The new Corporate Transparency Act could open doors for many tax & accounting firms that want to expand their services to corporate clients, but caution may be warranted in this area
The Corporate Transparency Act (CTA), enacted as part of the 2021 National Defense Authorization Act, amends the Bank Secrecy Act and is designed to enhance transparency in business ownership structures in order to better combat money laundering, tax fraud, and other illicit activities.
Starting January 1, a significant number of businesses in the United States, specifically reporting companies, must comply with the CTA by filing Beneficial Ownership Information Reports with the Financial Crimes Enforcement Network (FinCEN), which is part of the U.S. Treasury Department.
For tax & accounting firms and Certified Public Accountants (CPAs), understanding and navigating the CTA is crucial due to its professional liability ramifications. The Act requires businesses to report information related to their owners, officers, and controlling persons; and FinCEN estimates that around 32.6 million businesses will need to comply with the Act in its first year.
Thus, it is important for tax advisors to get up to speed quickly. The proposed penalties for businesses that fail to comply with the CTA or missing filing deadlines include criminal or civil fines and penalties. Financial penalties start at $500 per day of non-compliance, up to $10,000; and criminal penalties could include imprisonment for up to two years.
Tax & accounting firms have long served as advisors to clients whether official or unofficially. That role has expanded tremendously over the last two to three years and will continue even more, especially for firms that service businesses. With the passage of CTA, tax firms will need to be versed in the new rules quickly and accurately because failure to do so can potentially expose the firm to professional liability claims and their clients to possible regulatory problems. This is true for firms that offer tax services related to CTA compliance or if they inadvertently provided advice on the Act.
Even those tax & accounting firms that might just be providing an answer to “quick questions” about CTA compliance could find themselves in trouble if the client incurs damages related to their compliance with the Act and then blames their CPA for it.
What to consider?
For tax & accounting firms that decides to offer services related to the CTA, it is essential for them to clearly define the scope of their services in engagement letters, including disclaimers stating that they are not responsible for advising on CTA compliance unless specifically engaged for that purpose. Doing so helps firms to better manage client expectations and mitigate risks.
It is worth noting, however, that for firms newer to offering advisory services and that still may be in habit of providing quick and impromptu advice, they should be cautious about what advice is being given. It is important to know whether the advice is better given by a legal professional instead of a tax professional — and if the line is blurry, it might be better to air on the side of caution and direct the client to seek legal advice.
When firms and CPAs are considering offering services related to the Act, they should choose how they want to be involved. This can range from providing only administrative support to offering on-going compliance advice and interpretation. Importantly, firms and CPAs should understand the risk profile associated with each service level.
There are significant potential risk exposures for CPAs who provide CTA assistance, including:
- Bank scrutiny — Because this Act is part of the Bank Secrecy Act, banks may ask CPAs to confirm clients’ compliance by requesting a comfort letter and other supporting information.
- Data gathering — Normally, tax professionals handle a great deal of their clients’ data, and data security is already a concern with CTA. CPAs and firms may now have to gather much more information with CTA compliance, which increases how much more data needs protecting. Failure to do so can increase the firms’ data security liability exposure.
- Potential fraud — The worst of all situations is if the firm or CPA finds that a client intentionally filed false reports. It goes without saying the tax & accounting firm or CPA associated in any way also may be accused in aiding and abetting the client, which could result in civil or criminal charges.
For tax & accounting firms that have decided they will offer services related to the CTA, becoming knowledgeable about the Act and all the ways they can help keep clients in compliance is only the first step. The second and probably the most important step is coming up with client acceptance and engagement procedures. Having procedures to help identify which clients must comply with which portions of the CTA are necessary.
After CTA-compliant clients have been identified, firms should take extra precautions by ensuring firms maintain detailed documentation of all client interactions, decisions, and representations. This documentation can support services rendered and aid in defending the firm against future claims.
It also goes without saying that tax & accounting service providers should consult with legal professionals that are knowledgeable about federal financial criminal law to best understand how their CTA activities present risk and to make sure any risk is managed effectively. As with any new legislation or regulations, tax practitioners will need to stay updated on all developments including regulatory guidance and case laws related to the Act.
Clearly, the Corporate Transparency Act presents opportunities for CPAs and tax & accounting firms to offer new services to clients, representing a significant growth opportunity for their business. However, there could be some potential challenges — but by staying informed, clearly defining service scopes, maintaining rigorous documentation, and consulting with legal counsel, firms and CPAs could more easily and effectively navigating the complexities of the Act.