Small business owners have until March 21 to submit an onerous new filing to the Internal Revenue Service that could turn them into criminals for coming to a different conclusion than the feds about who benefits from their operations.
The Corporate Transparency Act, passed by Congress in 2021 and signed by former President Joe Biden, requires all business with less than $5 million in annual revenues and fewer than 20 employees to submit a detailed accounting of anyone who has interest or influence in their companies, whether or not they have a legal ownership stake.
It was sold to Congress as protection against money laundering and terrorism.
Rather than imposing accountability on corporate America, as the name implies, the more likely outcome is that it will make criminals of small business owners from farmers to dry cleaners to landscapers.
“The law assumes all small businesses are terror financiers and money launderers,” says Brian Calley, head of the Small Business Association of Michigan. “It singles out small businesses as being more likely to be criminals.”
SBAM, in its first-ever lawsuit against the federal government, is challenging the law on Fourth Amendment grounds in the U.S. District Court of Western Michigan, claiming its sweeping reporting requirements amount to illegal search and seizure.
The act had previously been enjoined by a federal court in Texas, but the injunction was lifted last month, and the IRS set the March 21 deadline for compliance. FinCEN, the criminal enforcement arm of the IRS, said Friday it will not issue penalties until the IRS hands down final rules.
The challenge for businesses is that the law establishes a vague definition of ownership. It requires anyone who has significant interest in the financial performance of a business, or substantial control of its operations to divulge considerable personal information.
That could include spouses or other family members, managers employed by the owner and friends and relatives who made small loans to help a business get started.
Determining who benefits “directly or indirectly” from a business, as the law requires, is highly subjective. The actual owner of a business may see that question much differently than someone looking in from the outside.
The lack of compliance clarity will force businesses who don’t want to risk a felony charge to turn to tax attorneys or other experts for help, adding an expense many can’t afford.
The filings must be updated anytime one of the established beneficiaries change addresses, get new driver licenses or take on new roles within the business.
Failure to comply, or making a mistake or omission, is punishable by a $10,000 fine and up to two years in prison.
SBAM argued its challenge before District Judge James Jonker and is awaiting a ruling. The Michigan group and others are also asking for relief from the new Republican-controlled Congress.
Calley suggested the law is a ruse for allowing the IRS to cast a wider net for income tax audits, or to give it leverage in negotiations over tax disputes.
The Trump administration and Republicans ran in the last election on the promise of getting the IRS off the backs of the American people.
Repealing the Corporate Transparency Act is an opportunity to fulfill that pledge.