The CTA is a game-changer for accounting firms: here's how to prepare
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 33M businesses, primarily small companies, will be required to file complex and confusing new reports in a matter of months unless Congress acts. Accounting firms that are prepared will be positioned to significantly grow their advisory and compliance businesses by enhancing current client engagements and growing their client bases.
CTA BOI reporting requirements
Beginning January 1, 2024, tens of millions of small businesses must comply with the Corporate Transparency Act (CTA) by filing a Beneficial Ownership Information (BOI) report.
Failure to accurately and timely file will result in significant FinCEN (U.S. Department of Treasury's Financial Crimes Enforcement Network) penalties, including $10,000 in civil fines and/or up to two years in prison. Similar to most mandated Department of 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 — or 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 18M. Most reporting companies will need their CPAs to handle reporting and gathering data required for accurate reporting.
This is a unique opportunity for accounting firms to acquire new clients, as many companies will need to understand and comply with these new rules. It's also an opportunity for 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.
Most importantly, accounting firms need to take action now to educate themselves and their clients and put plans in place to take advantage of this significant opportunity and mitigate any potential liability they may be exposed to due to not being fully up to speed on the rules and regulations.
Corporate Transparency Act and Beneficial Ownership Information Reporting: basic rules?
The Corporate Transparency Act requires tens of millions of small U.S. companies to file Beneficial Ownership Information Reports to FinCEN starting in 2024 as a "reporting company." This new law and reporting requirement is part of the U.S. anti money laundering regulations included within the national defense authorization act.
A company is exempt from being a reporting company if it exceeds $5M 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 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.
Accounting firms large and small do have the opportunity to take advantage of the growth opportunities offered by CTA. But it will require a great deal of preparation and education that should begin immediately to ensure the firms are able to be educated on all of the requirements and collect the necessary information to file accurate reports. This service opportunity furthers the objective of many accounting firms of being a full-service provider to their clients.
How should accounting firms prepare for CTA?
Most of the entities and individuals subject to CTA requirements are clients of accounting firms. Most typically, CPAs in accounting firms are the "trusted advisors" these entities would approach regarding CTA and FinCen's BOI reporting rule.
It wouldn't be a surprise for them to ask, or even expect, the accounting firm to handle BOI reporting, given how involved accounting firms have been in handling business filings during recent years, especially during the pandemic. 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 the firm — and client — interests, accounting firms should take several steps.
- Become and stay up to date familiar with the CTA and its requirements before any other actions are taken. Currently there is a widespread lack of knowledge among most accounting firms of what the CTA requires and how they should plan to meet those requirements for their own firms. Even after initial education is complete, it's important for everyone in the firm to stay up to date on the latest developments related to the CTA.
- Develop a process for helping clients gather the necessary information and handling beneficial ownership information in a confidential and secure manner.
- Proactively communicate with clients about the Corporate Transparency Act (CTA) and Beneficial Ownership Information (BOI) filing requirements. It's important to ensure that clients are aware of the CTA and its implications.
- Review existing anti-money laundering (AML) and know-your-customer (KYC) policies and procedures to ensure that they are up to date and effective.
- Conduct a client risk assessment to identify any potential risks associated with them.
- Review current risk mitigation controls and procedures, and make changes/implement new risk mitigation controls and procedures as is appropriate.
- Assist clients in gathering the necessary information to file the required reports. Ensure that all information necessary to file the required reports is collected.
- File the reports on behalf of their clients, if the firm has decided this is a service they will offer.
- Monitor clients for compliance with the law.
- Consider if they need to file under the CTA BOI reporting rules. After all, roughly 80% of accounting firms will be subject to the BOI reporting rules.
What's next? Additional FINCEN rules, bills in Congress.
FinCENs work is not done. The agency has said it will be providing more guidance before reporting is set to begin, because there are still many issues that need to be resolved. For example, FinCEN has yet to announce a proper 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, FinCen has not yet drafted the actual reporting forms and publish 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 January 1, 2024 BOI reporting start date to some undetermined future date to provide additional time for small businesses to learn about and better understand their new reporting requirements.
These bills and the extension of the launch of the BOI reporting requirement is supported by the AICPA and other professional and industry groups. However, the likelihood of extension remains uncertain and businesses and accounting firms are wise to continue to prepare for a January 1, 2024 start date.