What You Need to Know About Beneficial Ownership Information Reporting | Part 2

In Part 2 of their BOI series, Roger and Annie tackle the most challenging aspects of beneficial ownership reporting requirements, focusing on determining who qualifies as a beneficial owner and the significant penalties for non-compliance. They dissect FinCEN's FAQs about substantial control while highlighting concerning gray areas that could put both business owners and tax professionals at risk. The discussion provides critical guidance for practitioners considering whether to offer BOI services, emphasizing protection strategies like engagement letters and insurance coverage given the potential $591 daily penalties and criminal consequences.

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• (00:00) - Welcome to Federal Tax Updates
• (01:41) - Overview of Beneficial Ownership
• (02:43) - FAQs and Compliance Guide
• (06:34) - Reporting Requirements and Deadlines
• (14:26) - Defining Beneficial Owners
• (17:01) - Indicators of Substantial Control
• (29:18) - Accountants and Lawyers as Beneficial Owners
• (32:40) - Clarifying Beneficial Ownership
• (33:51) - Community Property and Beneficial Ownership
• (35:02) - FinCEN's Approach to Reporting
• (37:13) - Penalties and Enforcement
• (42:11) - Practical Implications for Accountants
• (52:59) - FinCEN Identifiers Explained
• (55:47) - Final Thoughts and Recommendations

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Creators & Guests

Host

Annie Schwab, CPA

Franchisee Operations Manager at Padgett Business Services

Host

Roger Harris, EA

President at Padgett Business Services

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Hello everyone. It's time for another federal tax update podcast. It's Annie Schwab. Annie, welcome.

Annie Schwab: Hello, Roger. Good to see you again.

Roger Harris: And I'm Roger Harris. Uh, this is episode two of a two part series. This is the first time the federal tax update has ever put out a series of two podcasts. I don't [00:00:30] know that it's magical. You listen to one first before you listen to the other, but we've tried to structure it in such a way that this one will be better if you've heard the first one. So to be sure, Annie, if you didn't listen to our first podcast in this series, how about kind of summarizing? What we talked about in the earlier podcast is what we're talking about beneficial ownership interest. Let me let me make sure I mentioned that because we're getting to the point of the year where, uh, we're going to have to start doing something we can't keep waiting [00:01:00] to see if we get delays or changes. And so we're trying to go through the FAQs and help you understand the the process and put your companies plans together for offering this service or make the decision you're not. Whatever you decide. So any before we start into the details of this one, why don't you remind people what we covered in the first one and then we'll get started to do so?

Annie Schwab: Um, so today's focus will be primarily on beneficial information [00:01:30] reporting. Um, as Roger said, this is part two. In part one, we focused on the company applicant and the reporting agent and some of the reporting requirements. So the FAQs published by FinCEN are about 59 pages. It's broken into sections. And these FAQs have been released at different times. Updated, published. You'll see on the FAQs when they were dated. As of today, [00:02:00] the information that we're providing you is from the FAQs that were last updated on October 3rd. So just keep that in mind. We're not going to cover all of them. We're going to cherry pick some of the FAQs that are probably more relatable to small business owners. And this is pretty much all we've got from FinCEN. They have a small entity compliance guide that's also on the website. It's kind of a similar version, more of a flowchart kind of thing, but it covers basically the same thing that the FAQs [00:02:30] covered. So because we're stuck with just this FAQ document on FinCEN, that's what we're going to talk about today. We're going to focus on who beneficial owner is compliance and enforcement issues. And we'll touch on a few things that was mentioned in the first one. But I agree with Roger. If you're tuning in and you haven't seen the first one, probably better to go back to the first one before watching this one. Yeah.

Roger Harris: It just makes more sense. Now [00:03:00] again, it depends on your knowledge and where you are in your journey with the boy and whether you've done some research. But we have to assume that we have an audience of a lot of different levels of understanding. So the first one would be helpful if you kind of started this with, I'm not sure what this is, but I know everybody's talking about it. Then I would go back and listen to the first one. Yeah for sure. Um, we're going to refer back to some of the things we said on the first one where we kind of teased what we were going to be doing here, but this is kind of the, in [00:03:30] my mind, kind of the meat and potatoes of what makes this more challenging than it appears. Um, I said in the last podcast that Vincent talks a lot about it only takes 10 or 15 minutes to file the form, and I agree with that. It only takes 10 or 15 minutes to file the form, but it's not the filing of the form that makes this somewhat challenging. And, uh, and but I will give them credit for this. The FAQs aren't bad. It's just. That's all we got. You know, it's the you know, if [00:04:00] the FAQs were supplementing more examples, court cases, real life scenarios, court cases or what happened, you know, and and you and I can talk about this, you know, we went out and secured a insurance partner that would cover these services. And it's even challenging for an insurance company. A lot of companies.

Annie Schwab: Won't check your policy for sure because it's not guaranteed to be covered.

Roger Harris: Yeah. And and even those that will don't really know exactly what they're covering [00:04:30] completely because they're faced with the same challenges we are in terms of, well, what about this versus that? There's no clear guidance, there's no history, there's no court cases. So insurance companies are taking somewhat of a shot in the dark as well. And we'll probably refer to that. So but Annie made the key point there as we go through today's particularly because we're going to talk about penalties, enforcement, things such as that, you need to make sure you're covered if you're going to offer this service [00:05:00] and don't come and talk about, well, my clients are small clients. They can still go to jail. And I don't care how big your business is, you're not going to be happy if you get sent to jail because your accountant didn't do something right with your boy report. So you know whether you need E and O insurance is not based on the fact that your clients are big or small or large or whatever. It's the fact that you're entering into providing services that could create problems for them if you [00:05:30] don't get it right. Yes.

Annie Schwab: So and I will say this was something that came about in 2021. It's not like brand new, but they have struggled. Fincen has struggled, um, at as a whole to bring awareness to this. So there are a lot of companies out there who have no idea that they're required to do this. When is it due? What happens if something changes? So a real lack of awareness. I know [00:06:00] FinCEN has tried to do some outreach programs and webinars and and obviously with the FAQs being updated. But it really it's unfortunate because the penalties are so steep and the awareness is so minimal that I'm sure they're going to be people who are caught off guard. And to be honest, they haven't addressed that. Like, you can file late, but it doesn't tell you. Like, are you going to get a letter? Do you how do you pay this penalty or what? What are you subject to? I mean, they really haven't you get a penalty. They haven't gone [00:06:30] through that. So anyway.

Roger Harris: Yeah. And yeah. And again just a couple of reminders. This this is targeting this is this law was passed to help target money laundering that that the people believe in. Federal government is going on in small businesses. So there's two stages. You got to report information about the company. And we covered that pretty much in the first webinar. And then you have to report the what they call the beneficial owners of that company. And that's what we're going to spend [00:07:00] a good bit of time on today in this webinar, because some of it's black and white and some of it's not. And this is where we get into, uh, some danger zones. So I think it's applicable here. Before we get into the beneficial owner to remind in our last podcast, we talked about practice of law. And because this is a legal decision in some instances, that there's a law that was passed that created this, that as most [00:07:30] laws do, leave some open interpretation to parts of it. And usually over time those interpretations get made by courts or rulings or guidance or whatever. And so we have things to fall back on so that we're not interpreting law, we're taking what's already happened and applying it, but we don't have that in this case. So we have to be careful that we're not doing what is considered the practice of law by trying to interpret or guess what [00:08:00] Congress intended in their law. That is what a lawyer does. That is what an attorney is for. So when we get to those type things, it is our advice and the advice that we gave to all of our offices. Do not, under any circumstance give what could be considered legal advice if it ain't answered in the FAQs. We don't know the answer. That's go to an attorney, though some attorneys say.

Annie Schwab: The attorney may send you away, but [00:08:30] they don't want to take the risk.

Roger Harris: Either. But at least they don't. They can practice law. That is true. They may not know the answer, but they can practice law and we can't. So if whatever we talk about in our first podcast or this podcast, uh, I hope you get the message that if it's not answered in the FAQs. We don't have the answer, and we're not going to attempt to give you an answer. I'm not going to attempt to influence you to give. Come up with an answer. It's either you figure it out on your own or go talk to your [00:09:00] attorney. I'm not going to charge you enough to to go to jail with you. Right?

Annie Schwab: So. Right. And I well, let me put a little time, time frame just before we dive in. So if you're not aware, um, this so it is a report that if you were in business before January 1st of 2024, you have until the end of the year to file your initial report. And that's probably the majority of your clients, probably the majority of people listening [00:09:30] today. You've been in existence for for some time, and you have until the end of the year to file your initial report. However, if you are a company that was created or registered after or on or after January 1st, so in 2024, you only had 90 days to file that initial report. So if you were created in February or March, your time is up. Right? So that's that's the scary part. Um, and then once [00:10:00] you file, let's say whatever date it is, whether it's the end of the year, was it June? Who knows. Once you file that starts your clock. So that marks your timer basically. And if anything changes with the reporting company or the beneficial owner, that could trigger a 30 day notice to update the form. And we'll talk more about some examples that that might be as it relates to beneficial owner. But that's sort of the gist [00:10:30] of the timeframe. And you know, if you have clients, even your business clients, that you may do accounting work for 30 days, it's not a long time if something changes, if you only meet with them quarterly, you know, that's a discussion that you have to have with your client, um, providing some examples of things that they would need to get to you ASAP to make that 30 day timeframe. So that's kind of the the idea of why we're here today and why there's been a lot of talk about, you know, unfairness [00:11:00] due to the unawareness, due to the complications and the lack of guidance, etc..

Roger Harris: And why there's at least some potential that we get a delay until we get more guidance and we get more awareness. But again, that's probably not going to happen in time for us to to hold off and still meet the December 31st deadline if we don't get started.

Annie Schwab: I will say that in the FAQs, it very clearly says that you are not required to use an attorney CPA enrolled [00:11:30] agent to submit this. So the the owner, the business owner themselves could certainly go onto the website. It's free to do. They can go on the website. They fill out the form, they submit it, keep a copy. I mean, it's not required that you know, an attorney, CPA or enrolled agent or any third party has to be used in order to file the report, and.

Roger Harris: That may be the first decision you have to make after this webinar, if you've listened to both of them is, hey, do I just take the position? I'm just going to be informative and I'm going to tell my [00:12:00] clients about it, but I'm not going to help anybody, or am I going to actually get engaged in helping them with it? Then you have to set up engagement letters, check your insurance, you know, have a policy and procedures that you follow and then balance that against. What can you charge, uh, that's competitive in the marketplace for the service you're offering. So you don't have to do it. They don't have to use you. You can take the position. I'm just going [00:12:30] to tell you about it. I'm going to say, here's the FinCEN website. You're on your own. Or you can engage in putting together what we've done here at Paget for our offices. You know, the whole service about informing clients engagement letters. We secured an insurance cover company that will cover it, but if you're going to get into it, this is not something you just. What's the old thing? You know, you can't jump in the water and get half wet. You know, you're either in or you're out. And and that's really what the first decision you have to make when [00:13:00] we finish here today is, are you in or are you out? I think what we're going to start with today, and I'll let Annie, because it seems simple in some instances, and yet it can get really complicated in others. And then we'll obviously spend time on what the penalties and ramifications of mistakes are. But we talked about how to report the company and all we keep you keep hearing us talk about is beneficial ownership beneficial ownership. So we're going to start now talking about what is a beneficial owner [00:13:30] for this. So Annie let's start with the FAQs as written because it sounds so easy in the beginning. So Annie why don't you talk about d section d beneficial owner. D sure.

Annie Schwab: The first question, and I'm sure this is the question that you have to who is a beneficial owner of a reporting company? So just tell me who has to be has to be listed on this form. Um, and [00:14:00] from the FAQs it says an individual. So not other entities, corpse trusts, all that kind of stuff. An individual who either directly or indirectly, number one, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership. So doesn't sound so hard on the on the surface.

Roger Harris: No substantial [00:14:30] says under that. Go ahead. Right. Beneficial owners must be individuals. Trusts, corporations or other legal entities are not considered to be beneficial owners.

Annie Schwab: Just individuals.

Roger Harris: Because there must be individuals. Trusts, corporations and other legal entities are not considered beneficial owners. So how hard can that be?

Annie Schwab: Well, do you know I like this one? How many beneficial owners can you have? Well, there's no maximum there. So, you know, if a reporting company does not [00:15:00] have any individuals who own or control 25%, then you might be thinking, hmm, do I need to put somebody on there? And FinCEN expects that every company will have someone who substantially controls that entity, and whether they own 25% or not, they need to be listed as beneficial owner. So right. That's getting a little tricky that.

Roger Harris: Yeah. So from that, you come to realize that the definition of 25% [00:15:30] can't be all there is, because you could very easily have a company where nobody owns 25%. So it's that other paragraph or that other sentence that says exercises substantial authority. So that's the big one D2.

Annie Schwab: So d2, d2.

Annie Schwab: Keep that one in your short list of FAQs to go to go read because it says very, very, very first sentence. What is substantial [00:16:00] control. An individual can exercise substantial control in four ways. If the individual falls into any of the categories, they would be exercising substantial control. Roger. Do you want to take the first one?

Roger Harris: Well, and again some of these are pretty clear. But we're going to always save the best for last. So um, and again, if you already own 25%, none [00:16:30] of I mean and they're one of these, they're already being reported anyhow. So, so we're, we're talking about someone who might control less than 25%, but is a senior officer the company's president, CFO, general counsel, chief executive officer, chief Operating Officer and I love this one or any other officer who performs a similar function. So think of it. And again, we're dealing in most cases with [00:17:00] small businesses. Remember this is a target for small businesses, not big companies. So we don't have 7 or 8 officers in a lot of our companies. It's, you know, a couple of people, but if they're listed, whether they own, they could own zero, they could own 0% of the stock. But if they're the president, CFO, CFO, CEO, you know, general counsel, you are considered to be a beneficial owner and therefore must be reported. That's [00:17:30] right. The rest of them get a little bit murky. Any comments on the senior officers?

Annie Schwab: No, but.

Roger Harris: Why don't you take the next.

Annie Schwab: One? The next ones.

Annie Schwab: So. Or it can be a person who has the authority to appoint or remove such officer or director for that matter. Uh, and so now you're now you're giving someone decision making, which is the fourth one. An individual is an important decision maker. No [00:18:00] definition of decision maker that I can see. Um, but the last one, the last one's the best one. Um, it's actually in the FAQs. It literally has a box and the title of the box.

Roger Harris: It's got its own box.

Annie Schwab: It's got its own box. It's gray and green, and the top of it says catch all. So they've got a catch. All right. Um, basically that says if you know, you perform duties, [00:18:30] you can still be you exercise decision making, substantial control. Then you could still be considered, even if you're not listed in one of the ones above. Very Gray Catch All is a really good title for it. Um, what a perfect title. What we're saying is, when in doubt, go ahead and list that person. Um, until you get further guidance that they're not necessarily going to be considered having substantial control.

Roger Harris: Yeah. This is where I think FinCEN [00:19:00] fails to understand the the realities of small business is that they lack a lot of the formality that these rules contemplate being in existence. Yeah, they're all supposed to have all these officers and yeah, they probably have some. But when it comes down to an important decision maker or the catchall exercises, new and unique ways to be substantial, for example, flexible corporate [00:19:30] structures may have different indicators of control. Then the indicators included here. So again could and this was one that I have personally been asking FinCEN for, for since we became aware of this. We're all aware in the tax code where husband and wives are mentioned. God knows how many times you know their relationship. We have things called community property states, which we'll touch on later. And we all know that we [00:20:00] may have a client who I'll say the husband. It could be the wife. Either one owns 100% of the business, goes to work there every day, and the spouse doesn't work there every day, but would never consider doing some of the things contemplated here, like firing an officer without talking to the spouse. So our spouses are automatically included as a in the catchall or in any other. What [00:20:30] is it, any other form of substantial control? You know where where you know, I will keep thinking that they should be able to give us examples. When you again, there is something for community property. But but a spouse is a common area where I think we're looking at, you know, a client and telling them this and they go, well, what about my spouse?

Annie Schwab: Family attribution rules could potentially pose an issue here.

Roger Harris: Yeah, it could be a child.

Roger Harris: Yeah. It could be a it could be a brother. It could be a child. It [00:21:00] could be any family member that this business owner relies on for help or advice. And when does that help or advice cross over into having substantial authority and control? This is where you could really get in trouble with the practice of law. Because these FAQs, as I said, are all that we have. So if it's not [00:21:30] spelled out in such detail that you can clearly answer that question by referring to an FAQ. This is where you could get in real trouble of being deemed to have been practicing law. You give the advice, and we'll go over some of these other examples that they give in a minute because it helps, but it doesn't completely answer the question. But if I tell Annie. If Annie asked me, is her spouse a beneficial owner? And I tell her my opinion [00:22:00] is no and she leaves her spouse off and FinCEN don't ask me how they're going to audit or when they're going to audit or what they're going to. I have no idea. But for some reason, they just pull Annie's business to look at, and they believe that Annie intentionally or willfully left her spouse off. Doesn't matter whether he's money laundering or not, even though that's the intent. It's that the intent was to leave him off. She's going to be subject to the fines that we talk about [00:22:30] later, and therefore she's probably going to want to come back at me because I'm the one that told her no.

Roger Harris: So this is where we're practicing law and we're exposing ourselves. If we get engaged in some of these decisions that I guess to people sitting around making these rules and with with, I don't think a complete understanding of the business is that because you're talking about 1 or 2 person business here, you're not talking about a [00:23:00] company with a formal board and all these officers and all this stuff. I mean, you know, they don't know all this. So this is where we can get in trouble. This is the one area that I want to caution everyone listening to this podcast. Do not do anything other than read to them what we're about to read to you and let them make the decisions. You can't do it because, um, despite Fincen's best efforts, I think it doesn't recognize how many small [00:23:30] businesses operate. So I'll get off my soapbox now, and I'll let Annie go into the question that FinCEN has put out, where they try to give you indicators of substantial control. Again, this is mostly for your clients to read. I would suggest that you give them copies of the FinCEN question and tell them this is your decision, not mine. So, Annie, go over what FinCEN says and then we can come back to is [00:24:00] it as black and white as this?

Annie Schwab: Sure.

Annie Schwab: And if you're taking notes, D3 is where this is. And it says one of the indicators of substantial control is that the individual is an important decision maker. Okay. So what are important decisions and important decisions defined by this FAQ includes decisions about a reporting company's business, the finances, and the structure. It involves an individual that directs, [00:24:30] determines, or has substantial influence. There's that word again over these important decisions, exercises, substantial control over the reporting companies. So they're basically saying decisions about the business, the finances and the structure. And they do give us a few examples of each. Um, again, clear not clear I'm not sure. Uh, so, for example, decisions about the business would be the nature, the scope, the attributes, the selection [00:25:00] or termination of a business line, or maybe a geographical focus, um, the entry into a termination or a fulfillment or non fulfillment decision or specific contracts. So someone who has makes decisions around that. Um, Roger, you want to take finances.

Roger Harris: Yeah. I mean reorganization dilution or merger. You know, again, I can see any of these things that Annie's discussed. And I'm reading, particularly when it comes to family members, [00:25:30] where you could go have discussions with family members or and we'll talk in a minute about accountants and lawyers. But a lot of people you could go talk to, well, when does a discussion cross the line of having substantial influence? I mean, you're influenced by everybody you talk to. When does one person cross over that line? So, uh, amendments of any substantial governance documents or reporting company, including the articles of incorporation or center information [00:26:00] documents, bylaws or significant policies and procedures? Again, that seems black and white. That seems clear. But when you are looking at things like substantial influence, uh, any I don't know about you, but I'm influenced by a lot of things, social media. I mean, there's all kinds of things that could be involved here.

Roger Harris: But when does it become substantial. I don't know, because it's usually a cumulative effect of all the. Influence that I've gotten. Now, there may be one person [00:26:30] that I go to and they say jump, I jump.

Annie Schwab: Then that's.A clear cut situation and they should.Be listening.

Roger Harris: That's clear. Yeah. We're going to list that person. So again, this is where particularly in small businesses who seek out advice in a lot of areas, you know a feller it could almost be a competitor for that matter. I mean, you could go, you know, some of these examples. You could go to your competitor down the street and be influenced by them. So does that mean they technically are a beneficial owner of your company, even [00:27:00] though your competitor? This is where it can get tricky. And this is where we have to be careful. And I hope and think over time we'll get clarity in these areas. But we don't have them today. And when we talk about enforcement in a little bit, we'll get into what can happen if you're wrong. And again, another area where if we had some clarity, these might not be as confusing or daunting as they are [00:27:30] right now. This will be important to all of our listeners. Question D6 says, is my accountant or lawyer considered a beneficial owner?

Annie Schwab: Well, if you listen to the first.

Roger Harris: What say you, Annie?

Annie Schwab: If you listen to our first podcast, you could tell my frustration with answers like it may depend or sometimes or maybe kinds of things. And this one of these is, is that so? It's the answer to the question is my is [00:28:00] my accountant or a lawyer considered a beneficial owner. And the answer is that may depend on the work being performed. So general accounting or legal services are not necessarily considered beneficial owners because of like an arm's length advisory, third party, professional service type thing, but it also could be considered substantial control. So if an accountant or a lawyer is designated as an agent of the reporting company, perhaps then you would be, or an individual who holds a position [00:28:30] of general counsel or senior officer may be so area of concern. Absolutely. Especially tax preparer accountant I would be very, very careful whether you are filing that report on their behalf. Um, do you have, you know, make sure you're not making any decisions related to beneficial owner?

Roger Harris: Um, yeah. I think this is a great place where they just don't understand small business and their relationship because, I mean, we know that when we have small [00:29:00] business clients, they ask us a lot of important. They may be tax related, but they could also be, you know, am I the right structure? All these can have financial implications. So is it financial discussions we're having. And going back to that, you know, am I the major influence if I say something, if they're talking about selling a business and they're contemplating, you know, the tax consequences of a sale is my advice about that. I think [00:29:30] they're trying to say no. They're trying to say that you're, you know, if you're just doing your normal job as the accountant and tax advisor, we don't consider that. But then say, yeah, yeah, that's the that's the frustration is I think I know what you're trying to say, but if you can find me and we'll get to it in a minute, over $500 a day, or send me to jail or send my client to jail because we interpreted that wrong. You know, I'm not comfortable. Just say it. I think they [00:30:00] I think they want to do it the right way, but I just don't think they understand how this is a technical term, loosey goosey. Sometimes things are in small businesses in terms, you know, they it lacks the formality and the relationships that I think the attorneys at FinCEN think exist in that small bakery with three employees and one owner.

Annie Schwab: And I think that's kind of what AICPA was really pushing, is just a little bit of clarity and real [00:30:30] life approach to it, instead of just a whole bunch of yes, no, maybe. So it depends. Sometimes if this then that it just it it's too it's too gray. Um, and so I don't know, maybe, maybe AICPA will get through to them at some point, but.

Roger Harris: We're all trying. Yeah.

Roger Harris: All right, let's go. Another one. Here's another one. Just the mere fact that you're a member of the board of directors of a company. Does that make you a beneficial [00:31:00] owner? No, it does not.

Annie Schwab: Um, you have to see if they own at least 25% or what kind of substantial control that they have over the company.

Roger Harris: So just still go back to the other rules. Just the fact of the board. What about this one? This one will apply to some of our clients. You know how we have to designate someone on a partnership return as the tax matters partner, and in some cases, the partnership representative? Does that make you a beneficial owner?

Annie Schwab: It depends.

Annie Schwab: My favorite answer. [00:31:30]

Roger Harris: There you go again.

Annie Schwab: Um, it's not automatic. Um, however, you may qualify as a beneficial owner if they exercise substantial control or own at least 25%. So they keep sending you back to the substantial control definition, not automatic. It depends. Maybe sometimes. Um, there we are again.

Roger Harris: All right.

Roger Harris: Well, I'm going to give you another one. Now this one just.

Roger Harris: Came out new.

Roger Harris: This I think you mentioned we we're doing this based on the FAQs [00:32:00] of October the 3rd. This one was one that came out on the third. And this is right in your wheelhouse. And I'll read the question. You do the answer. If one spouse has an ownership interest in a reporting company and the other is the other spouse also considered a beneficial owner if the reporting company is created or registered in a community property state. What say.

Roger Harris: Annie?

Annie Schwab: The FAQ answer is possibly and it says so.

Roger Harris: It's not. It depends. It's possible. [00:32:30]

Annie Schwab: It's possibly. Period. And then you get a whole two sentences to help you determine this. Whether the state community property laws affect a beneficial owner determination will depend on the specific consequences of applying to that state law. Okay. That was not helpful. If the community property state law says that both spouses own or control at least 25%, then both spouses should be reported as beneficial owners unless another exception applies [00:33:00] to them. So it's based on state law. And if it's deemed that they both own the 25%, then they both need to be listed unless they can find another exception Perception that prevents them from needing to be reported.

Roger Harris: Okay. So as we wrap up, beneficial owner with all this kind of gray area here, where should we shouldn't we. Are they aren't they FinCEN made? I [00:33:30] don't know if it's a formal comment, but I've heard them make this comment. Well, if in doubt, just put them on the initial form. Okay. I agree for the initial form that works because first of all, one thing you'll learn when you put them on the form, you don't tell them why they're there. You don't tell them they're there because they own 26% or because they're this. You just say, here's the beneficial owners. So their position is where in doubt every time it says it [00:34:00] depends. Or maybe it could be. Wish I knew that sort of thing. Just stick them on the form and then you're good to go. Why is that problematic in the long term.

Annie Schwab: Yeah.

Annie Schwab: Well you can't get them off.

Roger Harris: Right.

Annie Schwab: For one. And now if you if there's a change now you're chasing down any potential change a driver's license. They get married, they move anything. And so now you have all of this information that you have to track with only 30 days to get [00:34:30] it updated.

Roger Harris: Right. So what got you through the problem at the initial filing has enhanced and increased the problem of the monitoring of changes going forward, which is one of the hardest things for us to do because of the short timeline. We just aren't set up to do that. So I agree, throwing any questionable person on the form gets me through the initial, but now it's created the problem. What do I do about monitoring all these people that I've [00:35:00] put on this form and for changes? So, you know, I wish FinCEN had a better answer, but that's that's what they gave us.

Annie Schwab: So to the nitty gritty.

Roger Harris: You've talked about the report. Yeah. You've we've. Why does this. Why do we even care? Why are we so nervous about this and what we've talked about the reporting company. We've talked about beneficial owners. Why? Why is this a big deal? Why don't we just go out and do the best we can, take a flier at it and see. See what happens. And that comes down to [00:35:30] penalties and enforcement.

Annie Schwab: That's correct. And I will that is section K.

Annie Schwab: K and I'm going to read you a paragraph from section K number two. And then we can we can kind of chat about it. It says according to the Corporate Transparency Act, a person who willfully violates the boy reporting can be subject to penalties up to $500 a day for the violation. Um, and it's going to be adjusted for inflation. [00:36:00] A person who willfully violates this may also be subject to criminal penalties, up to two years in prison and a fine up to $10,000. Potential violations include willfully failing to file or willfully filing false information, or willfully failing to correct or update a previous report. I don't know about you, but 30 days to update a report [00:36:30] for a client that I see once a year is not worth two years in prison and $10,000 fine. That makes me nervous.

Roger Harris: What I really. What I really find interesting is this law. I mean, I guess it's in effect, but it hasn't. Even the deadline hasn't passed yet, and the $500 penalty has already been increased to $5. There you go. Because the law.

Annie Schwab: Because the inflation.

Roger Harris: The Law allows you to - Yeah. So so it's already gone from 500 to 591. [00:37:00] And in theory, the majority of the businesses hadn't needed to file the first report yet. So so now the penalty is actually almost $600 a day. And what's consistent in all of this? They keep talking about willful. Now, I guess a lawyer has in their mind some sort of legal training on when like when does ignorance or lack of doing something cross the line and [00:37:30] become.

Annie Schwab: Worthless or.

Annie Schwab: Fraudulent at that point, like what's.

Roger Harris: Or fraudulent?

Annie Schwab: Is it a threshold? Like what is it?

Roger Harris: Well, no. Because I asked. I said, how many days can you claim I just didn't know about it before. It becomes willful because and you know, their answer was, well, there is no days. I mean, it could be, and I understand it could be willful the first day and it could not be willful 500 days later. I get that from a legal standpoint. But you're asking [00:38:00] us to accept responsibility for some of the decisions that are being made, either us being the client or us being the company helping them. And you won't give us examples or anything to help us understand in your eyes, when does something become willful? Now what they're telling everybody, which is typical of government. Oh, look. Wait, look, this is new. We know it's all [00:38:30] new. You know, we're not after the people who make honest mistakes and do well again. I get all that. But how you. Oh, and we did get one. Good. I'm really going off base here. But there was a court case called the Chevron case that came out a few was ruled the Supreme Court ruled on a few years ago until that case got turned over. They were judge, jury and executioner. In other words, you couldn't appeal beyond them if you thought what you did wasn't willful. And they decided [00:39:00] it was. At least now we can take it to court. But now, how much money are you going to spend going to court, you know. I mean, that's better, but it's so we don't have cases, we don't have examples, we don't have definitions. I get that you're not after what you say is the honest business person, but how are you going to determine those people and any what's your thoughts?

Annie Schwab: I just don't.

Roger Harris: This is the crux of why this.

Roger Harris: Is hard.

Annie Schwab: I don't.

Annie Schwab: Know.

Annie Schwab: I think it's too risky. [00:39:30] I don't want to be in that position and subject myself to that. I wish that we would get just an extension so that, you know, these types of what if and how do you define willful and, you know, some examples of when it goes from honest mistake or negligence or ignorance whatever to willful, um, I, I don't know, I that's why we have to enforce having the client make the decision on their own. So as an accountant or tax preparer, even [00:40:00] attorney, there's you're going by what they interpreted, not you interpret it because you can be liable.

Roger Harris: This is where your engagement letter, engagement engagement letter is going to be hugely important here in terms of making sure that the client agrees that they're the ones making decisions. And and we'll talk a minute about some situations that we could find ourselves in. But let's let's expand on this. Any who is subject to these penalties. Is it just.

Annie Schwab: Anybody? [00:40:30] Anybody who is an individual that is determined to have willfully assisted in not filing on time, filing inappropriate information, not updating appropriately so it could be a company applicant could be a beneficial owner. Um, yeah.

Roger Harris: Well, let's talk about two. We in the in the first podcast we talked about company applicants. Can a company applicant be subject to these penalties?

Annie Schwab: Yes.

Roger Harris: So [00:41:00] again, going back to our discussion in the first podcast about setting up LLCs and corporations for clients. If you do that, you become the company applicant. And this says that you can be penalized as the company applicant. But let's take it a step further. How about the person who files the report? This is where it comes to us. Can a beneficial owner, uh, well, who can be held liable [00:41:30] for it if we just file the report for them, can we be held liable?

Annie Schwab: We could be. Yeah.

Roger Harris: Yeah. So these penalties can be applied to us, not just the beneficial owners. So in theory, they could find the owner and us if they determined that we were both willfully doing something wrong.

Annie Schwab: And here's another kicker. Once you're listed, even if you no longer have a business [00:42:00] relationship with this client you've disengaged from, from any type of services offered. You're still stuck on there. You can't get yourself off. Once you're on, you're on. And that's scary.

Roger Harris: Yeah, yeah.So, um, we got penalties for not filing the report. We got penalties for filing the report incorrectly. We got penalties for not updating the report. We got all these penalties and we, as well as the owner [00:42:30] of the business, could be held liable for the penalty. So we're back to willful again. You know, supposedly it's got to be willful. Here's a practical situation that I'm going to propose the question to Annie that all of us were going to deal with next year. I guarantee you we're going to deal with this next year. You're going to be doing someone's corporate tax return next March, and you're going to ask them, did they file a beneficial ownership [00:43:00] form and they were in business going into 2024 or hell, they started. It doesn't matter. They're late either way. They didn't meet the deadline. The deadline was December 31st, 2025. And you tell the client, well, you should have done a buoy report and it was due by December 31st. The penalty is $591 a day, and you're now 60 days late. And the client looks at it and says, what should I do? And what are you.

Roger Harris: Going [00:43:30] to tell them?

Annie Schwab: Go find.An attorney. That's what I'm.

Annie Schwab: Going to tell you.

Roger Harris: I don't know,

Annie Schwab: I'm going to say,

Roger Harris: Yeah, I don't know.

Annie Schwab: Unless something changes between now and when you're having this conversation. There's no guidance in these FAQs associated with other than you can file it late, but there's no guidance into okay, I file it late now what is there a way for me to give an explanation of why or ask for a waiver? Or do I have to write a letter? How are you going to come find me and give get me money. Like collect your money. Like what? What do [00:44:00] I do now? And those are not in the FAQs. So that's.

Roger Harris: And that's part of the frustrating we all know that's going to happen. And we've all pointed that out to FinCEN. Tell us what to do in that situation. Because at a minimum we're going to cause our clients to have to go pay an attorney who's probably going to say, I'll just file the damn thing and.

Annie Schwab: And wait.

Annie Schwab: And wait.

Roger Harris: And then that may be the right answer. But if that's the right answer, then tell us, because [00:44:30] we all know that's going to happen, and it just doesn't make sense that they can't tell us today how to deal with that situation. It could happen today that someone who formed a new company more than 90 days ago, and the attorney who formed the company didn't advise him about Bowie, didn't know about it. And now they come to us because they want us to do some accounting work for them, or some payroll work for him and realized that there are more than 90 days late. I don't know. I [00:45:00] agree with Andy, and what we're telling our office is until we get more information. First of all, if they just formed a company, send them back to the food company.

Annie Schwab: But some people can form companies on their own i mean, you can go on online and get, you know, form a company and get your Ein and start your start your business. So, you know, but if they have an attorney that helped them, I would that would be my first place to send them.

Roger Harris: Going back there if not, go find one because I'm not answering that. So, um, this is why this is important [00:45:30] and it's problematic and we need some help. But while we keep hoping for a delay or hoping for some additional guidance is these aren't small penalties. $591 a day is not a small penalty. Two years in jail is not something most people are interested in doing. I'm not going to be able to charge enough. I you know, it's going to be hard for me to charge enough to cover one day of penalties, much less a month of them or mere six months of them if they want to penalize me. So this is why this simple. [00:46:00] Oh, it only takes 15 minutes, you know, is, uh, got a problem? You know, it's got challenges. Because first of all, if there are 33 million small business owners that are covered by this, I want to believe, and I think I'm safe in believing that probably at least 95% of those are honest, hardworking people that aren't laundering. I think so, and yet we're having to jump through all these hoops [00:46:30] in hopes to find the bad guys. And I guess this is a good way to do it. But it bothers me that if we're if we're going to put the masses through these potential risk and this cost to pay us or to pay an attorney to do it, they should give us a system that is easily understandable, easily administered, and one that we can help our clients with, with confidence that we're not going to have found themselves trapped because these penalties.

Roger Harris: Let me make [00:47:00] one thing clear and then we'll get into some some final points. These penalties apply whether you're laundering money or not. This has to do with not doing the form, not laundering money and not doing the form right. You know, they don't have to prove you laundered money. They just got to prove you didn't do the form. And they say it was willful. So before we get into the identifier part, the kind of the last piece, any final thoughts, any on the enforcement and, and just the general concept and maybe talk a little bit about what we're doing at Paget, what we [00:47:30] think your program should look like if you're going to do this, given everything we've talked about. What, what, what pieces do you need to to offer this and, and be as helpful and as safe as you can to your.

Annie Schwab: So I will start with, um, as their tax preparer, their accountant. There is an obligation of informing them that this is around, so I don't I want everybody to understand, even if you choose, that this is not a service that you provide, [00:48:00] maybe you don't want to. You don't think you can make money off of it, or maybe you just don't want to get involved with it. That's that's fine. That that is absolutely fine. I would encourage you, though, however, to put it in some sort of communication to your clients that this is something that's new. What does it mean? We've created fliers and email templates for our offices to use to send to their clients, sort of with some basic information what the due date is and then, you [00:48:30] know, a call to action. So if they want help and one of our franchisees is willing to perform the duties, that means that franchisee has secured enough insurance. That covers, boy, they have an engagement letter. They have a process in place where it is the responsibility of the client to come to them within 15 days of any changes that would be required for the form to be updated. So we've.

Annie Schwab: We've thought about a process. It's not just a form. It is an ongoing service. [00:49:00] You may file the form one time. There's only it's not something you have to do every year. But after that initial form, any changes to that form have a very short time window. And that responsibility needs to be placed on the client and not on you. And you need to make sure that you have communicated how this works with the client, so that they understand what their responsibilities are and what your responsibilities are. And then pricing is another aspect that you'll have to to consider. But it's not an easy [00:49:30] decision, and it's probably not a service that every tax practitioner or accountant wants to take on. There certainly risks associated. And I imagine just like if it wouldn't be a podcast if I didn't bring up Irk Mills or something like that, I mean, there's going to be bad actors who are offering services or targeting your clients to offer services to do this for them, and some of them do probably do decent, honest work, and some may not. So [00:50:00] I believe that's also going to be hitting us in the future.

Roger Harris: Yeah. Again, it's it's something where we have an obligation to inform, but that's as far as it goes. But if you're going to do it, let's do it the right way. I joked the other day our engagement letter to to to set all the rules between the client and us is 2 to 3 times as long as the form that will actually be submitted, but that's the the level of detail that you need to [00:50:30] have to make sure that you are covered and the clients are making the right decisions and you're not making decisions. You then have to be careful not to be pulled into a decision that would get you in trouble. By practicing law, you've got to be disciplined in how you Communicating work. And again we've, we've put together a a cognito form for clients to fill out to give us the information that also reminds them of this is their information. We're not you know, we're not making this stuff up. We're not advising [00:51:00] them. So if you want to get into it, get into it the right way. It's something your clients need to know. They probably don't know about it. They're expecting you to be their advisor and their helper. But if you're going to do it, do it the right way. So, uh, the last thing I want to talk about is something that actually could make your life a little bit easier when it relates to this. And because you're going to all when you go look at the form, you're going to see it, you're going to go, well, what the hell is that? Annie? What is a FinCEN?

Annie Schwab: So you're right, it's right in the very [00:51:30] beginning of the form, the application, it says, would you like to get a FinCEN identifier? Um, and there is a FinCEN identifier for an individual and a FinCEN identifier for a reporting company. Very simple for the reporting company. It's a check the box on the application. Hey, please send me one for an individual. You do have to go online and submit documentation, driver's license, multi-factor authentication, that kind of thing. But what it does is instead [00:52:00] of using your Social Security number or your Ein, or reentering your address, date of birth, driver's license number, once you get a FinCEN identifier, I believe it's a nine digit number. You can enter that in replace of all the demographic data, driver's license, that kind of stuff, and it'll carry over to other forms so that identifier can be entered if you have multiple entities. And the idea is that it would link the entities together. So it's easier [00:52:30] on the data entry. And it should it something change. Like I get a new driver's license, I just have to update my fence and identifier for the new information, and it would spread that information among any place my FinCEN. So physically it's beneficial and it's free. There's it took me about eight minutes to get my FinCEN identifier, and that's because I had to go take a picture of my driver's license front and back and send [00:53:00] it there. But it's right. We haven't found the harm in it. So we are encouraging our our clients to go ahead and request one for the reporting company. You do it right there on the application and then take the ten minutes go online. Fincen identifier for an individual. I think it'll save time in the long run and protects your personal information.

Roger Harris: Yeah, it's one thing that can make your life simpler. So [00:53:30] get a FinCEN identifier. Make sure you get copies of when you complete the form. Make sure you get a copy for yourself. Give your client a copy because like you said, it's hard to go find a copy of that sucker after.

Roger Harris: You do it the first time, think about it. Come up with a good strategy. If you want to do this, come up with a strategy. We've all kind of sit around waiting. It's time to make a decision now. It's October and you know, we got to get all this done by December and see what happens. So it's time for us [00:54:00] to finally believe it's here. We've waited as long as we can. You know, it's. Yeah. Any wrap up, any comments? Again, if you didn't listen to the first podcast, please go back and listen to it, because we talked about the company and the company side of it. Then these two kind of are meant to be together together.

Roger Harris: They're like a couple, you know, you got to yes. You got to have them both know.

Annie Schwab: That would be my only advice. And as we mentioned, you know, we cherry picked some of these FAQs. If it's something [00:54:30] that you're going to decide that you're going to offer to your clients, print out a copy, read each and every one. Um, you can request to get emails from FinCEN. So if they update or add or monitor, you know, change one, you can get a notification that there's something new out there. I definitely would recommend doing that. And otherwise stay tuned. I'm sure if something happens, we'll be bringing it to you on another podcast. We'll be.Back.

Roger Harris: Yeah, but a good point. Read all the FAQs. We went through [00:55:00] as many as we could in as much detail as we thought was relevant, given our time restraint. We there's no way we covered every possible scenario. And you should read the FAQs for yourself. Make your own determination about what they mean and how they apply to your clients. This was hopefully to give you some some preliminary understanding before you do it, but do not take this podcast as the gospel, because a lot of this was our opinion and it represents what we plan to do, and it doesn't possibly [00:55:30] contemplate an individual client situation that you may have. So print out the FAQs. I wish there was more. That's all you got. Read them, apply them to your clients and make the best decision for you and them.

Roger Harris: Anything else?

Annie Schwab: That's it for me today. I know it was a little bit longer than we usually go, but hopefully you enjoyed it. And as always, continue to watch. Follow us. Invite your friends.

Roger Harris: Yeah, yeah. Invite people and hope this is helpful. And I have reason to believe there'll [00:56:00] probably be another mention of BOE before the end of the year on another federal tax update podcast, so don't miss another one. Annie thank you. Thanks for all you do and helping put this together. Thanks for joining me, as you always do on this podcast. Pleasure. I'm lucky to have you with I'm lucky to have you around to do this. So thank you and thanks, everybody for listening. Tell your friends about us. We'll be back soon with another Federal Updates podcast. Bye, everyone.