FinCEN Cracks Down on Tax Fraud and Money Laundering—New Filing Requirement for Small Businesses
Published February 28, 2023

FinCEN Cracks Down on Tax Fraud and Money Laundering—New Filing Requirement for Small Businesses

Small business entities, new and existing, will soon have an additional filing requirement to add to the list of mandatory reporting requirements. The Corporation Transparency Act (CTA), enforced by the Financial Crimes Enforcement Network (FinCEN), comes as part of the Anti-Money Laundering Act of 2020 in an endeavor to gain visibility of possible illicit financial activity, such as tax fraud and money laundering, to name a few.

The Requirement

Small businesses that fall within the law’s established parameters will be required to file a “beneficial owner report.” The report will collect information that includes each beneficial owner’s full legal name, date of birth, current residential address, and a legal identifying number (i.e., passport or driver’s license number). FinCEN will store this information in a secure, non-public database and, only for matters stated in the CTA, will be authorized to disclose collected information solely to certain government agencies and financial institutions.

The Parameters—Defining “Small Business”

The Proposed Rule provides criteria to better decipher which entities qualify as small businesses. A small business is a non-exempt entity that meets both of the following criteria:

  • Has 20 or fewer full-time employees.
  • Is a “reporting company,” meaning the entity is a corporation, limited liability company, or other entity created by the filing of a document with a secretary of state or similar office. The term “other entity” is inclusive of a limited liability partnership, limited liability limited partnership, business trust, and a limited partnership.

Deadline to Complete the Filing Requirement

Effective January 1, 2024, all new entities will be required to file a beneficial owner report within 30 days of formation. Beginning January 2, 2024, all existing entities will have one year to complete the filing requirement (until January 1, 2025). In addition, if any of the beneficial owner report information changes, there is a 30-day period in which the entity must file an updated report. Penalties of up to $500 per day will be imposed for the duration of the violation period.

Who Is a Beneficial Owner?

All beneficial owners of a qualifying small business must be included on the beneficial owner report. An individual qualifies as a beneficial owner if he or she owns 25% or more of the company, or has substantial control over the company, directly or indirectly.

The Proposed Regulation has provided that an individual possesses substantial control if he or she:

  • Serves as a senior officer of the company.
  • Has the authority to appoint or remove a senior officer or a ruling preponderance of the board of directors of the company.
  • Has a significant impact on important affairs of the company.

In addition to beneficial owners, the report must also include any individual that played a role in filing the application with the secretary of state or similar office to do business in the United States. This could include attorneys, legal firms, and accounting firms.

If you would like to speak with a tax professional about the new FinCEN filing requirement or need guidance related to any business advisory or tax planning and strategy matter, one of our executive contacts would be happy to assist you. You may email them below, or call (800) 270-9629.

Authors & Contributors

Taylor Jules

Executive Contacts

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