Corporate Transparency Act is on hold – what’s next?

David K. Olive: Business owners should continue to gather info for possible future filing.

A federal district court in Texas has temporarily halted enforcement of the Corporate Transparency Act, a law requiring businesses to disclose their beneficial ownership information to the federal government.

It’s a law that some business owners have already complied with but that many were not even aware existed – despite a Jan. 1, 2025, deadline for filing and fines of up to $500 per day for each day an LLC is in violation. For willful violations, the law includes criminal penalties for not filing, with fines of up to $10,000 and imprisonment for up to two years.

On Dec. 3, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction blocking enforcement of the CTA. Judge Amos Mazzant concluded that Congress lacks power to adopt the measure.

The injunction is not the last word on the matter, and a higher court may remove the injunction, putting the requirement back into effect. The U.S. Department of Justice, on behalf of the U.S. Department of the Treasury, filed an appeal to Mazzant’s ruling on Dec. 5 to the U.S. Court of Appeals for the Fifth Circuit.

The CTA was passed by Congress in January 2021 to require some companies to file beneficial owner information naming the people who own or control them. That data goes to the Financial Crimes Enforcement Network, or FinCEN, a bureau of the Department of the Treasury, which began collecting it on Jan. 1, 2024, with a final deadline of Jan. 1, 2025.

FinCEN offered new guidance to reporting companies on how the injunction impacts compliance, noting, “In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

FinCEN’s website explains that the legislation is part of the government’s efforts “to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

The website notes the data is designed to be accessed by federal agencies engaged in national security, intelligence or law enforcement activity; officials at the Department of the Treasury; foreign law enforcement agencies and courts that submit a request on the basis of their own national security and law enforcement; financial institutions with customer due diligence requirements; and federal functional regulators that supervise financial institutions. Storage, it notes, is in a secure, nonpublic database.

Future of CTA unpredictable
Jeff Shore, a shareholder with BRS CPAs & Advisors, raised the issue of the CTA in a September installment of Springfield Business Journal’s “A Conversation With …” interview series. He said the information was intended to fight financial crimes, such as money laundering. Shore also noted the United States was behind European countries in putting the process in place.

“It’s been a roller-coaster ride for us,” Shore said in an interview following the injunction.

Shore said BRS has sent multiple notices to its clients to urge them to complete the filing. Most of those clients do not have attorneys on retainer, he said.

Shore shared guidance from the American Institute of Certified Public Accountants following the injunction.

“The future of the CTA and (beneficial ownership information) reporting, including when reports need to be submitted, remains fluid and unpredictable,” the memo states.

It adds that the Texas district court’s ruling in the case, Texas Top Cop Shop Inc. et al. v. Garland et al., is the most recent decision issued, but it is not the only case in which the CTA has been challenged, and federal district court decisions have been conflicted.

“As such, it is strongly advised that CPA firms continue to closely monitor developments and be prepared to respond swiftly if necessary,” the memo states.

Shore said the guidance he has received is not to file documents now but to gather information so if a document has to be filed, it can be.

“The forms themselves are not super complicated,” he said. “What gets really confusing is who has to file and who doesn’t have to file.”

Not-for-profits are off the hook, he said.

FinCEN’s guidelines also note exemptions for companies reporting more than $5 million in gross receipts or sales in the most recent completed tax year or having at least 20 full-time employees.

Shore said some people have multiple limited liability corporations – possibly even ones they have forgotten about. Inactive LLCs are also exempt from filing, he said.

“We found a lot of clients with LLCs that are inactive,” he said. “They might as well get those cleaned up and closed.”

Another challenge has been posed by corporations like homeowners’ associations, which are generally required to file.

“It’s turned into a sleuthing exercise, trying to figure out who was on board,” he said.

He noted he is president of his own HOA, and he gathered the required information at the most recent membership meeting. Because there is no owner, the board members are the reportable persons, he said.

Shore said those business owners who go it alone, without the support of a CPA or attorney, may not even have realized the CTA was happening.

“The general public wouldn’t know if they weren’t engaged with a CPA or attorney,” he said.

He added that the AICPA is lobbying for an extension, should the injunction be overturned.

“That’s what we’re hoping we’ll see,” he said.

Quick resolution unlikely
David K. Olive, a tax and estate planning attorney with Carnahan Evans PC, emphasized that the injunction is a procedural ruling and not a final judgment on the merits of the case.

“I would note that it’s issued by a notably conservative justice that is known for taking up conservative causes,” he said. “He has issued sweeping rulings like this before and been overruled.”

But the practical effect of the preliminary injunction is that enforcement is on hold, Olive said.

“It’s unlikely that this would be resolved before the end-of-the-year deadline,” he said.

Olive said some in Congress are trying to get an extension to the deadline, in part because the CTA has not received a lot of attention, and there is not broad awareness of its requirements.

“It’s not a really sexy topic – that’s the biggest problem,” Olive said.

Like Shore, Olive said the best approach is to prepare, even though there is an injunction.

“The general consensus right now is keep gathering information and keep preparing for filing,” he said. “We are still working on filing reports for clients. I can’t think of a downside to complying with the law.”

He said if the injunction is lifted, there will likely be a window of 30 days or so for companies to file.

“The teeth on this statute are too severe to just assume you will not be penalized,” he said.