What Client Tax Advisors Should Do About the New Corporate Transparency Act

The Corporate Transparency Act (CTA), introduced as part of the 2021 National Defense Authorization Act and amending the Bank Secrecy Act, aims to enhance transparency in business ownership structures to combat financial crimes like money laundering and tax fraud. This legislation requires specific businesses, known as “reporting companies,” to file Beneficial Ownership Information Reports (BOI) with the Financial Crimes Enforcement Network (FinCEN).

Compliance Implications for Tax & Accounting Professionals:

Understanding and adapting to the CTA is crucial for tax & accounting firms and Certified Public Accountants (CPAs) due to potential professional liability ramifications. The Act necessitates reporting information concerning owners, officers, and controlling persons, impacting an estimated 32.6 million businesses in its first year.

Compliance Deadlines and Penalties:

Reporting companies must comply with the CTA by January 1st, 2024, by filing BOI reports with FinCEN. Failure to comply can incur significant penalties, including:

  • Financial penalties: $500 per day of non-compliance, up to $10,000.
  • Criminal penalties: Imprisonment for up to two years.

Professional Liability Risks for Tax & Accounting Professionals:

Tax & accounting firms have traditionally served as advisors to clients, with their roles expanding significantly in recent years, especially for those serving businesses. The CTA further emphasizes the need for firms to acquire knowledge and expertise quickly, as non-compliance exposes them to potential legal repercussions and clients to regulatory problems. This applies to firms offering CTA compliance services or inadvertently providing advice on the Act.

Even seemingly innocuous answers to “quick questions” about CTA compliance could expose firms to liability if clients incur damages related to their compliance and blame their CPA.

Recommendations for Tax & Accounting Professionals:

Clearly defining the scope of services in engagement letters is essential for firms offering CTA services. This includes disclaimers stating firms bear no responsibility for advising on CTA compliance unless explicitly engaged for that purpose. Such measures manage client expectations and mitigate risks.

For firms new to offering advisory services and accustomed to providing on-the-fly advice, caution is paramount. It’s crucial to recognize when seeking legal counsel instead of relying on tax professionals. When the line is blurry, erring on the side of caution and directing clients to legal experts is advisable.

Engagement Strategies for Tax & Accounting Professionals:

Firms and CPAs considering offering CTA services must determine their level of involvement, ranging from administrative support to ongoing compliance advice and interpretation. Understanding the risk profile associated with each service level is crucial.

Significant Potential Risk Exposures:

CPAs providing CTA assistance face substantial potential risks, including:

  • Bank Scrutiny: Banks may request comfort letters and supporting information from CPAs to confirm clients’ compliance.
  • Data Gathering: Data security is already a concern for tax professionals. CTA compliance may require gathering additional information, increasing the data requiring protection. Failure to do so can magnify data security liability exposure.
  • Potential Fraud: In the worst-case scenario, if a client intentionally files false reports and the firm/CPA is associated in any way, they could be accused of aiding and abetting, leading to civil or criminal charges.

Essential Steps for Firms Offering CTA Services:

  • Becoming Knowledgeable: The first step is acquiring in-depth knowledge about the CTA and various client assistance options.
  • Client Acceptance and Engagement Procedures: Implementing procedures to identify clients requiring CTA compliance and the specific portions applicable is crucial.
  • Documentation: Maintaining detailed documentation of client interactions, decisions, and representations is essential to support services rendered and defend against future claims.
  • Consult Legal Experts: Consulting lawyers specializing in federal financial laws to understand and manage risks effectively is highly recommended.
  • Staying Updated: Continuous learning regarding regulatory guidance and case laws related to the Act is crucial for tax professionals.

By adopting these recommendations, tax & accounting firms can effectively navigate the CTA and support their clients in achieving compliance while minimizing their own potential risks.

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