What are the Penalties for Not Complying — Willfully or Otherwise — with the Corporate Transparency Act?

When you hear or read about an individual spending two years in the slammer, you probably assume that person has committed at least a somewhat serious crime. Maybe Joe Schmo was hit with a Class D felony for speeding to elude police or possession of an assault weapon.

Would you believe, though, that starting in 2024, some business owners will be penalized with a hefty fine and up to two years in prison? For what? Not money laundering or tax evasion but willfully not complying with the soon-to-be-enacted Corporate Transparency Act (CTA).

If this is the first you’re reading about the CTA, you’re not alone — even though an estimated 32.6 million current businesses will be affected by it in 2024, many only recently became aware of it. Scheduled to take effect on January 1, 2024, the CTA was enacted as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for FY 2021.

What is the purpose of the CTA? According to FinCEN, it is designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system. The agency believes the rule will help stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers and those who would use anonymous shell companies, to hide their illicit proceeds.

The Act’s Beneficial Ownership Information (BOI) Reporting Rule mandates that applicable businesses submit identifying details into a federal database maintained by the United States Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The database, the Beneficial Ownership Secure System (BOSS), will only be accessible to law enforcement officials in the U.S. and internationally.

There is no fee for applicable businesses to submit their BOI to FinCEN and no annual reporting requirement. However, the CTA requires businesses to correct and update their report when necessary.

Red push pin on calendar, Red circle on 31.

What is the Deadline for Reporting Beneficial Ownership Information to FinCEN?

Domestic and foreign reporting companies registered with a secretary of state’s office before January 1, 2024 must submit their initial BOI report to FinCEN by December 31, 2024. Reporting companies registered on or after January 1, 2024 must file a BOI report within 90 calendar days of either receiving actual notice that its formation has become effective or the secretary of state or similar office first providing public notice that it has been formed — whichever occurs first. FinCEN issued a final rule on November 30, 2023 that extended that filing day from its initial 30-day deadline.

Everyone makes mistakes, and business owners who voluntarily submit a report correcting any inaccurate data filed with FinCEN within 90 days of the deadline for their initial report have — according to Section 5336(h)(3)(C) of the Corporate Transparency Act — a safe harbor from TCA penalties. Individuals who do not comply with CTA requirements or willfully report inaccurate information are subject to civil and criminal penalties, including fines and possible jail time.

What is the Penalty for Willfully Violating the Corporate Transparency Act?

There are multiple answers to this question — CTA non-compliance may result in penalties, both civil and criminal. Here is a summary of those penalties straight from FinCEN:

“The willful failure to report complete or updated beneficial ownership information to FinCEN or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues or criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.”

Fake Dictionary, Dictionary definition of the word penalty.

The three types of BOI reporting violations subject to penalty consist of willful failure to file a report, providing false information and unauthorized disclosure of information. Corresponding penalties include:

Willful Failure to File a Report

Failure by a reporting company to file a required initial report could result in fines of up to $500 per day capped at $10,000 and up to two years in jail. However, subsequent events that would necessitate an amendment to such required but missing filing — had the initial report been submitted — also accrue.

That means that failure to file an initial report may result in aggregate fines accruing well in excess of $10,000 (prior to an initial notification of violation coming from FinCEN to the reporting company). Also, when you do not report BOI to FinCEN or omit necessary information, it’s more likely that federal authorities will investigate your company and its business practices.

Providing False or Inaccurate Beneficial Ownership Information

Reporting companies knowingly providing inaccurate or false BOI could be subject to the same penalty of $500 per day (up to $10,000) and up to two years in prison. That’s also the case for reporting companies willfully failing to update or correct such false or inaccurate information.

Unauthorized Disclosure of BOI

This type of CTA violation can come with a steeper monetary penalty. An individual or reporting company that accesses information from BOSS without proper authorization and without disclosing it may be penalized with not only the $500 per day fine — up to $25,000 — but also five years in prison. If that entity is violating another U.S. law or has a pattern of illegal activity involving more than $100,000 in a 12-month period, the beneficial owner could receive a fine of up to 500,000 and 10 years in prison.

Conclusion

Getting jail time for failing to report information to the U.S. government might seem like a steep penalty, but the punishment for CTA violations is part of enforcing the new law. If you’re unsure of how the CTA and BOI might affect your business, the multidisciplinary team here at 3Sixty Advisors can work with you to ensure your filing is timely and accurate. Contact us today to schedule a meeting! 

An Illustrative Guide to Filling Out Form 1120

The number 1.5 million can be used to describe multiple things in the United States. For example, there are 1.5 million faculty at degree-granting postsecondary institutions in the U.S. Roughly 1.5 million Americans have lupus, and approximately that same number of individuals served this great country of ours in Iraq between 2003 and 2011.

In the business world, nearly 1.5 million small businesses officially organized as C corporations employ almost 13 million American workers across various industries. The Internal Revenue Service (IRS) classifies C corporations as independent legal entities owned by their shareholders.

The tax requirements for C corporations are somewhat different from those of other U.S. business types. The profit of a C corporation is taxed twice, once as business income at the entity level and again at the shareholder level when distributed as dividends or realized as capital gains. Corporate income taxes are paid at the corporate income tax rate instead of a personal tax rate.

C corporations must file Form 1120, a process that’s complex for individuals without extensive tax knowledge. In this blog, we’ll cover some of the basics of Form 1120, what types of companies should file it and what information is needed to accurately complete it.

What Exactly Is Form 1120: the Corporation Income Tax Return?

Officially titled the U.S. Corporation Income Tax Return, Form 1120 is utilized by C corporations to figure their income tax liability and report their income, gains, losses, deductions and credits. In addition to paying federal income tax, these businesses may be subject to local and state taxes.

Why do C corporations fill out a separate form from other business entities? One reason is that they are designed to shield business owners from certain tax liabilities. These companies have more than 100 shareholders — or ones outside the U.S.

There are numerous variations of Form 1120, including 1120-S, which S corporations use. Others include:

  • 1120-C: For cooperatives
  • 1120-F: For foreign corporations
  • 1120-H: For condominium management and residential real estate management
  • 1120-L: For life insurance companies
  • 1120-POL: For political organizations

Is Form 1120 for C Corporations or S Corporations?

Unless they are exempt under U.S. Code §501, all domestic corporations are required by the IRS to file Form 1120 annually — even if they do not have taxable income or are in bankruptcy. C corporations include limited liability companies (LLCs) that have elected to be taxed as a corporation. New LLCs utilize IRS Form 8832 to elect how they want to be taxed.

As mentioned earlier in this blog, S corporations file Form 1120-S. Because they do not pay corporate taxes but instead pass their tax liabilities to their individual shareholders, they are categorized as pass-through entities.

What Information Do I Need to Fill Out Form 1120?

One of the reasons Form 1120 can be so “taxing” to complete is that it is six pages long. Another is the amount of information needed to accurately complete it. This financial data consists of details for both operating and non-operating expenses and income.

Other C corporation information used to complete Form 1120 includes:

  • Employer Identification Number (EIN)
  • Date of incorporation
  • Total income and assets
  • Gross receipts
  • Capital gains
  • Tax deductions
  • Interest, dividends and royalties earned
  • Rents
  • Cost of goods sold

When Should Form 1120 Be Filed?

As a guideline, a C corporation must file its Form 1120 by the 15th day of the fourth month after the end of its tax year. Corporations with a fiscal tax year ending June 30 must file by the 15th day of the third month after the end of their tax year.

When expected to owe more than $500 in taxes for the year, C corporations also must pay quarterly estimated tax payments. Such payments are due by the 15th day of the fourth, sixth, ninth and 12th months of the tax year,

If the due date falls on a Saturday, Sunday or a legal holiday, a C corporation can file on the next business day. Businesses that need additional time to file can request a six-month extension using Form 7004. C corporations filing 10 or more returns on or after January 1, 2024 are required to e-file Form 1120. C Corporations failing to file Form 1120 by the due date are subject to penalties based on the time the return is overdue.

Form 1120 Instructions

10 Steps for Filling Out Form 1120 

Once you have gathered the necessary materials, follow these steps to fill out Form 1120:

  1. Download Form 1120.
  2. Enter the necessary corporation information.  
  3. Calculate all taxable income you received during the year. 
  4. Claim any eligible deductions and credits to reduce your tax liability.
  5. Fill out page 2 Schedule C: Dividends, Inclusions and Special Deductions.
  • Dividends and similar income go on Line 23.
  • List any special deductions related to this income on Line 24.
  1. Complete Schedule J – Tax Computation and Payment — on page 3.
  • Part I: Tax Computation
  • Part II: Payments and Refundable Credits
  1. Complete Schedule K —Other Information — on pages 4 and 5.
  • This includes information about the C corporation owners and their investments in other companies.

  1. Complete Schedule L — Balance Sheets per Books — on page 6.
  • Use this schedule to report your balance sheet as found in your C corporation’s books and records.
  1. Complete Schedule M-1 — Reconciliation of Income (Loss) per Books with Income per Return — on page 6.
  • This is used to reconcile your accounting (book) income with your taxable income.
  1. Complete Schedule M-2 — Analysis of Unappropriated Retained Earnings per Books — on page 6.
  • This is used to reconcile your C corporation’s unappropriated retained earnings account as found on the beginning of the year and the end of the year balance sheets. Both balance sheets are listed on Schedule L.

At 3Sixty Advisors Tax Services, we offer proactive tax solutions customized for your business. Our team of tax experts understand the complexities and challenges C corporations encounter when managing your taxes. And, our proprietary technology and focus on compliance ensures that your filing is accurate and conforms to all IRS guidelines. Contact us today to learn more!