For years, the IRS has complained about “tax havens” like Switzerland whose secrecy laws have enabled wealthy US citizens to hide assets offshore and (illegally) shelter their foreign income from US taxation. Since 2009, the US has made great strides in chipping away at these barriers to find out what Americans have been hiding.

Meanwhile, the US hasn’t been so transparent at home.

It turns out that the US itself is one of the most secretive tax havens in the world. Foreign investors and private citizens can easily set up companies in the US without having to disclose the true “beneficial owners” of those companies. In many US states, less information is required to form a new company than is required to obtain a bank account or even a driver’s license.

As a result, many non-US individuals, businesses, and trusts open “businesses” in the US, often in the form of US limited liability companies (LLCs).

Because the true “beneficial owners” of these companies are not disclosed, foreign actors can hide behind these structures and use them to conceal income and assets from their home governments. They ultimately route substantial amounts of money through the companies to avoid paying tax in their home countries.

And the use of US tax havens has been growing. On October 3, 2021, the International Consortium of Investigative Journalists (ICIJ) reported on the “Pandora Papers,” nearly 12 million leaked documents that disclose the confidential use of offshore tax havens by celebrities, wealthy citizens of numerous countries, and prominent global political figures. In its report, the ICIJ pointed out that use of US tax havens has grown while remaining somewhat under the radar:

“Over the past decade, South Dakota, Nevada and more than a dozen other U.S. states have transformed themselves into leaders in the business of peddling financial secrecy. Meanwhile, most of the policy and law enforcement efforts of the world’s most powerful nations have stayed focused on ‘traditional’ offshore havens, such as the Bahamas, the Caymans, and other island paradises.”

It’s easy to understand how foreign countries would be upset by the double standard concerning the US’s lack of transparency.

In the last two rankings of “financial secrecy” by the FACT Coalition and Tax Justice Network, the US has been 2nd in the world (after Switzerland in 2018 and after the Cayman Islands in 2020). “This is not a ranking in which the US wants to be number one or even number two,” according to Gary Kalman, Executive Director of the FACT Coalition from 2016 to 2019.

Despite the US being a member of the international anti-money laundering “Financial Action Task Force on Money Laundering (FATF)” for more than a decade, the US has made little progress in improving its transparency.

The ICIJ points out that “the US is the country best situated to bring an end to offshore financial abuses,” but it has shown little interest in doing so:

“The U.S. has refused to join a 2014 agreement supported by more than 100 jurisdictions, including the Cayman Islands and Luxembourg, that would require American financial institutions to share information they have about foreigners’ assets.

Year after year in South Dakota, state lawmakers have approved legislation drafted by trust industry insiders, providing more and more protections and other benefits for trust customers in the U.S. and abroad. Customer assets in South Dakota trusts have more than quadrupled over the past decade to $360 billion.”

While the US has done little to advance transparency, European countries have made progress.

Over the past years, European countries have adopted the Common Reporting Standard (CRS), which provides transparency into beneficial ownership of companies established and operating in Europe. But the CRS’s reach is limited. Since the US has not adopted the CRS, European countries remain powerless to obtain ownership information related to their citizens or residents who operate through US companies.

Now, things are about to change on the US side—in a big way.

In early 2021, the US Congress enacted the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. The purpose of the act is to curtail the concealment of illicit activity by bad actors through their use of anonymously held shell companies.

The CTA authorizes the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to disclose beneficial ownership information to law enforcement agencies so it can assist their efforts in combatting terrorism, money laundering, and other misconduct involving companies that are present in the United States.

Before the US Treasury can disclose information on “beneficial owners,” it must collect it. This means new mandatory reports with big penalties (or prison time) for those who fail to file.

As required by the CTA, beginning in 2022, many entities will need to file new reports with FinCEN to disclose details on their “true” beneficial owners. FinCEN is charged with designing the new reports and issuing instructions and guidance. Owners of companies that fail to file the reports may be subject to $10,000 files and potential prison time.

The reports are not part of an individual’s or entity’s tax return. Instead, they are filed separately with FinCEN, the Treasury division best known for collecting information on US persons’ foreign bank accounts.

The new filing requirements will likely come as a surprise to many business and LLC owners in 2022.

As often happens when the US Government enacts new laws, there may be “collateral damage.” While the CTA is intended to target shell companies and owners hiding behind layers of trusts and entities, the new requirements also affect many legitimate businesses and business owners, leading to additional reporting requirements, costs, and administrative burden for them.

The new requirements have the potential to affect:

  • G-4 visa holders who have US LLCs or own property through a US entity
  • Nonresidents who have US LLCs or own property through a US entity
  • US small businesses
  • Foreign companies doing business in the US

What’s next?

While the new reporting requirements were supposed to go into effect on January 1, 2022, FinCEN is still finalizing them, and they are expected to take effect in the first half of 2022. We are following developments closely.

In the meantime, see our Frequently Asked Questions on the new “beneficial ownership disclosures” to learn more about:

  • Who is affected by the new requirements?
  • When are the filings due?
  • What information is needed?
  • What happens if I don’t file timely?

If you believe you may need to file the new beneficial ownership disclosures and would like assistance doing so, we are providing this service to our clients. Please contact us.

The Wolf Group has been assisting clients with non-tax filings through FinCEN for decades, including most commonly, the filing of FinCEN Form 114, Foreign Bank Account Report (FBAR).

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any US tax advice contained in the body of this writing is not intended or written to be used, and cannot and should not be used, by any recipients as specific tax advice related to their facts and circumstances. Taxpayers should consult their local tax professional and/or attorney to obtain specific tax advice related to their facts and circumstances.