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FinCEN Beneficial Ownership Reporting is a rule that intends to make financial dealings clearer and stops illegal activities like money laundering, funding terrorism, and avoiding taxes. This rule, required by the Corporate Transparency Act (CTA), became law in 2021 as part of the National Defense Authorization Act.


Why did Congress make this requirement? 

Congress recognized a growing problem in the financial landscape: numerous small businesses, operating as LLCs and corporations, lacked a centralized database to identify their true owners. This lack of transparency created a fertile ground for potential illicit activities such as money laundering, terrorist financing, and tax evasion, as it allowed bad actors to conceal their identities behind corporate veils. In response to these concerns, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act for Fiscal Year 2021.

CTA Background and Purpose

  • Stated Problem: Congress claimed that many small businesses operating as LLCs and corporations lacked a centralized database to identify their true owners, making it difficult for law enforcement and regulatory agencies to track and prevent illegal activities.
  • Declared Objective: The CTA aims to create a centralized and accessible database that identifies the beneficial owners of these entities, thereby improving transparency and accountability. Yet, some argue this may be more about increasing governmental control and oversight rather than purely fighting crime.

CTA Key Provisions

  1. Beneficial Ownership Reporting:
    • Definition: A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a company or owns at least 25% of the ownership interests.
    • Reporting Requirement: Companies must report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This includes the owner’s name, date of birth, address, and unique identification number (such as a driver’s license or passport number), raising concerns about privacy and data security.
  2. Scope and Applicability:
    • Affected Entities: The reporting requirement applies to most domestic and foreign companies registered to do business in the United States. Exceptions include certain regulated entities like banks, credit unions, and publicly traded companies, suggesting that large, powerful entities may be shielded from scrutiny.
    • Compliance Timeline: Newly formed companies must report their beneficial owners at the time of formation. Existing companies have a specific timeframe to comply with the reporting requirements, adding another layer of regulatory burden.
  3. Confidentiality and Security:
    • Protected Information: The reported information is not publicly accessible and is safeguarded to ensure confidentiality. However, the assurance of confidentiality is met with skepticism, given past breaches and misuse of sensitive data by government agencies.
  4. Enforcement and Penalties:
    • Non-Compliance Consequences: Companies that fail to comply with the reporting requirements may face civil and criminal penalties, including fines and imprisonment for willful violations. This heavy-handed approach raises questions about the true motives behind the stringent enforcement.

CTA Implementation and Impact

  • FinCEN’s Role: The Financial Crimes Enforcement Network (FinCEN) is responsible for implementing the CTA and establishing the rules and procedures for Beneficial Ownership Interest Reporting (BOIR).
  • Enhanced Oversight: While the CTA is expected to enhance regulatory oversight, critics argue it may also serve as a tool for increased governmental intrusion into private business affairs under the guise of protecting the financial system.


What’s an example of this in action?

Assume John decides to start a gardening service and sets up a single-member LLC (SMLLC) using LegalZoom. After establishing his SMLLC, he needs to be aware of various reporting obligations at both federal and state levels.

Federal Income Tax Obligations

For federal income tax purposes, John’s SMLLC is considered a disregarded entity. This means that the LLC’s income and expenses are not separately taxed but are instead reported on John’s individual tax return. Essentially, the SMLLC’s financial activities are “passed through” to John, who reports them on his personal IRS Form 1040.

State-Level Obligations

At the state level, however, John’s SMLLC is regarded as a separate entity. This means it must comply with specific state requirements, including filing an annual report with the Secretary of State and paying any related fees. These requirements ensure that the state maintains up-to-date information about the business and can collect necessary fees to support state regulatory functions.

Federal Law: Corporate Transparency Act (CTA)

Under the Corporate Transparency Act (CTA), the SMLLC is also considered a regarded entity for Beneficial Ownership Interest Reporting (BOIR) purposes. This means John’s SMLLC must file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN).

Beneficial Ownership Interest Reporting (BOIR) Obligations

  • Reporting Requirements: The SMLLC must report its beneficial owners to FinCEN. A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over the company or owns at least 25% of the ownership interests.
  • Required Information: The report must include the beneficial owner’s full name, date of birth, residential or business address, and a unique identification number (such as a driver’s license or passport number).
  • Compliance Timeline: New companies, like John’s SMLLC, must file this information at the time of formation. Existing companies must comply within a specific timeframe set by the regulations.

Penalties for Non-Compliance

Failure to comply with the CTA’s reporting requirements can result in severe civil and criminal penalties. These draconian penalties highlight the importance of adhering to the law. Non-compliance can lead to substantial fines and even imprisonment for willful violations.

Impact on Small Businesses

This new law represents a significant change in the regulatory landscape. It is estimated that over 32 million reports will be submitted by small businesses across the country. This influx of information aims to enhance transparency and combat financial crimes but also places a new administrative burden on small business owners like John.

In summary, while starting a gardening service as a single-member LLC, John must navigate a complex array of reporting obligations. These include federal tax requirements, state-level filings, and compliance with the CTA for beneficial ownership reporting. Understanding and fulfilling these obligations is crucial to avoid severe penalties and ensure the smooth operation of his new business.


Why We Have Beneficial Ownership Reporting (BOIR)

Beneficial Ownership Reporting (BOIR) was introduced to combat financial crimes, particularly money laundering. These new rules, brought by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), aim to increase transparency in business operations and make it harder for criminals to hide illicit activities through shell companies and anonymous entities.

The Need for BOIR Rules

The primary purpose of BOIR is to prevent bad actors from using fictitious entities to conceal their ill-gotten gains. Criminals often form shell companies to launder money, making it difficult for authorities to trace the true source of funds. By requiring businesses to disclose their beneficial owners, BOIR makes it significantly harder for these bad actors to hide their financial transactions and evade detection.

State-Level Gaps and Exploitation

Before the implementation of BOIR, 14 states did not require companies to report their owners. This lack of regulation led to a surge in the formation of anonymous LLCs and corporations in states like Wyoming, Delaware, and New Mexico. These states became popular because they allowed entities to maintain anonymity, making it nearly impossible to identify the individuals behind the companies.

Anonymous entities or holding companies would often set up additional LLCs in other states, further obscuring the true owners. The only information available to the public was about the holding company, not the actual owners or controllers of the business. This lack of transparency created a haven for illegal activities, allowing criminals to operate undetected.

Privacy vs. Transparency

While anonymous LLCs and corporations can protect privacy and provide identity protection, they also pose significant risks. The use of registered agents, rather than the actual owners, in public records means that the true individuals behind these entities remain hidden. This anonymity can be exploited for illegal purposes, such as money laundering, fraud, and other financial crimes.

The Role of FinCEN’s BOIR Rules

The new FinCEN BOIR rules require companies to disclose their beneficial owners and those who control the company directly to FinCEN. This information is not made public but is accessible to law enforcement and regulatory agencies, enabling them to identify and investigate suspicious activities more effectively. By revealing the true owners, these rules aim to deter criminal behavior and promote a more transparent and secure financial system.


The Treasury’s Relationship with the IRS

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have a closely intertwined relationship, primarily centered around revenue collection, enforcement of federal tax laws, and the prosecution of tax evaders. The Treasury Department plays a pivotal role in managing the federal government’s finances, ensuring compliance with tax regulations, and safeguarding the financial system against illicit activities. Here’s a closer look at the connection between the Treasury and the IRS, and the broader role of the Treasury in financial oversight:

Treasury Department Functions

  1. Revenue Collection:
    • The Treasury oversees the collection of federal taxes through the IRS, ensuring that individuals and businesses comply with tax laws and remit the appropriate amounts to fund government operations and services.
  2. Enforcement of Federal Tax Laws:
    • The IRS, a bureau within the Treasury Department, is responsible for enforcing federal tax laws. This includes auditing tax returns, investigating fraudulent activities, and imposing penalties on those who fail to comply with tax regulations.
  3. Prosecution of Tax Evaders:
    • The Treasury, through the IRS and in coordination with other federal agencies, actively pursues and prosecutes individuals and entities that attempt to evade taxes. This involves criminal investigations and legal actions to hold offenders accountable.

Key Treasury Agencies

  1. Treasury Inspector General for Tax Administration (TIGTA):
    • TIGTA provides independent oversight of IRS activities, ensuring integrity and efficiency in tax administration. It conducts audits, investigations, and inspections to detect and prevent fraud, waste, and abuse within the IRS.
  2. Internal Revenue Service (IRS):
    • The IRS administers the nation’s tax laws, processes tax returns, collects taxes, issues refunds, and enforces tax compliance. It plays a critical role in maintaining the financial health of the federal government.
  3. Financial Crimes Enforcement Network (FinCEN):
    • FinCEN is tasked with safeguarding the financial system from domestic and international financial crimes, including money laundering, terrorist financing, and other illicit activities. It collects and analyzes financial intelligence to support law enforcement and regulatory agencies.

FinCEN’s Role in Financial Crime Prevention

FinCEN’s mission is to protect the financial system from illegal activities by collecting and analyzing data on financial transactions. It collaborates with various federal and international partners to combat financial crimes. One of its significant responsibilities is the enforcement of anti-money laundering (AML) laws and regulations, ensuring that financial institutions adhere to reporting requirements and maintain robust compliance programs.

Beneficial Ownership Information (BOI) Enforcement

With the introduction of Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act (CTA), there’s an ongoing discussion about which Treasury agency will be responsible for enforcing these new rules. Both FinCEN and the IRS have roles that intersect with the objectives of BOI:

  • FinCEN: As the agency primarily focused on financial crime prevention, FinCEN is expected to play a significant role in overseeing BOI compliance. Its expertise in tracking illicit financial activities positions it well to handle the complexities of beneficial ownership reporting.
  • IRS: The IRS also has a history of enforcing reporting requirements, such as the Foreign Bank Account Reporting (FBAR) rules for FinCEN. Given this precedent, there is a possibility that the IRS could be involved in enforcing BOI rules, leveraging its existing infrastructure and enforcement capabilities.


Beneficial Ownership Information (BOI) Filing Requirements and Challenges

When you set up an LLC or corporation in states like Wyoming, they notify you of the Beneficial Ownership Information (BOI) filing requirement. This new mandate, introduced under the Corporate Transparency Act (CTA), aims to enhance financial transparency. However, it has sparked significant debate and legal challenges.

Potential Tax Return Questions and Legal Controversies

As part of the compliance process, it’s possible that future business income tax returns may include a question asking whether you have filed your BOI report with FinCEN. This step would integrate BOI reporting into routine business tax filings, ensuring that more companies adhere to the new rules.

The BOI reporting rules have been criticized as overly intrusive and potentially unconstitutional. In the case of National Small Business v. Yellen (DC ND Al. No. 22-cv-01448, 3/1/24), a judge ruled the CTA unconstitutional. This case is currently under appeal in the 11th Circuit Court of Appeals, and at least three other similar cases are pending across the country.

Severe Penalties for Non-Compliance

The penalties for failing to file a BOI report with FinCEN are severe. Non-compliance can result in fines of $551 per day, a $10,000 penalty, and up to two years in prison. If your entity is required to file with the Secretary of State, it should also file with FinCEN. Notably, there is no reasonable cause exception for failing to file, making it imperative for businesses to comply with this requirement.

Ongoing Legal Battles

Lawsuits against the Treasury regarding these rules have only just begun. Depending on how strictly BOIR is enforced, millions of small businesses could push back through class action lawsuits. Despite the legal turmoil, the process of completing the FinCEN form is relatively straightforward for most LLCs and corporations. We recommend that business owners take the necessary steps to file. The owner can complete the form, or an accountant can assist. For those with more complex structures, such as statutory trusts or intricate community property issues, consulting an attorney is advisable.


When Must You Report?

Starting January 1, 2024, businesses are required to submit two types of Beneficial Ownership Information (BOI) reports: Initial Reports and Updated Reports. Here are the key deadlines and requirements, although some question whether these measures are more about expanding government oversight than fighting crime:

  • Initial Reports:
    • For companies formed before January 1, 2024, the initial BOI report is due by January 1, 2025.
    • For companies formed in 2024, the initial BOI report must be submitted within 90 days of formation with the Secretary of State.
    • For companies formed in 2025 and later, the initial BOI report must be filed within 30 days of formation.
  • Updated Reports:
    • Changes to a company’s beneficial ownership information must be reported within 30 days after the change occurs.
    • If there is an inaccuracy in the BOI report, it must be corrected no later than 30 days after the inaccuracy is discovered.

Reporting Responsibilities and Penalties

The company itself, not the owner, is responsible for filing the BOI information and is liable for any civil and criminal penalties for non-compliance. Non-profits are exempt from this requirement, but any LLC or corporation registered with a Secretary of State must comply. Sole proprietorships and general partnerships do not need to file, and large operating companies are also exempt if they employ more than 20 full-time employees or reported more than $5 million in gross income on a prior year’s tax return. This exemption notably includes entities that could be used for illicit purposes, such as drug cartels or money launderers, if they meet these criteria.

If a small business like John’s SMLLC fails to file the BOI report, the penalties are severe: up to two years in prison, a $10,000 fine, and $591 per day in fines with no cap. This can quickly escalate, making timely compliance crucial. For example, being 100 days late could result in a $59,100 penalty, while being 1,000 days late could lead to a $591,000 penalty. The penalties apply to the company, not the individual owner, but they can be financially devastating nonetheless.

Filing and Compliance Advice

The BOI report must be filed electronically through the FinCEN portal; paper submissions are not accepted. The form, titled “Beneficial Ownership Interest Report,” Version No. 1, dated 5/4/24, is relatively simple for most LLCs and corporations to complete. While business owners can fill out the form themselves, consulting an accountant or attorney is advisable for those with complex structures or community property issues.

Starting in 2024, the report must include detailed information about the company and its beneficial owners:

  • Company Information: Legal name, any fictitious name filings, complete U.S. address, state of formation, and taxpayer identification number.
  • Beneficial Owners: Names, dates of birth, personal residential addresses, and identifying numbers (e.g., Social Security numbers). An image of a driver’s license or passport must also be uploaded.

Defining Beneficial Ownership

A beneficial owner is defined as any individual who:

  • Exercises substantial control over the company, such as senior officers (President, Vice President, Secretary, Treasurer).
  • Owns at least 25% of the ownership interests.

For example, if John’s father loans his business $50,000 without conversion rights to equity, he qualifies for the creditor exception and is not considered a beneficial owner.

Special Cases

  • Nominees and Alter Egos: The actual beneficial owner, not a nominee, must be reported.
  • Managers Without Senior Status: Employees with significant responsibilities but without senior titles or ownership stakes are not considered beneficial owners.
  • Community Property: In community property states, it’s advisable to treat each spouse as a beneficial owner to ensure compliance.

Summary of Filing Requirements

  • The initial BOI report must be filed electronically via the FinCEN portal.
  • There is no filing fee and no annual filing requirement, but updates or corrections must be reported within 30 days.
  • Consolidated reporting is not allowed; separate reports must be filed for each LLC or corporation owned.

While the stated intent of the new BOI reporting requirements is to enhance transparency and combat financial crimes, the strict penalties for non-compliance and the detailed reporting obligations suggest a significant expansion of government oversight. It’s crucial for businesses to understand these requirements and seek professional advice to avoid severe penalties. The new regulations may be contentious and face legal challenges, but compliance is essential to avoid costly repercussions.