accountants (CPAs) will be impacted.
Why was the Corporate Transparency Act introduced?
The United States has recognized a lack of data to adequately identify beneficial owners—or anyone who owns 25% or more of an entity or has significant control over it. Their influence can be exercised directly or indirectly on an entity, allowing them to affect major decisions in an organization. Without proper oversight, beneficial owners can engage in criminal activities such as money laundering.
The Corporate Transparency Act was introduced to identify and monitor the activities of these beneficial owners. The federal law attempts to curtail different forms of illegal financing by building a database of beneficial owners and sharing data with the necessary authorities.
Learn about the June 9th FTC Safeguards Rule change regarding protection against data breaches.
Who does the CTA apply to?
Two types of entities will have to comply with the Corporate Transparency Act and share information about their beneficial owners. These include:
- Entities created through a filing with a Secretary of State (SOS) or an equivalent official, such as corporations or limited liability companies (LLCs)
- Entities that are not from the U.S. but are still registered to do business on U.S. soil through a SOS or equivalent
The definitions for these entities are relatively broad in the CTA, so each entity should take the time to check if they will be required to report after January 1, 2024.
Data will be collected by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. FinCEN will use the gathered information on beneficial owners to inform authorized governmental authorities and financial institutions.
Are there exemptions?
Most exemptions to the Corporate Transparency Act are for entities already sharing all relevant information, such as those regulated by federal or state governments. Public accounting firms registered with the Public Company Accounting Oversight Board are also exempt.
Since the CTA is primarily aimed at small- to medium-sized businesses, large operating companies are exempt as well if they meet the following requirements:
- Employ 20 full-time employees within the United States
- Have $5 million or more in gross revenue or sales on last year’s tax return
- Operate from a physical office in the United States
How soon will the CTA go into effect?
The new rules from the CTA will be law from January 1, 2024, and will be applied in two phases depending on the type of entity. Entities formed after January 1, 2024, will have to report the required information within 30 days of their formation or registration. Whereas entities created before January 1, 2024, have until the following year to report the required information.
If an entity files an inaccurate report, it will have 90 days to correct it. Failure to comply with the new regulations or correct reported information will result in penalties, including:
- Up to $10,000 in criminal fines
- Up to two years of Imprisonment
- A daily cost of $500
Also read: Payroll Compliance: How to Protect Yourself
What will the impact be on Certified Public Accountants?
As they are also often small- to medium-sized businesses, many Certified Public Accountants will have new reporting requirements for their beneficial owners. At the same time, CPAs will be asked to advise their clients who are also affected by the CTA.
However, caution should be used. Debates are ongoing regarding a CPA’s right to give clients this advice, which depends on a state’s definition of unauthorized practice of law (UPL). CPAs should take the time to educate themselves on the CTA and remain current with further guidance from FinCEN. If it isn’t clear whether they would be practicing the law without a license, CPAs should refer their services to other professionals. In any case, CPAs should document all their communications and clarify that the CPA’s involvement complies with the CTA.
The effect of the Corporate Transparency Act will become more apparent as it goes into effect in 2024. Until then, it is in a CPA’s best interests to comply with the new regulations and take all the precautionary steps possible to protect itself, helping not just itself but also affected clients as they adjust to the CTA.
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