Taxpayers are no longer required to report beneficial ownership information (“BOI”) to the U.S. Financial Crimes Enforcement Network (“FinCEN”). At least, for now.
In a January 2, 2025, post on its webpage following a merits panel in the Fifth Circuit’s decision to uphold the universal injunction issued by the U.S. District Court for the Eastern District of Texas in Texas Top Cop Shop Inc. v. Garland, No. 4-24-cv-00478, FinCEN informed the public that the BOI reporting requirements under the Corporate Transparency Act (“CTA”) and its regulations are on hold as long as a nationwide injunction of the CTA is in place. FinCEN added that existing companies required to file their BOI by January 1, 2025, will no longer face the associated penalties for failure to file while the injunction is in place. However, FinCEN did indicate that it would still be accepting taxpayers’ BOI reports on a voluntary basis.
The CTA was enacted to address the lack of transparency in corporate ownership. To that effect, the CTA requires certain businesses, such as domestic corporations, limited liability companies (“LLCs”), and other entities created by the filing of a document with a secretary of state or similar office to report information concerning their “beneficial owners” to FinCEN. The basis for this new reporting regime was to combat the fact that absent such transparency, certain actors are able to conceal ownership of entities and use that anonymity for terrorist financing, money laundering, tax fraud and more. It has been estimated that this reporting rule may apply to up to 32.6 million existing entities.
Since the law has come into effect, small businesses as well as member associations representing them have challenged the constitutionality of this new compliance requirement in various forums throughout the country. Several federal district courts in the U.S. have been divided on the constitutionality of Congress’ authority to impose this regime, however, the recent decision by the U.S. District Court for the Eastern District of Texas in Texas Top Cop Shop took things a step further, finding the law to be likely unconstitutional and determining that a nationwide injunction should apply, and the reporting rule should be stayed.
The DOJ promptly appealed this ruling to the Fifth Circuit, with a motions panel ruling in favor of the government on December 23, 2024, and granting a stay of the district court’s injunction pending appeal, only to see this order vacated on December 26, 2024, by the merits panel of the same Circuit. On December 31, 2024, the DOJ filed an emergency application with the Supreme Court to stay the nationwide injunction once again, or in the alternative, to grant a partial stay narrowing the injunction to cover only the parties identified in the original complaint.
The uncertainty surrounding this regime has not been limited to the courts but has even bled into Congress, with 44 members of the House issuing a letter to the Treasury and FinCEN on November 5, 2024, requesting that the effective date of the reporting requirements be postponed. Such a postponement was included in the initial stop-gap spending measure that was scrapped, with the eventual final spending bill not including a duplicate amendment to extend the initial deadline for compliance with the CTA to January 1, 2026. And with the onset of President Trump’s second term, it is important to note that there is uncertainty as to what influence the authors of the Heritage Foundation’s Project 2025, which called for the outright repeal of the CTA, will have within the new administration.
However, as noncompliance with the CTA can lead to significant civil penalties of $500 per day up to $10,000, as well as potential criminal penalties, we would continue to advise small business owners to be prepared to comply with the law.
While the Eastern District of Texas issued a nationwide injunction, this decision is still being litigated with the risk of a further stay of the injunction by the Supreme Court as there are other federal courts that have upheld the constitutionality of the CTA.
As such, it is recommended that small business owners do a self-assessment to determine whether it is in their best interests to allocate sufficient resources to prepare themselves to comply should the requirement go live again and to continue to consult with counsel to keep themselves abreast of updates as they are released.
David A. Kianpour is a Senior Associate at Zerbe, Miller, Fingeret, Frank & Jadav LLP. He has extensive experience in various tax evasion information reporting regimes, including FATCA and CRS. He also currently assists clients with general tax compliance and planning issues, as well as representation before the IRS and Tax Court in tax controversy and collection matters. dkianpour@zmflaw.com.
