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New Corporate Transparency Act Rules Confront Small Business 'Awareness Gap'

S.J. Steinhardt
Published Date:
May 31, 2023

iStock-157679087 Treasury Department

New beneficial ownership disclosure rules mandated by the Corporate Transparency Act (CTA) will have an immediate impact on new businesses formed after the start of the year, but some companies may be unaware of them, Accounting Today reported.

Under the final rule, beginning Jan. 1, 2024, companies must file beneficial ownership information with the Treasury Department's Financial Crimes Enforcement Network (FinCEN). Existing companies must file within the year 2024, while a new company started during the year will have 30 days to file.

It is estimated there will be 32.6 million filings in 2024, and five to six million filings each year thereafter, according to Accounting Today. The penalty for failure to comply is $500 per day, capped at $10,000.

A beneficial owner is defined as “any individual who exercises substantial control over your company, or who owns or controls at least 25 percent of your company,” according to FinCEN.

"For existing businesses that have a year to comply, this is way in the distance," tax attorney Barbara Weltman, author of "Small Business Taxes 2023," told Accounting Today. "But new entities formed after the first of the year will be faced with a 30-day deadline, with extremely severe penalties if they miss the deadline. My guess is that they won't be too harsh about imposing penalties at the beginning. The point is that CPAs and attorneys who are advising startups will have to include this as part of their package. It applies to any entity that is created by a state—corporations, LLCs and any other entity that is formed under state law. But it won't apply to partnerships or sole proprietorships. And it's one more factor to consider in deciding what type of entity to use."

"Other than the unbelievable penalties, it's similar to FBAR [Report of Foreign Bank and Financial Accounts]," she noted. "It uses the same portal to file, and the information you provide is so minimal it's not onerous. You just have to do it."

Though the CTA has been law for several years, people may be unaware of the impending effective date. 

"[T]here will be untold numbers who don't have regular interaction with professionals and have never heard of the CTA,” Niles Elber of law firm Caplin & Drysdale told Accounting Today. “There will be people who miss their obligation almost from the get-go. It's at least as impactful as FBAR, because not that many have foreign accounts, but a huge number of small businesses will be required to comply." 

Very few small businesses are aware of the requirement, Roger Harris, president of Padgett Business Services, told Accounting Today.

"There is a huge awareness gap," he said. "And when they are alerted to it, they think it doesn't apply to them because they're small—but actually it does apply to them. Large entities, such as publicly traded companies, are exempt because they already know who you are. But a small company, such as a plumber with an LLC, could be caught unaware."

A coalition of professional groups, led by the AICPA, aims to make taxpayers and practitioners aware of the new reporting requirement. The coalition includes Latino Tax Pros, the National Association of Black Accountants, the National Association of Enrolled Agents , the National Association of Tax Professionals, the National Conference of CPA Practitioners, the National Society of Accountants, the National Society of CPAs, the National Society of Tax Professionals, Padgett Business Services, the Diverse Organization of Firms, H&R Block and Prosperity Now.

"We are highly concerned that many business owners are unaware of this filing requirement. Small businesses are the backbone of our economy, and we want to ensure they understand their reporting obligations," said Melanie Lauridsen, director for tax practice and ethics with the AICPA. "We have collaborated with the organizations represented to ensure we have the largest scope possible to reach millions of affected taxpayers. This collection has come together because we all feel awareness is critically needed."

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