By Karen Hube

Whether you are an owner of a large private business with cross-border operations or a simple LLC holding a family cottage, it's likely that you are obligated to comply with new federal ownership disclosure rules by year-end -- but have failed to do so.

Three-quarters of the 32 million private companies and pass-through entities that are required to file ownership information to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) starting this year still haven't done so, risking up to a $10,000 penalty or jail time for noncompliance.

The new rules, passed under the Corporate Transparency Act $(CTA.UK)$ in 2021, apply to people who have substantial control or at least a 25% stake in a business or pass-through entity that isn't registered with a federal government agency such as the Securities and Exchange Commission.

This generally includes LLCs and private corporations such as S corporations and businesses that were created by filing documents with a state government, and foreign entities registered to do business in the U.S.

Public companies, nonprofits and private companies such as registered investment advisors (RIAs) that already file ownership information with the federal government have no CTA filing obligations.

The rules are an effort by the Treasury Department to crack down on money laundering and tax evasion to reduce the nation's nearly $700 billion tax gap, which is the difference between taxes owed and taxes paid to the Internal Revenue Service.

"When FinCEN tries to find out who is doing money laundering and hiding money, they're having a difficult time tracking cash flows because they don't see who owns what, because people have been able to shield their names and ownership," Yun says.

But the low compliance rate so late in the year reflects problems with the general way the CTA was written, says Alan Granwell, an attorney at Holland & Knight. While many owners may not be aware of the new rules, even those who are and have best intentions to file are stumped by myriad questions, he says.

"We're getting calls left, right and sideways about this stuff," Granwell says. "You have different questions arise depending on whether you're in private equity, venture, construction, real estate -- each has its own issues."

Some business owners may be holding off on filing, hoping that the CTA will be overturned in the courts or that Republicans, who typically favor easing regulations and less oversight on businesses, will cancel the CTA requirements next year now that they have a majority in the Senate and the House.

But that's a risky stance, says Carolyn Yun, a client advisor at Hollow Brook Wealth Management. If the law sticks, FinCEN will have to make an example of non-filer to encourage compliance, she says.

"I would expect jail time would be reserved for egregious offenders. But FinCEN may have to apply daily penalties," she says.

FinCEN can charge an entity $500 a day up to $10,000 for noncompliance.

Businesses launched this year were given 90 days to file with FinCEN; those existing before this year have had the full year and face a Jan. 1 deadline to comply.

Businesses created next year will have a 30-day window to comply.

Each owner must provide their full names, dates of birth, home addresses and an identification number from a driver's license or passport, along with an image of the document.

This information must be electronically filed through FinCEN's website ( https://boiefiling.fincen.gov), which has a robust list of FAQs about the CTA and its requirements .

Updates to ownership information are required within 30 days after any changes occur, such as a new address or updated contact information.

For small entities, complying with CTA rules is easy and can take less than five minutes, says Yun, who says she owns a small LLC and it took her three minutes to file her information.

"But some clients have multiple entities and different businesses in each entity and ownership commingled with family member," Yun says. "Some have to file 40 different documents."

Unanswered questions are rampant, Granwell says.

For example, for business owners in community property states, are spouses required to file information? What do you do if owners don't have a driver's license or passport to provide as identification?

"This just came up -- one owner is in an elderly home and doesn't have the required documents," Granwell says. It's unlikely identification can be applied for and granted by the year-end deadline.

Some entities are grappling with the refusal of partial owners to provide personal information, Granwell says. "You have to sign off on your report that it is true, correct and complete, but how can you do that if you don't have all the information?"

There is no way of submitting an attachment with your report as you would on a tax return to explain unusual circumstances.

With unresolved questions, Granwell suggests filing by the deadline as best you can, sending a letter to FinCEN explaining your challenges and keeping detailed notes of your efforts to fully comply. "There's no good single good answer," he says. "Show you're trying the best you can."

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December 01, 2024 04:00 ET (09:00 GMT)

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