FinCEN has published extensive information on the CTA. CPAs may find the Small Entity Compliance Guide particularly helpful (https://tinyurl.com/bdf7yyyh). Rather than rehash that information, this article will focus on planning consideration for CPAs. CPAs will assuredly be asked to assist with the CTA filings. How should CPAs deal with these requests? How should CPAs determine whether they should accept these engagements? How can CPAs identify engagements that raise issues of concern that either should be rejected or only completed with the assistance of other advisors? Although the AICPA has recommended CPAs be cautious in undertaking the filings, some CPAs have indicated that they will nonetheless do so. Consider the cautions and complications below before or when proceeding.
A Simple CTA Filing Example
An individual client owns 100% of a single member disregarded LLC used in a home-based business. The LLC is below the 20 employee/$5 million threshold, so it is a Reporting Company that must file and must report the client as its Beneficial Owner. The filing should be simple because it is obvious who owns the LLC and who controls it. This type of filing might be of little concern to a practitioner helping—but maybe there might be more at play here, as discussed below.
A Complex CTA Filing Example
Contrast the above example with the following: An LLC owns a residential real estate property. This LLC is owned by two different trusts (e.g., nonreciprocal spousal lifetime access trusts). Who needs to be reported as a substantial control person and who as a beneficial owner? If a trust owns personal use property (such as a home or a painting), the trust agreement may provide that the authority to retain or sell that property falls within the purview of an investment trustee. Alternatively, in some trust documents that authority may be within the purview of the general trustee if the house is a rental property, but within the purview of the distributions trustee if it is a personal-use residence occupied by one or more trust beneficiaries. If the property were a rental property converted to personal use, the responsible trustee may change.
Making matters even more complex, some trusts provide that a trustee (be it an investment trustee or distributions trustee) can act only with consent of yet another party, called a trustee advisor or a trust protector. Different states allow for different types of fiduciary roles and controls. Since in this hypothetical example two trusts own the LLC that owns the house, the trust instruments must be reviewed. Are all of the trustees control persons? Only one? What about the trustee advisors or trust protectors? Parsing these powers to determine which positions are control persons required to report may not be a simple question, and really may be more of a legal determination that CPAs perhaps should not handle.
It is common with real property LLCs owned by trusts for the LLC to be structured as a manager-managed LLC so that the named manager has authority to open a bank account and handle property expenses. That manager will likely be a control person about whom information will be required to be reported. To determine that there is a manager and identify the powers the manager holds, a CPA would have to review the certificate forming the LLC, any amendments, and the operating agreement for the entity. Even though the entity is disregarded for tax purposes, the fact that multiple trusts own it, and it is operated by an appointed manager, suggests that the LLC would have an operating agreement laying out these operational details. If this example included several key employees, the analysis would be even more complex.
Can CPAs Make Legal Determinations?
CPAs need to ask themselves if they are comfortable making these types of legal decisions. Is it practical to start with a seemingly simple engagement and then inform the client that legal assistance is required when filing proves to be complex? Perhaps engagement letters should explicitly state that a CPA will assist with a CTA filing, but that legal counsel will be necessary to review and advise on any legal documents. CPAs should exercise caution about how involved they are willing to become in reviewing legal documents. Practically speaking, however, affected individuals will turn to their CPAs with questions on the CTA, so even CPAs that decide not to handle filings will face questions from clients.
Can CPAs Tell Which Filings Will Be the Simple Ones?
The problem with the diverging situations above is that it may be quite difficult to discern, before beginning an engagement, which analysis will be necessary. It could also be extremely difficult to ascertain the information once a control person is identified. Revisiting the single-member home-based business LLC above raises more questions: Will a CPA be comfortable filing a CTA report without knowing if the entity is in good standing in the state of formation? Should a good-standing certificate be ordered? Should copies of any documents filed with the state be obtained to be certain of the current status and control? If not, how can a CPA know whether the initial certificate forming the entity was changed to provide for a manager-managed LLC or change from manager-managed to member-managed? That may be important to ascertain whether there is a manager who must also be reported as a beneficial owner. Furthermore, knowing the current status of the LLC might not determine which information needs to be reported to FinCEN.
Revisiting the Simple CTA Filing Example
Even a seemingly simple CTA filing might require obtaining and reviewing legal documentation that a CPA would prefer not to be responsible for. Would it be enough to merely state in the engagement letter that the CPA has no responsibility for legal documents or their interpretation, and that the client must hire legal counsel for those matters? What if the client’s attorney is not knowledgeable about the CTA? Can CPAs state in the engagement letter they have no responsibility for determining who is a beneficial owner? That might not suffice if the terms of the legal documents are fundamental to determining which information must be reported and who has the responsibility to file. Also, the client might not hire the CPA if they anticipate having to also hire a lawyer.
All of the above might entail far more detail than those consummating the CTA filings might anticipate. That could create complications with clients who do not understand why the costs of filings, at least the initial one, are so significant.
How to Price CTA Filing Work
What will be the time and costs to complete filings? Will clients be willing to pay these costs? It may be that there will be modest costs involved for some entities where the ownership structure is simple and obvious, for instance when an individual owns 100% of an entity personally and is the sole control person. (Note that information about individuals who are substantial control persons but who are not owners of the entity may have to be provided.) In contrast, if an entity is owned by a series of complex trusts, each of which has various fiduciaries, nonfiduciaries, and powerholders. The initial cost—merely to determine who has to report—may be significant. This should be considered when endeavoring to determine pricing for such service. It may be that for the initial filing, a fixed fee may be impossible to estimate and that the initial filing will have to be completed on an hourly basis to address the wide variability of situations.
FinCEN provided the following estimates of the time required for filing. If these are anything like the tax return preparation estimates the IRS provides, caution is in order:
FinCEN estimates the average burden of reporting BOI [beneficial ownership information] as 90 minutes per response for reporting companies with simple beneficial ownership structures (40 minutes to read the form and understand the requirement, 30 minutes to identify and collect information about beneficial owners and company applicants, 20 minutes to fill out and file the report, including attaching an image of an acceptable identification document for each beneficial owner and company applicant).
FinCEN estimates the average burden of reporting BOI as 650 minutes per response for reporting companies with complex beneficial ownership structures (300 minutes to read the form and understand the requirement, 240 minutes to identify and collect information about beneficial owners and company applicants, 110 minutes to fill out and file the report, including attaching an image of an acceptable identification document for each beneficial owner and company applicant).
From a practical perspective, how can a tax professional determine whether a filing will be a 90-minute or 650-minute job until all relevant documents are reviewed? Furthermore, those estimates don’t include the costs of obtaining potentially necessary documents, such as filed-entity documents or a certificate of good standing.
Limiting CTA Engagements
Tax professionals might be contacted by long inactive or former clients. Decisions will have to be made regarding whether to re-engage those clients. In which capacity should an advisor accept a re-engagement? If a CPA filed income tax returns, or handled a consulting or accounting engagement for an entity a decade or more ago, the advisor might have no current information or documentation on the entity. Do the old files even exist as a starting point? For CPAs who did not maintain detailed permanent files for tax compliance clients, they may never have had entity documentation. If a CPA accepts a former or inactive client, the engagement letter should limit the scope of work to solely preparing a CTA filing and not accept responsibility for identification of beneficial owners, tax compliance, or other matters. What happens if a CPA accepts an old client only to assist them with their CTA filing and there are significant issues in the tax returns for the entity that the CPA was not involved in? Might the CPA be tainted by those issues? If the engagement is to be broader, consider how to bridge the gap in time, services, and documents. Should the engagement agreement include an indemnification for any fines assessed by FinCEN with respect to incorrect information (to the extent the incorrect information was supplied by the client)?
CPAs should consider whether they even wish to take on a limited CTA filing engagement that does not include tax compliance or other matters. Is it worthwhile financially to accept a CTA filing engagement, given the limited nature of the involvement, the likely resistance some clients may have to pay fees for what they may view as a simple filing—not appreciating the complexity of the analysis and the steps that CPAs might believe necessary, as well as the risk?
Corrections to Filings
Once the initial filing is completed, how will CPAs and their clients identify when follow-up filings will be required to be made? That process seems more daunting than the initial filing. How will CPAs be aware of a change that may trigger additional filing requirements (e.g., when a trust protector deemed a beneficial owner of an LLC changes their address)? In any engagement to assist with CTA filings, CPAs might want to clarify that it is solely the client’s responsibility to notify the preparer of any future changes on a timely basis so that new filings can be made. In this scenario, advisors might need to include a primer regarding when the updates need to be made so that the client has been made aware of the requirement. CPAs might consider formally concluding (i.e., ending) the engagement after the initial filing (or assistance, depending on whatever the engagement entailed) so that it is clear that they have no ongoing responsibility to monitor facts that may trigger future filings (if such monitoring would even be practicable). That may also be prudent given the significant uncertainty as to the nature of the services and how they should be priced.
Once a CPA firm evaluates whether, and to what extent, it wishes to become involved in CTA filings, communications should then be prepared and sent to all clients.
It may be prudent for all advisors who might be perceived as having any responsibility to assist clients with CTA filings to inform clients of the CTA obligations, at least in general communications. And if the firm will not take any action with respect to filings for its clients, that point should be communicated in writing. This can be accomplished in a constructive and positive manner of providing information about the CTA and recommending that clients seek the assistance of other advisors if they require help.