The government wants to learn more about your business or entity. This article will explore the new Corporate Transparency Act (CTA) and its impact on millions of entities operating in the US, including the Self-Directed IRA LLC. 

What is the Corporate Transparency Act?

Beginning on January 1, 2024, a considerable number of companies in the United States will have to report information about their beneficial owners (the individuals who ultimately own or control the company). The beneficial owners will have to report the information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury.

The primary purpose of the CTA is to stop the use of entities for money laundering and other criminal enterprises. The Treasury is attempting to gather more detailed information on individual owners with control or at least 25% ownership in entities with activities in the United States. The CTA follows a recent trend by the IRS and US governmental agencies to gain greater disclosure on individual ownership of cryptos and U.S.-focused entities.

The U.S. government believes there is a significant amount of under-reporting of income taxes and possible criminal activity by some entities that they are currently not able to uncover. They are hopeful that the CTA’s requirement for certain beneficial ownership information (BOI) will help them in this regard.

When is the CTA Starting?

The CTA is going into effect on January 1, 2024, and will require the disclosure of certain information related to beneficial owners and controllers of most US domestic entities and certain non-US entities doing business in the United States. These rules will likely impact investment funds and Self-Directed IRA LLCs by requiring the reporting of beneficial ownership information for certain individual owners and control persons. The identifying information will need to be reported to FinCEN.

How Many Entities Will Be Impacted by the CTA?

As first stated in the FinCEN September 2022 regulatory impact analysis, they said it is difficult to estimate the number of entities that are reporting companies and will be subject to the CTA. The analysis assumed that all entities created or registered before the effective date of Jan. 1, 2024, that are subject to the BOI reporting requirement — 32.6 million entities — will submit initial BOI reports in the first year.

In 2025 and beyond, FinCEN estimates that almost 5 million initial BOI reports will be filed each year, the same estimate as the number of new entities per year that meet the definition of a reporting company and are not exempt. The total five-year average of expected BOI initial reports is about 10.5 million.

FinCEN estimates that about 6.6 million BOI update reports will be filed in 2024, and about 14.5 million such reports will be filed annually for 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

The primary issue with the CTA from a FinCEN oversight standpoint is manpower. In 2023, they have less than four hundred employees. With an average of 10 million BOI reports filed in the coming years, the question is how will they handle the sheer volume of reports and whether will they have the capacity to do much with the data.

What Companies Need to File a BOI Report?

All entities formed or registered to do business in the United States will need to either (i) confirm they qualify for an exemption from the CTA’s reporting requirements or (ii) timely submit a BOI report to FinCEN.

Which Entities are Exempt from the CTA BOI Requirement?

Exemptions may apply to certain entities, including the following:

• There is an exemption for entities already subject to other federal reporting, so registered investment advisers under the Investment Advisers Act of 1940.
• Large operating companies have several requirements including a threshold of at least 20 full-time employees, a physical US office, and more than $5 million of gross receipts.
• Tax-exempt entities such as private foundations are exempt from reporting.
• Certain inactive entities do not need to be reported.
• Certain types of trusts that are not created by a filing with a Secretary of State or similar office.

Who is a Beneficial Owner?

Under the CTA, a “Beneficial Owner” is any individual who either:

• Directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, either exercises substantial control over the Reporting Company, such as a senior officer, or the ability to appoint a senior officer. A decision maker on the business, finances, or structure of the company; or
• Owns or controls at least 25% of the ownership interests of the Reporting Company.

There is always at least one beneficial owner, and there can be more than one beneficial owner, even if no one owns at least 25% of the entity.

It is important to note that a “Beneficial Owner” needs to be a person (not a company or legal entity).

When is BOI Reporting Due?

Reporting for the LLC’s will be due:

• If the LLC was established on or after January 1, 2024, 90 days from creation to reporting the BOI with FinCEN.
• If the LLC was established prior to January 1, 2024, the BOI report will be due on or before December 31, 2024.  

Penalties for Failure to File BOI Report

The BOI reporting is free but if one is late or fails to file a BOI report, the penalty is $500 a day up to $10,000.  In addition, criminal penalties of up to two years of imprisonment may apply for a failure to file the BOI report.

What Type of Information Must be Reported on the BOI?

For reporting companies, the following information will need to be provided on the BOI report:

• Legal Name of individual
• Date of Birth of individual
• Current Address of individual
• Identifying Number (Passport, Driver’s License, State ID) of individual

Any changes to the BOI need to be reported to FinCEN within 30 days of the change. In addition, corrections need to take place within 30 days of learning of the error.

The Self-Directed IRA LLC and the BOI Report

A Self-Directed IRA LLC, also known as a Checkbook Control IRA, involves the establishment of an LLC that is wholly owned by one or more IRAs and managed by the IRA owner. Under the CTA rules, a Self-Directed IRA LLC would be deemed a reporting company and would, thus, be required to file a BOI report with FinCEN. Since the BOI report must be completed by an individual and an IRA is not an individual, the report would need to include the information for the IRA owner, who is the person in control of the LLC as the manager.

IRA Financial has been working with its internal compliance team to develop a program that will allow it to file the BOI reports for the plan.  Each BOI report must be submitted directly to FinCEN and the person submitting must have a FinCEN filing number.  To relieve our clients of the stress and responsibility of acquiring a FinCEN number and filing a BOI report, we will be offering this service to all our clients who have elected to join our annual consulting/compliance program.

It is possible that some investors may look to establish a trust, instead of an LLC, to circumvent the BOI reporting rules. IRA Financial is one of the few Self-Directed IRA custodians that does offer clients the ability to use a trust as a checkbook control vehicle to make investments.

Does a Self-Directed IRA or Solo 401(k) have to File a BOI Report?

A full-service Self-Directed IRA that invests directly in the name of the IRA without the use of an entity, such as an LLC, would not be treated as a “reportable” company under the CTA regulatory framework.  The same goes for a Solo 401(k) plan since, in both cases, they are retirement trusts that are not entities formed or registered to do business in the United States.

Conclusion

If you do utilize the Checkbook IRA LLC structure, there will be extra reporting requirements starting next year. For most investors, this shouldn’t be worrisome. In fact, if you are an IRA Financial client and take advantage of our compliance service, we’ll do all the work for you. The CTA is just another way for the government to catch bad actors and those looking to cheat the system. Stay tuned as we see what happens in the new year.