The red-tape nightmare coming for U.S. small businesses

When next year rolls around, millions of company owners and representatives may be in for a very unpleasant surprise–unless they're fans of time-consuming paperwork.

January 1, 2024, is when new reporting rules kick in from the Treasury Department's Financial Crimes Enforcement Network (FinCEN). These rules require business entities operating in the U.S. to disclose information about their owners and registrants to the agency, pursuant to the Corporate Transparency Act (CTA), which was designed to prevent money laundering, financing of terrorism and other illicit activities.

Not all businesses are subject to the new requirements; there are 23 exemptions narrowing the scope. All in all, large companies–those that already report to the SEC or have $5 million in yearly revenue–are mainly spared, according to FinCEN's current language. But the agency estimates that 32.6 million small businesses will be legally obligated to comply come January, with five million more added every following year.

Kevin Matthews, assistant professor of accounting at George Mason University School of Business, says he is one of the few figures in the field sounding alarm bells about this. Along with Donald T. Williamson of American University, he wrote a special report for Tax Notes State compiling what's currently known about the new regulations. As a self-described "citizen-activist", Matthews sees it as his duty to spread the word that, as he says, "Look guys, there's this big thing that's about to happen, and it could affect God and everybody in ways that you don't understand."

In summary form, FinCEN's rules are clear enough. They call for businesses to identify their "beneficial owners", which would be anyone with "substantial control" or 25 percent or more ownership interest in the reporting company. Entities are also required to disclose their "corporate applicants", i.e. those that filed the company's formation documents with the state.

But deciphering the letter of the law is one thing–implementation quite another. Over and above the hurdles older companies may face in trying to track down owners and original applicants, Matthews says the realities of ownership structures present confusing questions. "It's easy when you have only one company," Matthews says. "What if I own one company that owns another, which in turn owns several others?"

Also, the 25 percent ownership-interest threshold could be a nightmare for international businesses. "Which rules are we setting up?" Matthews wonders. "Different countries have different ways of calculating." Matthews offers an example from his past experience as a CPA. "I previously had a client that owned 15 corporations all over Latin America. It took me hours to develop a spreadsheet figuring out the ownership interest."

Matthews predicts that the first year after the law comes into force "is going to be pain and frustration as people are trying to put stuff together". The chaos won't be limited to CPAs, but could envelop everyone from lawyers and accounting firms to "a carpenter who's got a bank account owned by an LLC not in his name" and countless others with no connection to finance.

So far, FinCEN has been almost totally silent about the finer points of the law and how the new requirements are to be satisfied. Matthews speculates this could be a sign of impending delay. He imagines "there's someone right now at FinCEN HQ whose life is being consumed with trying to get this set up in time. Maybe they're not at a point where they're ready to instigate that."

As a former naval officer responsible for financial management, Matthews is on board with FinCEN's mission to protect the U.S. financial system. "Following the money is how we protect the country," he says. At the same time, he claims that a little clarity from FinCEN would go a long way toward ensuring companies' smooth compliance. "The best-case scenario is that FinCEN puts out a statement saying, 'This is what we stand for.' You tell me the playing field and the rules, and I'll follow the rules. People need to know and maybe demand that FinCEN provide more fidelity."

Failing that, the best companies can do is learn what they can about the new rules. Matthews's detailed, point-by-point breakdown in Tax Notes State may be a good place to start. To remain blissfully ignorant, he says, is to court big trouble. "We've got this alligator coming to our boat, and it looks hungry and I don't want to find out if I taste like chicken."

Provided by George Mason University