Legal Thoughts – Episode 3 of the Corporate Transparency Act
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW | Transcript of Legal Thoughts
Published September 25, 2023
Topic: : “Corporate Transparency Act’s (CTA) Penalties and Intersection with Federal Tax Law”
Welcome to Legal Thoughts! My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, contracts, litigation and immigration law firm based in Dallas, Texas.
In addition to myself, we have Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Admin Assistant, Michelle Gutierrez.
On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will be interviewing me on the important topic of: “Corporate Transparency Act (CTA) Penalties and Intersection with Federal Tax Law”.
For today’s episode, we will focus on the Penalty Provisions of the Corporate Transparency Act and the types of actors who can be assessed the penalties. We will also talk about the IRS and FinCEN intersection in the U.S. Department of Treasury’s pursuit of tax evaders, tax fraudsters, and actors engaged in other financial crimes.
Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, contracts, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.
Good afternoon, Mr. Jackson. Thank you for agreeing to sit down with me once again as we begin to dig a little deeper into FinCEN’s new nation-wide enforcement of the Beneficial Ownership Information Reporting Requirements of the Corporate Transparency Act with respect to America’s small and medium sized businesses. At the end of Episode 2 of our CTA Legal Thoughts Podcast series, you warned that the CTA had teeth. Today, my questions are going to focus on how sharp those teeth really are and the intersection between the work of the Internal Revenue Service and the Financial Crimes Enforcement Network in fighting tax violations and other financial crimes. Our podcast audience, may have for sure, been sitting on pens and nettles dying to hear more about all this with how you left them hanging in our Episode 2 about CTA penalty teeth and all.
So anyway, Attorney, today, I will be asking you about the possible consequences if a small and medium sized business is required comply, but fails to comply, with the new CTA beneficiary ownership information reporting requirements..
Audience, let me start my questioning of Attorney Jackson like this: first and foremost, before we get started let me just give a summary of the types of questions that I will be trying to get answers to this afternoon. Hopefully, these areas will answer some of your questions; we do not address specific concerns in our Legal Thoughts Podcast, blogs or Law Watch Videos on our U-Tube Channel. Our publications, like these, are general. If anyone in our audience have specific questions they can call us, write us, or otherwise reach out to us.
(1)who should be concerned about the Corporate Transparency Act’s Penalty Provisions?
(2)what penalties are permitted under the Corporate Transparency Act Penalty Provisions? and
(3)how the Corporate Transparency Act’s Penalty Provision relates to penalties permitted for violations of other laws in the United States, say the Internal Revenue Code; for example?
Now that our stage has been set: Let’s get smarter with our third and final podcast in our Legal Thoughts podcast series dealing with this new federal law called– the “Corporate Transparency Act.”
Mr. Jackson, let’s start Episode No. 3 of our CTA series of Legal Thoughts podcast, right now.
Attorney, I know you talked a lot about the beneficial ownership information reports and 25% ownership interest and such in Episode 2 a couple of weeks ago. I want to circle back and dig deeper into the CTA; so this is my first question of today:
Who should be concerned about the Corporate Transparency Act’s Penalty Provisions?
ATTORNEY ANSWER – QUESTION 1
Mlaah I appreciate how your set the stage for our audience and me. So, I will begin pointing out the actors who should be concerned about the Penalty Provisions in the Corporate Transparency Act. So let me start with actors on the stage.
First Actor: Domestic and foreign reporting companies are defined in the CTA as any business entity structured under any State or Tribal business organizational laws.
Second Actor: Beneficial Owners are defined in the CTA as anyone with 25% or more equity interest in a domestic or foreign reporting company.
Third Actor: Individuals with Substantial Control of the reporting company. This term is defined in the CTA to include literally anyone who has substantial control over the direction and decision making in a reporting company. This includes members of the management team of the reporting company; such as, Chief Financial Officer, Chief Executive Officer, Chief Operating Officer, Treasurer, General Counsel, and President. The term includes anyone in the reporting company that directs, manage and control the reporting company. They all are covered under the CTA’s definition of Substantial Control and they all must file individually beneficial ownership information reports with FinCEN on the schedule I explained in our Legal Thoughts podcast’s Episode 2 a few weeks ago.
Fourth Actor: Conspirators and Co-Conspirators could be anyone who conspires with others to violate the CTA.
Fifth Actor: Anyone who misuse or access FinCEN’s national data base of small & medium sized businesses without authorization or misuse beneficial ownership information reports in violation of the Corporate Transparency Act (CTA).
INTERVIEWER: Mlaah Singh, Tax Law Clerk
Wow all the various actors are on the stage. So, now Attorney, let the curtains open!
Mr. Jackson, please answer my second question as it applies to—
(a) actor number one (this is the reporting company),
(b) actor number two (these are the beneficial owners,
(c) actor number three (these are individuals with substantial control, like the CEO of the reporting company),
(d) actor number four (these are conspirators and co-conspirators); and finally,
Okay Attorney Jackson, now that you have identified all the actors on the stage; please answer my second question, which goes like this.
What penalties are permitted under the Corporate Transparency Act Penalty Provisions? Please explain as clear as possible the potential CTA penalty exposure of the various actors on the stage. Please help our Legal Thoughts audience to understand how the CTA Penalty Provisions work as it applies to America’s small and medium sized businesses and those who owns and operates them.
ATTORNEY ANSWER – QUESTION 2
That is an excellent way to organize my answer because law is complicated and the Corporate Transparency Act is no different. It is a sprawling law designed to catch all kinds of actors engaged in various kinds of financial crimes and deception, such as, Covid-19 relief abuse, money laundering, tax fraud, tax evasion and a host of other financial misdeeds through the use of shell companies, structured business entities of all sizes, doing business in deceptive arrangements, such as, deceptive DBAs and a host of other entity fictions spanning across interstate borders and even international borders.
Mlaah, I am saying all this so that our audience will understand that the penalties permitted under the Corporate Transparency Act depends upon the actors, their culpability and the intersection of the CTA with other international, federal, state and local laws. Violators of the CTA could also be violating other federal laws, such as, the Internal Revenue Code in particular; but also state and local laws could be violated by actors who violate the CTA. I am going to limit my discussion in this podcast to penalties under the CTA and possibly the Internal Revenue Code. But our audience must understand that this is not an exhaustive listing of possible penalties that violators of the CTA may face, nor is it intended to be an exhaustive listing of possible civil and criminal penalties that might be possible under other international, federal, state and local laws for crimes uncovered by investigators and prosecutors using the data collected and stored by FINCEN under the CTA. Anyone subject to the mandatory reporting requirements in the CTA should consult their legal advisors and counselors when complying and even contemplating and planning to comply with the CTA’s beneficial ownership information reporting requirements. There are serious civil and criminal consequences for violation of the CTA.
Mlaah, since I have now further set the stage with the seriousness of all this; let me now briefly answer your question as to the actors identified on the stage.
First Actor No 1: Reporting Company- reporting company’s who willfully impedes the filing of a beneficial ownership report, causes an inaccurate report to be filed, or otherwise conspire in deceit in filing a beneficial ownership information report to be filed with FinCEN shall be liable to the United States for a civil penalty of not more than $10,000 and may be fined under title 18, United State Code, imprisoned for not more than 3 years, or both upon conviction. These CTA penalties applies to initial beneficial ownership information reports, corrective reports and the annual beneficial ownership information report. Again all kinds of other international, state and local laws could be implicated for fraudulent and deceitful behavior related to beneficial ownership information reports.
I am going to take actors numbers 2, 3 and 4 together because the CTA penalty provision states, in part, that in general, it shall be unlawful for any person to affect interstate or foreign commerce by knowingly providing, or attempting to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph, to FinCEN.
It is also a violation of the CTA penalty provision if anyone willfully fail to provide complete or updated beneficial ownership information to FinCEN.
Further it is a violation of the CTA penalty provision if anyone knowingly disclose the existence of a subpoena, or other law enforcement request under the CTA.
Although I discussed Actor One (the reporting company), separately, every single violation that applies to Actors 2, 3 and 4 also applies to Actor number one– the reporting company.
Note: the CTA penalty provisions do not permit a penalty for negligent violations of the CTA Beneficial Ownership Information Reporting requirements. There are also certain statutory exempt individuals and entity actors. Minors or underage actors and several other types of actors are also statutory exemptions from the CTA’s reporting and penalty provisions. However, those professionals who advise the actors on the stage are included in the meaning of the CTA’s Penalty Provision term, ‘anyone’ ; such as, accountants, lawyers, consultants or anyone else advising small and medium sized businesses. Creditors of reporting companies are, for the most part, statutorily exempt from the CTA reporting requirements, but, not always.
Reasonable Cause Defense Provision: The CTA Penalty Provision states that the Secretary of the Treasury may waive the civil and criminal penalties of the CTA upon determination that the violation was due to reasonable cause and was not due to willful neglect. This CTA waiver provision opens the door to lawyer’s advocacy possibly before FinCEN and even in appropriate judicial forums.
Statute of Limitations: the CTA has a six year statute of limitations. That mean, violators who file a defective report is legally exposed for six years. Typically, in law, a statute of limitations for violation or prosecution does not begin to run until a suitable report is filed in compliance with an actors obligations under the statute. There appears to be nothing in the CTA that alters this general rule in federal law.
Mlaah, I know this has been a long answer; but, I am trying to cover a lot of territory and make the Penalty Provisions of the Corporate Transparency Act as simple as possible to our Legal Thoughts podcast audience. This is a very complicated new federal law. It is a new law enacted in 2020 and it is being implemented and enforced by FinCEN on the time-line that I explained in our Legal Thoughts Podcast’s Episode 2 a few weeks ago. Our listeners who missed Episode 2 in this series of podcasts on the CTA should go back and listen to Episode One and Episode 2.
Let me at this time move on to Actor No. 5 on the stage. Actor No. 5 are organizations and people who violate the Corporate Transparency Act because they either access FinCEN’s national data base without FinCEN’s approval or they use the beneficial ownership information report in violation of the CTA.
The CTA penalty provision states that the criminal penalties provided under section 5322 apply to misuse and unauthorized disclosure of beneficial ownership information. Bottom line– this means potentially years in federal prison upon conviction for misuse and unauthorized access to FinCEN’s secure national data base of America’s small and medium sized companies. I might note here that FinCEN’s national data base is not available to the public.
INTERVIEWER: Mlaah Singh, Tax Law Clerk
Attorney Jackson, no need to apologize for going slowly through the penalty provisions of this complicated new law. I suspect our Legal Thoughts podcast audience appreciated your professorial approach to explaining this difficult material.
Mr. Jackson thanks for the insights you provided today with respect to the penalties permitted under the new Corporate Transparency Act.
You mentioned earlier in this podcast something about penalties under other international, federal, state and local laws that could be intersecting with the penalty provision of the CTA. That sounds extremely interesting. Our audience might be curious about your comment – you made in passing. Particularly, I think it would help if you explain how the Corporate Transparency Act relate to the Internal Revenue Service because it is likely very clear to our podcast audience that the United States Treasury has been vigorously enforcing the federal tax laws forever. Most individuals and businesses listening to us right now, most likely, have been filing federal tax returns with the IRS for years. Are there very serious tax offenses correlated to violations of the Corporate Transparency Act?
You have throughout this Legal Thoughts Podcast series dealing with the Corporate Transparency Act stressed how important it is that all small and medium sized business owners in America should know about the Corporate Transparency Act. You said in Episode 2 of our podcast that the CTA is going into effect beginning January 1st, 2024 for certain new businesses and by January 1st, 2025 for those businesses already existing on January 1st 2024. Our listeners who did not hear the first two podcast in this series may want to visit our Legal Thoughts Podcast where ever they listen to their podcasts.
Thank you for your time this afternoon; Mr. Jackson. If you could clarify what you were saying about the intersection between federal taxes and the Corporate Transparency Act, I think our podcast audience would be grateful. So let us all get smarter this is my last question in this CTA series.
Attorney Jackson, does compliance with the Corporate Transparency Act have any affect on compliance with federal tax laws?
ATTORNEY ANSWER – QUESTION 3
Mlaah, thank you for that very astute final question. Remember what I said in our Legal Thoughts Podcast’s Episode One. The Congressional intent in passing the CTA, and FinCEN’s implementation of Section 6403 of the Corporate Transparency Act (CTA), enacted into law as a part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), that describe who should file a beneficial ownership information report with FinCEN; the public policies behind enacting and implementing these new laws are to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity committed by actors using corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through use of the U.S. financial system. In its final implementation rule issued September 30, 2022, FinCEN gives a detailed analysis of the problem that it has been charged to solve. FinCEN talks about tax evasion, tax fraud and Covid-19 relief violations and violations by shell companies large and small. They even use some recent Department of Justice convictions to explain the problem confronting the nation. Artificial intelligence enabled data bases and networks are likely to result in exposing financial deceit, corruption, and illicit activity of businesses of all sizes and structures that has been long hidden from audit examiners, investigators and prosecutors. The Corporate Transparency Act was passed by Congress to expose financial crimes. The CTA does not say how far back into the past investigators can go investigating crimes under other statutes and laws.
As I pointed out in Episode One, the reporting companies are not limited to corporations; reporting company is defined in the CTA as any entity structured under any business organization code of any State and of any Tribal laws. That includes the smallest of the smallest limited liability companies and any other business entity structured under State and Tribal business laws. Also, arguably the definition of reporting company also includes businesses who are “doing business as” and are often referred to as DBAs. To the extent DBAs have filed organizational or formation documents with, say the Secretary of State, or local, city and county officials they could be required to file beneficial ownership information reports with FinCEN. DBA’s historically have been used by small and medium sized businesses; and sometimes used to deceive the public, engage in financial deceit and tax evasion. So the reach and scope of FinCEN’s activities and its national data base may expose violations of many jurisdictional laws, violations of professional ethics codes and uncover long-hidden deceit. For now, let me just turn to your question about the Corporate Transparency Act’s intersecting with our nations federal tax laws.
Most of our audience has, likely, heard of the Internal Revenue Service. The Internal Revenue Service is a federal agency of the United States Treasury. The IRS is charged with the responsibility to enforce the federal tax laws of the United States. The United States’ tax laws are codified in United States Code Chapter 26; we commonly refer to that as the Internal Revenue Code. The Internal Revenue Service consist, broadly of two divisions. There is the Civil Division where tax returns are processed from all kinds of taxpayers from around the world who must comply with the Internal Revenue Code. There is the Criminal Investigation (CI) Division who conducts criminal investigations regarding alleged violations of the Internal Revenue Code. The Department of Justice pursue prosecution referrals from CID.
So, in answer to your question; the IRS can assess a host of civil penalties ranging from negligence penalties, failure to file penalties, failure to pay penalties, accuracy-related penalties, understatement of income penalties, and many-many-more penalties going all the way up to the 75% civil fraud penalty for certain violations of the Internal Revenue Code. The work of the Civil Division is likely to touch on the work of FinCEN because tax returns, if any, filed with the IRS by the actors who FinCEN uncover engaging in illicit activities through their national data base could aid the IRS Civil Division in uncovering tax fraud, tax evasion and other federal tax violations.
As for the Criminal Division, as I have mentioned; this division of the IRS is tasked with investigating tax crimes and making referrals to the Department of Justice for possible prosecution. Any person who willfully in any manner attempts to defeat, actually defeat, fail to pay, evade any tax under the Internal Revenue Code could be fined not more than $100,000 (individual violators), and $500,000 (corporation violators). Violators of the Internal Revenue Code could also be imprisoned for up to five years in addition to the civil fines.
Our audience need to know that violations of the Internal Revenue Code is extremely serious and the IRS has been pursuing tax violators through their Civil Division and Criminal Division for years. They will have access to FinCEN’s national data base of small and medium sized businesses that is likely to give them a treasure trove of information to pursue tax fraudsters, tax evaders and those cheating the federal tax system. FinCEN and the IRS has been working together on certain maters for years; take for example, foreign bank account reporting violations. The IRS is the agency that pursue FBAR violators although FBAR’s are filed with the Financial Crimes Enforcement Network annually on April 15th. FinCEN is a federal law enforcement agency of the U.S. Department of Treasury. Our audience needs to know that! FinCEN investigates all kinds of financial crimes.
Let me end Episode 3 with this—- Beneficial Ownership Information Reporting Requirements must be taken extremely serious by all small and medium sized businesses structured and operating anywhere in the United States.
INTERVIEWER WRAP-UP: Mlaah Singh, Tax Law Clerk
Attorney, thank you for sitting with me today in our third and final Episode of our Legal Thoughts podcast series on the Corporate Transparency Act; FinCEN’s Beneficial Ownership Reporting Requirements; and the Penalty Provisions of the CTA with respect to several different actors. I hope our audience now understands what you meant when you said in Legal Thoughts Podcast, Episode 2; a few weeks ago, that the Corporate Transparency Act has teeth. Today, you have also clearly shown how federal tax enforcement by the Internal Revenue Service intersects with the investigations of the Financial Crimes Enforcement Network and the beneficial ownership information reports that certain small and medium sized businesses will be required to begin filing after January 1st, 2024. That is only a few months from now, Attorney!
Our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.
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ATTORNEY’S CLOSING REMARKS:
This is the end of “LEGAL THOUGHTS” for now
Thank you for giving us your ear today as we explained the Corporate Transparency Act’s (CTA) Penalty Provision and the intersection between the Internal Revenue Service and Financial Crimes Enforcement Network’s efforts to combat illicit activities, corruption, tax fraud and tax evasion. Our listeners would like to read our tax blogs (we have published many-many tax blogs on various topics over the years), visit our law firm’s website at www.cjacksonlaw.com to access our free blogs. Our listeners should stay tune for future Legal Thoughts podcast on various topics in our practice areas.
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