Accounting firms across the U.S. must prepare now to advise their clients and be ready to handle the most significant onslaught of business reporting and filing requirements in decades.
An estimated 33 million businesses, primarily small companies, will be required to file complex and confusing new reports. Accounting firms that are prepared will be positioned to significantly grow their advisory and compliance businesses by expanding their current client engagements and growing their client bases.
Beginning Jan. 1, 2024, tens of millions of small businesses must comply with the Corporate Transparency Act by filing Beneficial Ownership Information reports. The new legal and reporting requirements are part of U.S. anti-money laundering regulations included within the National Defense Authorization Act.
Failure to accurately and timely file will result in significant penalties from the Treasury Department’s Financial Crimes Enforcement Network, including $10,000 in civil fines and/or up to two years in prison.
A company is exempt from being a reporting company if it exceeds $5 million in gross receipts and has 21 or more full-time employees. There are specific exemptions from BOI reporting. FinCEN’s new reports require each reporting company to disclose information about the reporting company and any individual who acts as a beneficial owner, including any individuals with substantial control or unique ownership interests.
Based on initial estimates by FinCEN, 33,206,418 existing reporting companies will need to file an initial report in 2024. Another 14,456,452 reports are estimated each year thereafter because any information changes within a reporting company mandate filing an “updated report” with FinCEN within 30 days of the change. These changes can be as minor as an owner changing their home address, which will trigger the requirement for the reporting company to file a new report to stay compliant and avoid penalties.
Similar to most mandated Treasury filings, many of these companies will reach out to their trusted advisors, most often their accounting firm, for guidance and to outsource the complex and confusing required filings and other compliance activities.
Industry estimates put the number of entities required to file a BOI report — also referred to as reporting companies — that will reach out to professionals for help with CTA compliance at roughly one-half of those required to file BOI reports, a staggering 18 million. Most reporting companies will turn to their CPAs to educate them about this new reporting requirement and to handle reporting and gathering data required for accurate reporting.
This legislation, while not new, is a new and unique opportunity for accounting firms to acquire new clients, as many companies will need to understand and comply with these new rules. This should provide an opportunity for many accounting firms to increase their revenue per existing client. Based on FinCEN’s estimates of BOI reporting volume, this ongoing revenue increase could reach 10% or more per client.
How should accounting firms prepare for CTA?
The vast majority of entities and individuals subject to CTA requirements are clients of accounting firms. Typically, CPAs in accounting firms are the “trusted advisors” these entities would approach regarding CTA and FinCEN’s BOI reporting rules.
It wouldn’t be a surprise for them to ask, or even expect, their accounting firm to handle BOI reporting, given how involved accounting firms have been in handling business filings in recent years, especially during the pandemic. These firms often have the most detailed information regarding entities and their ownership because of tax returns and other compliance reporting that firms already do for covered entities and their owners.
To protect firm — and client — interests, accounting firms should take several steps now:
- Understand and stay up to date with the Corporate Transparency Act and its requirements before any other actions are taken.
- Proactively communicate with clients about the Corporate Transparency Act and Beneficial Ownership Information filing requirements.
- Consider offering BOI reporting as a service if it fits with the firm’s strategic goals and growth plans.
In addition, firms should:
- Review current processes and procedures, including anti-money laundering and know-your-customer policies, to ensure they are up-to-date and effective.
- Develop a process for helping clients gather the necessary information and handle beneficial ownership information in a confidential and secure manner.
- Conduct a client risk assessment to identify any potential risks associated with the CTA and BOI reporting.
- Consider if your firm needs to file under the CTA BOI reporting rules. After all, roughly 80% of accounting firms themselves will be subject to the BOI reporting rules.
Potential risks for firms and CPAs
There has been much discussion and debate within the accounting community about whether CPAs are in a position to provide guidance and advice to their clients regarding whether an exemption applies, or to ascertain whether legal relationships constitute beneficial ownership.
The overarching concern is that CPAs and nonattorney tax professionals providing assistance to clients in this arena could be deemed engaging in the unauthorized practice of law, or UPL. As each state has its own definitions of what services are considered UPL, this is an area of some risk to the accounting profession. As of the date of this writing, no state has yet to provide clarity as to whether providing advice to clients regarding the CTA would or would not be viewed as UPL.
The majority of leading authorities and professional associations have expressed the view that accounting firms would not be at any more risk for UPL than they would be for any other area in which they advise clients or handle compliance reporting. Clearly, engagement letters created by firms for existing or new clients should specifically state that the firm is not engaged in the practice of law, and if legal advice is desired, clients should consult with competent legal counsel. Some authorities suggest that firms should contact specific states in which they do business to get clarification regarding this issue.
Many firms will be subject to BOI requirements
There are currently more than 46,000 public accounting firms doing business in the U.S., according to the AICPA, and a significant number of firms will themselves have to comply with the Corporate Transparency Act’s BOI reporting requirements.
However, while a significant number of accounting firms will be considered “reporting companies,” some firms meet one of the 23 exemptions. For example, public accounting firms required to register with the PCAOB are specifically exempt. Under the general definition in the CTA of who is a “reporting company,” firms with over $5 million in gross receipts and with 21 or more full-time employees do not have to file.
Even without those accounting firms that are exempt as described above, tens of thousands of firms doing business in the U.S., many of which are small firms, will be subject to BOI reporting beginning Jan. 1, 2024.
What’s next: FinCEN rules, congressional action
FinCEN’s work is far from done. According to FinCen director Andrea Gacke, the agency is furiously working on creating a dedicated beneficial ownership information contact center to help further educate those who may be required to file. She pointed to the recent issuance of the following to help enhance awareness and education:
Director Gacke said the agency is reaching out to private industry, professional associations and secretaries of state (and others) to spread the word. In addition, the agency will provide more guidance before reporting is set to begin. However, there remain many issues that need to be resolved.
For example, FinCEN has yet to announce a final format or mechanism for filing documents with the agency.
FinCEN must also issue two additional rules. The first rule will need to outline who will have access to the database where the BOI reporting information on business entities is stored and how they’ll make sure the database is secure. The second rule must revise the customer due diligence rule, mainly affecting financial institutions.
Finally, the agency has not yet drafted the actual reporting forms and published them for public comment.
In addition, there are two bills in Congress, H.R. and S. 2623, both titled the Protecting Small Business Information Act of 2023. Both of these bills would delay the Jan. 1, 2024, BOI reporting start date to some undetermined future date to provide additional time for small businesses and their advisors to learn about and better understand their new reporting requirements.
These bills and the extension of the launch of the BOI reporting requirement beyond Jan. 1, 2024, are supported by the AICPA and other professional and industry groups. However, the likelihood of an extension remains uncertain and increasingly unlikely. Therefore, businesses and accounting firms are wise to continue to prepare for a Jan. 1, 2024, start date.
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