Excedrin Headache #1,367

What do sophisticated tax cheats, drug cartel money launderers, Russian potash oligarchs, and quite possibly you all have in common? Well, if you operate your business as a partnership, corporation, or limited liability company, you’re all about to find yourself caught up in a sticky new web of Grade A federal red tape.

Washington is constantly trying to close the loopholes that bad guys use to hide taxable income or other ill-gotten gains. An ethically-challenged business owner looking to avoid tax might run his operations through Partnership A, which is owned by Partnership B, which routes income through Foreign Partnership C, which send the money back to domestic Partnership D. But by the time that income is supposed to reach his 1040, it’s disappeared and never gets taxed. (How does that happen?) Or a Russian billionaire might want to park some of his assets outside Vladimir Putin’s reach, so he uses a shell corporation to buy a $50 million condo on Manhattan’s Billionaire’s Row. All of those entities make it harder for Uncle Sam to track ownership and collect taxes.

And so, in 2020, Congress added the blandly named “Corporate Transparency Act” to that year’s defense spending bill. The law requires corporations, LLCs, and any other business entities formed by filing documents with the Secretary of State or similar office to report its “beneficial owners.” These include anyone who owns 25% or more of the ownership interest or exercises “substantial control” over the company.

Of course, it wouldn’t be red tape without a laundry list of 23 exceptions to the new rules for companies that already disclose ownership information. These include “large operating companies” with more than 20 employees, banks, investment advisors, and even certain public accounting firms. (Yay, us!)

If you’re not fortunate enough to slip through one of those loopholes, you’ll have to report your “Beneficial Ownership Information” with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). That report will include your full legal name, date of birth, current legal address, and your driver’s license or passport number and photo.

If your company is in existence before the end of this year the report is due by January 1, 2025. If you form a new one after December 31, the report is due within 30 days. The penalty for failing to report is $500 per day up to $10,000. If that failure is willful, or you knowingly include incorrect information, you can owe an additional $10,000 plus spend up to two years in jail.

Oh, and if any of that information changes, you’ll have to update it within the same 30 days. If you get a new driver’s license and forget to submit it, will FinCEN really fine you $500 per day? Maybe!

FinCEN just published a helpful 56-page summary of the law if you need help falling asleep some night. It would be really helpful if we had examples of forms (paper, web portal, carrier pigeon?) we’ll need to comply with the new law. Sadly, they don’t exist. Hey, if Congress can wait until the night before the government runs out of money to pass legislation extending the debt ceiling, shouldn’t we cut FinCEN the same slack? We also don’t know if the penalties are calculated per reporter or per company. Details, shmetails.

Don’t look to accountants to navigate the new rules. This is a job for Legalman! But it’s important to understand that the new red tape grows out of the government’s efforts to track down more business income to tax. It’s just another reminder of how important it is to have a proactive plan to pay the least amount possible and survive any sort of audit. You know who to call!