Business filing rules on hold as courts weigh Corporate Transparency Act

Off-again, on-again requirements for businesses to report ownership information to federal regulators are now off again, while provisions of the anti-money laundering U.S. Corporate Transparency Act (CTA) work their way through lawsuits and appellate courts.

Filing requirements under the CTA had been set to go into effect on Jan. 1 and then were postponed until Jan. 13 after an initial court injunction. Now, the U.S. Fifth Circuit Court of Appeals has postponed the requirements indefinitely until it reaches a ruling.

It is scheduled to hear oral arguments—for and against the CTA—in March.

“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,” the Financial Crimes Enforcement Network (FinCEN) announced following the latest stay.

“However, reporting companies may continue to voluntarily submit beneficial ownership information reports,” the regulators added.

“As we speak today, filing your Beneficial Ownership Information Report with FinCEN is voluntary,” said Jess LeDonne, director of policy and legislative affairs for the Bonadio Group, which has several offices throughout New York. ”There is no enforcement at the moment.”

The act aims to thwart illegal activities such as money laundering and tax fraud by mandating businesses to disclose ownership details to FinCEN. It was intended to create a central registry and database to help law enforcement detect and prevent financial or related criminal activity.

Several businesses filed the initial lawsuit in federal court in Texas, aiming to overturn the CTA.

The core of their argument is that by mandating invasive disclosures of beneficial ownership to federal regulators, the CTA violates their First and Fourth Amendment rights. They contend that the act disrupts the balance of state and federal governance of corporate entities without adequate justification, turning a process historically managed by states into a federal oversight task with potential criminal penalties for non-compliance.

The businesses that are suing contend that the CTA compels them to reveal personal and sensitive business information under threat of severe penalties, thereby chilling their constitutional rights to free association and protection from unreasonable searches.

“Basically, the argument is this is unconstitutional overreach,” LeDonne said.

A lower-court judge agreed with those who brought the action.

“Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power,” wrote U.S. District Court Judge Amos Mazzant of the western district of Texas. “And even in the face of the deference the court must give Congress, the CTA appears likely unconstitutional.”

In stating that it would appeal the order, the U.S. Department of Justice said it believes the act is, in fact, constitutional. It appealed to the Fifth Circuit Court of Appeals.

While the appeals court at first lifted the injunction, it later restored the stay while arguments moved forward during the appeals process. That puts the act’s requirements on hold for now.

Jodi Bloom-Piccione, tax partner for Eisner Advisory Group, LLC, based in Melville, suggested some form of reporting could still result after the litigation is resolved.

“Even with the potential that the CTA is overturned, remember: The legislation was bipartisan when it passed, and there is the likelihood that some form of beneficial ownership information reporting will be passed later on,” Bloom-Piccione said. “Even the lower federal courts that have held the law to be unconstitutional have given Congress a roadmap to rewrite the law in a way in which they feel it would pass constitutional muster.”

Tom Sena, partner at accounting firm UHY, which has offices in Melville and Garden City, said the filing process is not burdensome for most.

“For most businesses, the filing itself isn’t really onerous.” He and other accounting professionals suggested that businesses may still wish to file voluntarily—or be ready to file immediately—should the stay be lifted once the appeals are exhausted.

“The good news is, for most smaller businesses, filing the beneficial ownership information report is a short process,” Bloom-Piccione said. “It is not as complex or time-consuming as filing taxes. For more complex businesses, or individuals who own multiple reporting companies, however, the filing requirements can pile up and become more confusing and tedious.”

LeDonne noted that FinCEN has created a downloadable PDF that is easy to complete and provides a web page where the information can also just be directly typed into an online form and then filed. “They did their best to make it simple,” LeDonne said.

However, getting caught off guard without having at least prepared a filing is not the only risk businesses could face. Scams are another.

FinCEN has issued an alert warning businesses about scams that are exploiting awareness of the Corporate Transparency Act’s requirements. Scammers use fraudulent documents, such as nonexistent “Form 4022” or “Form 5102,” and reference fake entities like the “US Business Regulations Dept.” to deceive businesses into providing bad actors with their information. Businesses are advised to verify correspondence, avoid clicking suspicious links or scanning QR codes, and never submit payments based on these fraudulent claims.

“Never give personal information, including regarding beneficial ownership to anyone unless you trust the other party,” the agency advises.

For those seeking timely information, the agency has been providing regular updates on the status of the CTA on its website at https://www.fincen.gov/boi.