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FinCEN crackdown on shell companies to begin in January

financial crime graphicBy Laurie L. Schweinle

On Jan. 1, Congress passed the National Defense Authorization Act for Fiscal Year 2021, which included the Corporate Transparency Act (CTA). CTA is a new provision intended to eliminate the use of shell companies commonly employed by criminal enterprises to launder money, finance terrorism, and otherwise engage in criminal acts.

Laurie Schweinle portrait

Laurie L. Schweinle is a litigation attorney who represents individuals and both privately-held and public companies in a wide range of civil litigation matters.

Effective Jan. 1, 2022, the CTA requires “reporting companies” to provide certain information to the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCEN. A “reporting company” is defined under the CTA as a corporation, limited liability company, or other similar entity formed pursuant to state or tribal law or formed pursuant to the law of a foreign country and registered to do business in the United States. The reporting companies must report “beneficial ownership” information to FinCEN. Subject to several exceptions, a “beneficial owner” is an individual natural person who directly or indirectly exercises substantial control over an entity or owns or controls 25% or more of the entity.

Beneficial ownership information includes the individual’s name, date of birth, current address, and a unique identification number, which may be a passport or driver’s license number. The information is required to be maintained by the secretary of the Treasury in a nonpublic database only accessible by authorized users, such as law enforcement with a warrant or financial institutions with appropriate permission.

The CTA is intended to target entities typically used as shell companies, such as small LLCs or those formed under the umbrella of a large company. The law excludes reporting requirements for other entities, such as publicly traded companies and many financial services institutions, because existing reporting requirements already provide for ownership transparency.

Entities formed prior to the effective date of the regulations will have two years to provide beneficial ownership information. Entities formed after the regulations go into effect must provide the required information at the time of formation or registration. Additionally, FinCEN must be updated within one year of any changes.

Because violators of the CTA will be subject to civil and criminal penalties, entities should monitor when these regulations go into effect and review them carefully to ensure compliance. Entities may also want to consider developing a strategy to ensure future compliance. Without regulations in place, there are still many unknowns, but the effects of the CTA are certain to impact both foreign and domestic businesses in a significant manner.

This article originally appeared in The Journal Record’s Gavel to Gavel column. View it HERE.


For more information about how the information in this article may impact your business, please call 405.606.4728 or email Laurie L. Schweinle.

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Breaking News: IRS issues guidance on Trump’s payroll tax deferral order

On Friday, August 28, 2020, the IRS and Treasury issued guidance implementing President Trump’s order to defer collection of some payroll taxes amid the coronavirus pandemic.

Phillips Murrah attorney Jessica Cory

Jessica N. Cory represents businesses and individuals in a wide range of transactional matters, with an emphasis on tax planning.

On August 8, 2020, President Trump issued a Presidential Memoranda, commonly known as an Executive Order (the “Order”), to defer the withholding, deposit, and payment of certain payroll taxes on wages paid from September 1, 2020 through the end of the calendar year.   The Order applies to any employee whose pretax compensation is less than $4,000 per biweekly pay period (or $104,000 per year, on an annualized basis).  The Order permits the employers of these eligible employees to temporarily suspend the 6.2% Social Security tax typically withheld from employees’ paychecks.

The Order has raised a number of questions for employers and payroll companies considering whether to implement the deferral.  For example, the National Payroll Reporting Consortium (“NPRC”) recently raised concerns about whether sufficient time is available to implement a deferral option by September 1, given the substantial programming changes that such an option would require. Because payroll systems are typically designed to use a single Social Security tax rate for the full year, for all employees, it may be challenging to change a reporting system to apply a different tax rate for part of the year, beginning mid-quarter, for only certain employees of certain employers.

In addition to practical challenges relating to implementation, the Order also raises liability concerns for both employees and employers, who are dually liable for unpaid payroll taxes under the Internal Revenue Code. Under Code Section 7508A, the Secretary of the Treasury can delay tax payments for up to a year during a presidentially-declared disaster, but no authority exists to authorize forgiveness of those deferred amounts. Accordingly, employees, employers, or both could be held liable for any deferred payroll taxes after the deferral period ends. This could represent a substantial burden. For example, for an employee earning $50,000 per year, the deferral would allow the employee to take home an additional $119 per paycheck during the deferral period. But, without Congressional action to authorize forgiveness of the deferred taxes, that employee—or his or her employer—would be facing a $1,073 tax liability in January.

Based on guidance released today from the Treasury Department in Notice 2020-65, employers who opt into the deferral program will be required to collect the deferred taxes ratably from their employees during a four month repayment period beginning on January 1, 2021, through increased withholding. Accordingly, during the repayment period, employers will be required to withhold 12.4% from their employees’ paychecks, rather than the normal 6.2%, to repay the payroll tax liability accumulated from September to December. The guidance does not indicate how an employer should collect the deferred taxes from an employee who terminates his or her employment prior to the end of the repayment period but indicates that employers may make other “arrangements … to collect the total [deferred tax amount] from the employee,” if necessary.

The guidance offered on Friday indicates that the Treasury intends to put the onus of repayment on the employer, with the employer potentially subject to interest, penalties, and additions to tax beginning on May 1, 2021, if the employer is unable to collect the accrued tax liability from its employees. Accordingly, given the voluntary nature of the deferral, the potential liability involved, and the costs and complexity associated with upgrading their payroll systems to accommodate the deferral, employers have a strong incentive to opt out and continue withholding for now.

To the extent an employer does want to participate in the tax deferral, the employer should consider establishing a procedure to allow eligible employees to opt in to the deferral. This procedure should require any employee opting in to provide the employer with a written and signed statement that:

  1. Acknowledges that any deferred taxes will come due in 2021.
  2. Authorizes the employer to withhold tax at a double rate, consistent with the guidance provided in Treasury Notice 2020-65, for those pay periods falling in the four-month repayment period.
  3. Agrees that in the event the employee’s employment is terminated prior to the end of the repayment period, for any reason, the employer can set off any remaining amount owed to the employee by the amount of outstanding deferred taxes, that the employee will be liable for any remaining amount, and the employee will reimburse the employer for any associated liability, including penalties and interest, as necessary.

Employers who decide to establish such an opt-in procedure should consult with counsel to ensure compliance with state labor laws.


For more information on this alert and its impact on your business, please call 405.552.2472 or email me.

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