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Is CTA Reporting a Proper Fit for the Profession?
When the Corporate Transparency Act (CTA) became effective Jan. 1, 2024, it required small and midsize businesses to report their beneficial ownership information (BOI) to the U.S. Department of Treasury. Some in the profession saw this as an added service CPAs could provide, but is this an area CPAs should be venturing into?
by Jonathan S. Ziss, JD
Jun 24, 2024, 13:22 PM
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.
To combat money laundering, terrorism financing, and other forms of illegal financing, the Corporate Transparency Act (CTA) was enacted on Jan. 1, 2021, and became effective Jan. 1, 2024. The CTA requires small and midsize businesses with fewer than 20 employees (reporting companies) to report their beneficial ownership information (BOI) to the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN).
The activation of the CTA reporting requirements earlier this year did not go unnoticed by the accounting, legal, and corporate compliance communities. Almost overnight, offers of CTA webinars, white papers, and services tailored to prepare and file the information in a compliant form proliferated. It is the advisory services related to CTA compliance – the nature and scope of advisory services and the involvement of the CPA community – that is the focus of this article.
Who Is a Beneficial Owner?
To comply with FinCEN’s BOI requirements, each “beneficial owner” of a reporting company first must be identified. A beneficial owner is someone who exercises “substantial control” over the company or who owns or controls at least a 25% ownership interest.
An individual exercises “substantial control” if he or she serves as a senior officer; has authority over the appointment or removal of any senior officer or a majority of the board; or determines or has substantial influence over important company decisions. Notably, senior officers and others with functional control over the company are beneficial owners under the CTA, even if they have no equity interest.
Individuals may exercise substantial control directly or indirectly. So, for example, a board seat, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control, may meet the definition of beneficial owner.
One of the initial challenges is that “substantial control” in the CTA is broader than in the traditional tax sense. Companies may need to seek legal guidance to determine who, according to the CTA, is a beneficial owner.
Another compliance challenge is the dynamic nature of those exercising substantial control – the comings and goings of officers, directors, owners, and others. Reporting companies must file updated or corrected reports within 30 days of reportable changes or the discovery of inaccurate information in previously filed reports.
Companies may want to revise their governing documents to include mechanisms that promote CTA compliance, such as representations, covenants, indemnifications, and consent clauses. These governance provisions may ease the reporting entity’s practical compliance burden by deemphasizing the need for meetings and other real-time communications to tackle BOI changes and other matters bearing on substantial control.
What Is a Reporting Company?
Determining which entities qualify as reporting companies has its nuances as well. Per the CTA, reporting companies include corporations, limited liability companies (LLCs), and other types of companies created by a filing with a secretary of state or equivalent official. The CTA also applies to non-U.S. companies registered to do business in the United States through a filing with a secretary of state or equivalent official. Since the definition of a domestic entity under the CTA is broad, additional entity types could be subject to CTA reporting requirements.
There are a number of exceptions to the CTA filing requirement. Many are entities already regulated by federal or state governments. As such, they already disclose their beneficial ownership information to governmental authorities. That being said, the CTA is silent as to whether nonprofits qualify as reporting companies. This is a situation that could be especially unwieldy in the case of, say, a sizable homeowners association.
Another notable exception is for “large operating companies.” These are defined as enterprises that meet all of the following requirements:
- Employ at least 20 full-time employees in the United States.
- Gross revenue (or sales) over $5 million on the prior year’s tax return.
- An operating presence at a physical office in the United States.
The CTA exempts “any public accounting firm” registered with the Public Company Accounting Oversight Board. Other accounting firms could be deemed reporting companies subject to compliance with the CTA.
Penalties for willfully violating the CTA reporting requirements include civil penalties of up to $500 per day that a violation is not remedied, a criminal fine of up to $10,000, and/or imprisonment of up to two years. A safe harbor is available to those that file corrected reports with FinCEN no later than 90 days after submission of an inaccurate report.
Is CTA an Accounting Function?
Whether or not, and to what extent, CTA reporting compliance is a CPA professional service centers on the vagaries of determining beneficial ownership and on determining whether an exemption from compliance may apply. In short, this type of work may be getting into “unauthorized practice of law” territory. The CPA license imposes the constraint that a license to practice certified public accounting does not extend to the practice of law. Thus, the concern from the perspective of licensure and professional liability is that the practitioner avoid the unauthorized practice of law.
From a professional liability perspective, don’t look at the situation by asking, “Are advisory services relating to CTA compliance necessarily legal advice?” Rather, ask yourself, “Is it possible advisory services relating to CTA compliance might be deemed legal advice?”
Consider the following explanation of what comprises legal services from a 2002 Pennsylvania trial court opinion:1
“The cases describe legal practice as exercising judgment which requires the abstract understanding of legal principles and a refined skill for their concrete application – in those circumstances where legal judgment is called for. An attorney applies legal knowledge or judgment in at least three ways:
(1) He instructs and advises clients in regard to the law, so that they may properly pursue their affairs and be informed as to their rights and obligations;
(2) He prepares for clients documents requiring familiarity with legal principles beyond the ken of the ordinary layman – for example, wills, and such contracts as are not routine nature;
(3) He appears for clients before public tribunals to whom is committed the function of determining rights of life, liberty, and property according to the law of the land, in order that he may assist the deciding official in the proper interpretation and enforcement of the law.”
This description is perhaps less than crystal clear. Practitioners, after all, routinely advise clients with regard to tax law. However, the CTA is not part of the tax code. Therein lies the potential conundrum. Further complicating the landscape is the fact that each state’s courts and bar associations are apt to have their own take on the matter of what constitute legal practice.
CTA and Risk Management
An unauthorized practice of law infraction is quite serious, exposing the practitioner to administrative, civil, and potentially criminal liability. So, the question of whether CTA advisory services cross over to an unauthorized practice of law situation is not a mere thought experiment or column fodder.
Putting the unauthorized practice of law to one side, there is also the professional liability concern that accompanies professional knowledge and the requirement that CPAs be duly competent in the services rendered. The CTA is new and nuanced. There is guidance, but questions remain. In addition, it may require more than ordinary due diligence to gather and analyze all pertinent BOI for certain clients.
Pennsylvania CPAs may already be managing their professional risk around the CTA without being fully cognizant of doing so. Consider the standard tax services engagement letter – the most common engagement letter (outside of attest services) that CPAs tend to issue. As noted above, the CTA is outside of the tax code, so a tax services engagement letter does not expressly cover CTA advisory. Providing CTA advisory services without an engagement letter takes the practitioner off the map, so to speak. The scope of services, therefore, is rendered subjective and dependent upon the client’s expectations. In the event of a dispute, it can be quite frustrating to nail down the client’s expectations, which are inevitably viewed through the lens of hindsight. Consider issuing a BOI letter to your clients before providing advisory/reporting compliance services.
The professional liability insurance industry has its eye on CTA advisory and compliance services. Pronouncements made via bulletins to policyholders – i.e., information and guidance that does not form part of the insuring agreement – spotlight concerns with the application of errors and omissions insurance coverage given the potential determination that assisting a client with the CTA may involve unauthorized practice of law. Another concern arises from the possibility that an individual who willfully files a false or fraudulent BOI report on a company’s behalf may be subject to the same civil and criminal penalties as the reporting company.2 Generally speaking, insurance coverage limitations apply when fraudulent, criminal, and/or illegal conduct is alleged.
For now, the insurance industry appears to be embracing CTA-related services while taking a wait-and-see approach as to whether these services are found to be legal services or otherwise outside the bounds of the CPA license.
Underscoring the unpredictable course of the CTA, the Federal District Court in Alabama recently halted enforcement of the CTA.3 On March 1, 2024, the District Court granted a motion for summary judgment, which effectively declared the CTA unconstitutional. FinCEN has stated that it is suspending enforcement of the CTA only to those in the court case, pending further developments.
Assuming the CTA survives the legal challenge and remains the law of the land, the CPA community will find its way forward with the challenges that the law provides. Inevitably, some firms will choose to blaze a trail by offering a full suite of CTA advisory and compliance services, while others will take a more measured approach. Still others, at least for now, will stand apart from the fray.
The CTA holds the allure of a new client service opportunity, but it is also a new professional risk to the practitioner. Caution should be at the center of your strategic plan if you offer, or plan to offer, services in this area.
1 York County Bar Association v. Kirk, 2002 Pa. Dist. & Cnty. Dec. LEXIS 111 (internal quotations and citations omitted).
3 National Small Business United v. Yellen, No. 5:22-cv-1448-LCB (N.D.Ala. 3-1-24) (appeal pending).
Jonathan S. Ziss, JD, is a partner with Goldberg Segalla LLP in Philadelphia, and co-chair of the firm’s management and professional liability practice. He can be reached at jziss@goldbergsegalla.com.
Is CTA Reporting a Proper Fit for the Profession?
When the Corporate Transparency Act (CTA) became effective Jan. 1, 2024, it required small and midsize businesses to report their beneficial ownership information (BOI) to the U.S. Department of Treasury. Some in the profession saw this as an added service CPAs could provide, but is this an area CPAs should be venturing into?
by Jonathan S. Ziss, JD
Jun 24, 2024, 13:22 PM
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.
To combat money laundering, terrorism financing, and other forms of illegal financing, the Corporate Transparency Act (CTA) was enacted on Jan. 1, 2021, and became effective Jan. 1, 2024. The CTA requires small and midsize businesses with fewer than 20 employees (reporting companies) to report their beneficial ownership information (BOI) to the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN).
The activation of the CTA reporting requirements earlier this year did not go unnoticed by the accounting, legal, and corporate compliance communities. Almost overnight, offers of CTA webinars, white papers, and services tailored to prepare and file the information in a compliant form proliferated. It is the advisory services related to CTA compliance – the nature and scope of advisory services and the involvement of the CPA community – that is the focus of this article.
Who Is a Beneficial Owner?
To comply with FinCEN’s BOI requirements, each “beneficial owner” of a reporting company first must be identified. A beneficial owner is someone who exercises “substantial control” over the company or who owns or controls at least a 25% ownership interest.
An individual exercises “substantial control” if he or she serves as a senior officer; has authority over the appointment or removal of any senior officer or a majority of the board; or determines or has substantial influence over important company decisions. Notably, senior officers and others with functional control over the company are beneficial owners under the CTA, even if they have no equity interest.
Individuals may exercise substantial control directly or indirectly. So, for example, a board seat, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control, may meet the definition of beneficial owner.
One of the initial challenges is that “substantial control” in the CTA is broader than in the traditional tax sense. Companies may need to seek legal guidance to determine who, according to the CTA, is a beneficial owner.
Another compliance challenge is the dynamic nature of those exercising substantial control – the comings and goings of officers, directors, owners, and others. Reporting companies must file updated or corrected reports within 30 days of reportable changes or the discovery of inaccurate information in previously filed reports.
Companies may want to revise their governing documents to include mechanisms that promote CTA compliance, such as representations, covenants, indemnifications, and consent clauses. These governance provisions may ease the reporting entity’s practical compliance burden by deemphasizing the need for meetings and other real-time communications to tackle BOI changes and other matters bearing on substantial control.
What Is a Reporting Company?
Determining which entities qualify as reporting companies has its nuances as well. Per the CTA, reporting companies include corporations, limited liability companies (LLCs), and other types of companies created by a filing with a secretary of state or equivalent official. The CTA also applies to non-U.S. companies registered to do business in the United States through a filing with a secretary of state or equivalent official. Since the definition of a domestic entity under the CTA is broad, additional entity types could be subject to CTA reporting requirements.
There are a number of exceptions to the CTA filing requirement. Many are entities already regulated by federal or state governments. As such, they already disclose their beneficial ownership information to governmental authorities. That being said, the CTA is silent as to whether nonprofits qualify as reporting companies. This is a situation that could be especially unwieldy in the case of, say, a sizable homeowners association.
Another notable exception is for “large operating companies.” These are defined as enterprises that meet all of the following requirements:
- Employ at least 20 full-time employees in the United States.
- Gross revenue (or sales) over $5 million on the prior year’s tax return.
- An operating presence at a physical office in the United States.
The CTA exempts “any public accounting firm” registered with the Public Company Accounting Oversight Board. Other accounting firms could be deemed reporting companies subject to compliance with the CTA.
Penalties for willfully violating the CTA reporting requirements include civil penalties of up to $500 per day that a violation is not remedied, a criminal fine of up to $10,000, and/or imprisonment of up to two years. A safe harbor is available to those that file corrected reports with FinCEN no later than 90 days after submission of an inaccurate report.
Is CTA an Accounting Function?
Whether or not, and to what extent, CTA reporting compliance is a CPA professional service centers on the vagaries of determining beneficial ownership and on determining whether an exemption from compliance may apply. In short, this type of work may be getting into “unauthorized practice of law” territory. The CPA license imposes the constraint that a license to practice certified public accounting does not extend to the practice of law. Thus, the concern from the perspective of licensure and professional liability is that the practitioner avoid the unauthorized practice of law.
From a professional liability perspective, don’t look at the situation by asking, “Are advisory services relating to CTA compliance necessarily legal advice?” Rather, ask yourself, “Is it possible advisory services relating to CTA compliance might be deemed legal advice?”
Consider the following explanation of what comprises legal services from a 2002 Pennsylvania trial court opinion:1
“The cases describe legal practice as exercising judgment which requires the abstract understanding of legal principles and a refined skill for their concrete application – in those circumstances where legal judgment is called for. An attorney applies legal knowledge or judgment in at least three ways:
(1) He instructs and advises clients in regard to the law, so that they may properly pursue their affairs and be informed as to their rights and obligations;
(2) He prepares for clients documents requiring familiarity with legal principles beyond the ken of the ordinary layman – for example, wills, and such contracts as are not routine nature;
(3) He appears for clients before public tribunals to whom is committed the function of determining rights of life, liberty, and property according to the law of the land, in order that he may assist the deciding official in the proper interpretation and enforcement of the law.”
This description is perhaps less than crystal clear. Practitioners, after all, routinely advise clients with regard to tax law. However, the CTA is not part of the tax code. Therein lies the potential conundrum. Further complicating the landscape is the fact that each state’s courts and bar associations are apt to have their own take on the matter of what constitute legal practice.
CTA and Risk Management
An unauthorized practice of law infraction is quite serious, exposing the practitioner to administrative, civil, and potentially criminal liability. So, the question of whether CTA advisory services cross over to an unauthorized practice of law situation is not a mere thought experiment or column fodder.
Putting the unauthorized practice of law to one side, there is also the professional liability concern that accompanies professional knowledge and the requirement that CPAs be duly competent in the services rendered. The CTA is new and nuanced. There is guidance, but questions remain. In addition, it may require more than ordinary due diligence to gather and analyze all pertinent BOI for certain clients.
Pennsylvania CPAs may already be managing their professional risk around the CTA without being fully cognizant of doing so. Consider the standard tax services engagement letter – the most common engagement letter (outside of attest services) that CPAs tend to issue. As noted above, the CTA is outside of the tax code, so a tax services engagement letter does not expressly cover CTA advisory. Providing CTA advisory services without an engagement letter takes the practitioner off the map, so to speak. The scope of services, therefore, is rendered subjective and dependent upon the client’s expectations. In the event of a dispute, it can be quite frustrating to nail down the client’s expectations, which are inevitably viewed through the lens of hindsight. Consider issuing a BOI letter to your clients before providing advisory/reporting compliance services.
The professional liability insurance industry has its eye on CTA advisory and compliance services. Pronouncements made via bulletins to policyholders – i.e., information and guidance that does not form part of the insuring agreement – spotlight concerns with the application of errors and omissions insurance coverage given the potential determination that assisting a client with the CTA may involve unauthorized practice of law. Another concern arises from the possibility that an individual who willfully files a false or fraudulent BOI report on a company’s behalf may be subject to the same civil and criminal penalties as the reporting company.2 Generally speaking, insurance coverage limitations apply when fraudulent, criminal, and/or illegal conduct is alleged.
For now, the insurance industry appears to be embracing CTA-related services while taking a wait-and-see approach as to whether these services are found to be legal services or otherwise outside the bounds of the CPA license.
Underscoring the unpredictable course of the CTA, the Federal District Court in Alabama recently halted enforcement of the CTA.3 On March 1, 2024, the District Court granted a motion for summary judgment, which effectively declared the CTA unconstitutional. FinCEN has stated that it is suspending enforcement of the CTA only to those in the court case, pending further developments.
Assuming the CTA survives the legal challenge and remains the law of the land, the CPA community will find its way forward with the challenges that the law provides. Inevitably, some firms will choose to blaze a trail by offering a full suite of CTA advisory and compliance services, while others will take a more measured approach. Still others, at least for now, will stand apart from the fray.
The CTA holds the allure of a new client service opportunity, but it is also a new professional risk to the practitioner. Caution should be at the center of your strategic plan if you offer, or plan to offer, services in this area.
1 York County Bar Association v. Kirk, 2002 Pa. Dist. & Cnty. Dec. LEXIS 111 (internal quotations and citations omitted).
3 National Small Business United v. Yellen, No. 5:22-cv-1448-LCB (N.D.Ala. 3-1-24) (appeal pending).
Jonathan S. Ziss, JD, is a partner with Goldberg Segalla LLP in Philadelphia, and co-chair of the firm’s management and professional liability practice. He can be reached at jziss@goldbergsegalla.com.
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