By Suzanne M. Holl, CPA 

The Corporate Transparency Act (CTA) was enacted Jan. 1, 2021, as part of the National Defense Authorization Act, and was the most significant reformation of the Bank Secrecy Act and related anti-money laundering rules since the U.S. Patriot Act. The CTA is intended to combat money laundering, terrorism financing, and other forms of illegal financing by mandating that certain entities (primarily small and medium size businesses) report “beneficial owner” information to the Financial Crimes Enforcement Network (FinCEN).

The CTA authorizes FinCEN – a bureau of the U.S. Treasury Department – to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.

This blog provides a high-level overview of some of the key CTA provisions and addresses critical unknowns and potential risks for accounting firms.

What Is Subject to the CTA Reporting Requirements?

Those who are required to comply with 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. The definition of a domestic entity under the CTA is extremely broad, so additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.

There are a number of exceptions, many of which include entities already regulated by federal or state governments that already disclose beneficial ownership information. Another notable exception is for “large operating companies,” which are defined as companies 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.

As currently promulgated, the CTA does have an exemption for “any public accounting firm” registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002 (firms registered with the Public Company Accounting Oversight Board). However, other public accounting firms could be deemed reporting companies subject to compliance with the CTA.

Who Is a “Beneficial Owner” of a Reporting Company?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of a reporting company’s ownership interests. An individual exercises “substantial control” if the individual serves as a senior officer of the company; has authority over the appointment or removal of any senior officer or a majority of the board; or directs, determines, or has substantial influence over important decisions made by the reporting company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest.

In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.  

CTA regulations provide a much more expansive definition of “substantial control” than would be in the traditional tax sense. Many companies may need to seek legal guidance to ultimately determine who is deemed beneficial owners within their organization.

Reporting Requirements

As currently promulgated, CTA’s reporting requirements have two phase-in stages:

• All new reporting companies – those formed (or, in the case of non-U.S. companies, registered) on or after Jan. 1, 2024 – must report required information within 30 days after formation or registration.
• All existing reporting companies – those formed or registered before Jan. 1, 2024 – must report required information no later than Jan. 1, 2025.

Penalties for willfully violating 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 from the penalty is available to reporting companies that file corrected reports with FinCEN no later than 90 days after submission of an inaccurate report.¹

Considerations as You Begin to Prepare

With the CTA introducing a new and expansive reporting regime, now is the time for entities to assess the implications of the new rules on their organizations. The following, although not meant to be all inclusive, should be considered:

• Is the entity subject to the CTA or does it qualify for exemption?
• If the company is not exempt, how should it calculate percentages of “ownership interests” to determine whether any owners meet the 25%-ownership threshold? In many companies with simple capital structures, the answer will be obvious. It may be much less obvious, however, for companies with complicated capital structures (given the expansive definition of “ownership interest”), or companies in which some ownership interests are held indirectly (such upper-tier investment entities, holding companies, or trusts).
• How should a company begin to assess and determine each person who exercises “substantial control” over it? There may well be multiple people who qualify, given the expansiveness (and vagueness) of “substantial control.”
• What new processes and procedures should be put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must be provided to FinCEN (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier numbers from a nonexpired passport, driver’s license, or state identification card (including an image of the unique-identifier documentation).

Keeping current with the information that needs to be provided to FinCEN could be a significant trap for reporting companies because they will be relying on beneficial owners to timely update them on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). Reporting companies must file updated or corrected reports within 30 days of reportable changes or the discovery of inaccurate information in previously filed reports. As a result, a company’s operative documents may need to be revised to include provisions related to the CTA such as representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require the following:

• A representation by each shareholder, member, or partner (as applicable) that it will be in compliance with or exempt from the CTA.  
• A covenant by each shareholder, member, or partner (as applicable) requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements.
• An indemnification by each shareholder, member, or partner (as applicable) to the company and its other shareholders, members, or partners (as applicable) for its failure to comply with the CTA or for providing false information.
• A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

Risks to the CPA Helping Clients Prepare for the CTA

There has been debate as to whether or not CPAs are in a position to provide guidance and advice to clients regarding whether an exemption applies or to ascertain whether certain relationships constitute beneficial ownership. The overarching concern is that CPAs and non-attorney tax professionals who provide assistance to clients in this arena could be deemed as engaging in the unauthorized practice of law. As each state has its own definitions of what services are considered unauthorized practice of law, this is an area of risk to CPAs. As of the date of this writing, no state had yet provided clarity as to whether providing advice to clients regarding the CTA would or would not be viewed as unauthorized practice of law. &

From a risk management best practices perspective, CPAs must tread carefully regarding the CTA and beneficial ownership reporting. They should instead advise clients to seek guidance from legal counsel.

Here are a few tips to aid in your risk management in this area:

• Familiarize yourself with the CTA and the beneficial ownership reporting requirements. Stay current with any further guidance promulgated by FinCEN. For details, refer to the Beneficial Ownership Information Reporting Rule. More information regarding CTA’s beneficial ownership reporting requirements can be found on FinCEN’s Frequently Asked Questions. 
• Tread carefully to avoid accusations of practicing law without a license. Performing services that are outside of the purview of your license or your competencies poses significant liability and insurance coverage risks. It is best to refer such services to other professionals than to face allegations of falling short of professional standards of care. However, if contemplating providing CTA-related services, document your due diligence efforts to confirm that your state has not deemed these services to be the unlicensed practice of law.
• Always document … then document some more! Inform and advise your clients in writing regarding the new beneficial ownership reporting requirements under the CTA and your recommendation that they seek legal guidance. Also, modify engagement letters to include language that specifically disclaims the firm’s involvement in assisting clients with CTA compliance.  
• Prepare your own firm for compliance if you are deemed to be a reporting company under currently promulgated CTA guidance.
  

¹ See 31 U.S.C. 5336(h)(3)(C)

Suzanne M. Holl, CPA, is senior vice president of loss prevention services with CAMICO. With more than 30 years of experience in accounting, she draws on her Big Four public accounting and private industry background to provide CAMICO’s policyholders with information on a wide variety of loss prevention and accounting issues and leads the risk management team at CAMICO. She can be reached at She can be reached at sholl@camico.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.