Uncategorized

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

The Corporate Transparency Act (CTA) is a federal anti-corruption and anti-money laundering law that came into effect on January 1, 2024. Among its provisions is the beneficial owner information report (BOIR), which many business entities are required to file, or they may face significant penalties that can increase quickly.

BOIRs are filed with the Financial Crimes Enforcement Network (FinCEN) and are used to identify the entity’s beneficial owners. This is meant to assist FinCEN with identifying bad actors hiding behind business entities to engage in criminal activity. If your organization is engaged in legitimate business, there’s no reason not to comply with the CTA.

Who is a Beneficial Owner?

Beneficial owners must be identified on a BOIR. To be considered a beneficial owner, either of the following must be true about an individual:

• They own at least 25 percent of a reporting company.
• They maintain “substantial control” over a reporting company.

The CTA’s definition of “substantial control” is somewhat open-ended, but in general, if any of these are the case for an individual, they likely need to be identified on a BOIR:

• The individual is a senior officer (a president or chief officer) or general counsel
• The individual is a general partner of a limited partnership
• The individual has the authority to remove other officers
• The individual has control over intermediary entities that possess substantial control over the reporting entity

Who Must File a Beneficial Owner Information Report, and What Entities are Exempt?

Entities that must file a BOIR include limited liability corporations (LLCs), non-publicly traded corporations, and limited partnerships (including limited liability partnerships and family limited partnerships).

Exempt entities include publicly traded corporations, sole proprietorships, non-profit corporations, most trusts, and inactive entities. These entities are not required to file a BOIR with FinCEN. Further, some beneficial owners do not need to be included on a BOIR, including minor children, individuals whose only interest in the reporting company are through a future inheritance, certain creditors, and employees who are not senior officers and whose economic or control benefits are based on their employment status within the company.

What if a Beneficial Owner is Another Entity or a Trust?

If you’ve previously filed a BOIR for a reporting entity and that entity is the beneficial owner of another reporting entity – LLC 1 owns LLC 2, for example, and both need to file a BOIR – you should be able to use a FinCEN number that the reporting system generates upon reporting, and then you can use the FinCEN number to report the beneficial owner information for LLC 2.

However, some have encountered issues with FinCEN’s online filing system that occasionally makes this shortcut entry of a FinCEN impossible without re-entering all of the “end-of-the-line” beneficial owner information for the second entity. This shouldn’t be a problem, as long as you know who the beneficial owners are for the second entity, you can just enter their information to complete the process.

If the entity’s beneficial owner is a trust, check the box that says, “beneficial owner is an exempt entity” and enter the name of the trust in the box.

How is a Beneficial Owner Information Report Filed with FinCEN?

Anyone who is authorized by the reporting entity to file a BOIR may do so. This individual must also provide their personal information (or create their own FinCEN number and provide it) on the BOIR for compliance purposes.

To file a BOIR with FinCEN, go to the agency’s website. Once there, click on “File BOIR” and click on the Web option to File Online. There are numerous prompts to click through and some instructional videos online to watch that demonstrate how to file the BOIR. When submitting the report, the following information will be required:

• The reporting entity’s name, company EIN, company address and state of formation.
• The reporting agent’s personal information. If this individual will file many BOIRs in the future, it is recommended that they request a FinCEN number, as this will speed up the process for subsequent BOIRs.
• The name, address, birthdate and driver’s license or passport information for all beneficial owners, along with a copy of their IDs (either in PDF or JPEG format).

Once the BOIR is filed, make sure to download the filing submission when prompted at the end of the filing process. This is proof that your organization has filed the BOIR. Be sure to save the submission ticket under a document name for the entity that corresponds to the BOIR just submitted. The filing ticket itself will not have the entity name on it.

If you believe that incorrect information has been submitted with the BOIR, the process can be restarted by clicking the “Correct a BOIR” button on the agency’s filing website.

What are the Penalties if a Reporting Entity Fails to File a BOIR?

The CTA stipulates that any reporting entity that willfully violates BOIR reporting requirements are to be assessed a civil penalty of up to $500 each day that the violation continues.

However, none of the May Firm’s clients (that we are aware of) have received warning from FinCEN that they are past filing requirements or have been assessed fines. Given the number of reporting entities that FinCEN must obtain information from, as well as the difficulties in obtaining information from existing companies that must still file, it is likely that it will be some time before the agency reaches out to non-filers and threatens penalties.

That said, it is recommended to comply with BOIR filing requirements and submit beneficial owner information voluntarily. If your business still hasn’t filed its BOIR, there is still time to do so and avoid any penalties.

Prepare Your Organization with Timely BOIR Filing with an Attorney’s Assistance

Filing a BOIR is a relatively straightforward and simple process for reporting entities. However, if your organization is unsure how to proceed with the CTA and with BOIR filing, an experienced business attorney can provide guidance.

Although many questions remain regarding the CTA’s impact on businesses, including when and how FinCEN will enforce BOIR filing, prompt and accurate filing will ensure your organization isn’t surprised by penalties or additional scrutiny from the agency.

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

Thousands of Americans consider themselves self-employed as freelance or “gig” workers, but understanding tax planning comes with that territory. Unfortunately, many do not understand what it takes to correctly pay their taxes, or the consequences of not doing so. The best plan of action is to follow professional legal counsel, prepare in advance, and know what to expect.

What Are Freelancers and Gig Workers?

To understand tax planning for freelance and gig workers, it is necessary to first define these terms and know examples of each.

Freelancers are individuals who are self-employed and often work on different projects for multiple clients. Freelance positions may include those for writers, graphic designers, and illustrators. These people can generally work for several different people or companies remotely and their product’s final form is usually electronic, can be emailed or posted, and often does not have to produce a piece of paper or a tangible product.

A gig worker is essentially an internet-based worker that is not necessarily tied to a location or specific employer. They are typically engaged in some sort of professional work activity that yields an end-product that can be emailed or posted. Some good examples of gig workers could be individuals who publish, draft blueprints, make accounting entries, or make anything that can be put in electronic form, emailed, and assembled anywhere in the country or world.

Regardless of which category you fall into, it is absolutely necessary that you understand tax planning for freelance and gig workers.

What Do Freelancers and Gig Workers Need to Be Aware Of?

Although being a freelancer or gig worker can be a big responsibility in and of itself, tax planning must not take a backseat to the work being done.  If proper tax planning is not taken seriously, Tax Day (aka April 15^th) could be a rude awakening.

When a freelancer or gig worker gets paid, the money usually goes into a bank account. That income is how personal and business expenses are paid. Freelancers and gig workers are then expected to pay self-employment taxes on a quarterly or annual basis and can do so electronically through the Internal Revenue Service.

Some good tips for tax planning for freelance and gig workers include:

1. You need to file your own tax returns and pay your own taxes. One of the most critical things for freelancers and gig workers to be aware of is that they will likely fall under the category of independent contractors, meaning that they are responsible for doing their own tax returns and paying their own taxes. When you are an independent contractor or self-employed, there is no W-2 form, and no client or employer withholding and paying your federal income taxes for you.
2. Know if your state has an income tax. Fortunately, Texas does not have a state income tax on a personal level, so if you do all your work in the state of Texas as a freelancer and gig worker, there is no state income tax consideration. However, some states do have a state income tax, meaning that if a freelancer is doing work for someone in New York, the state will likely want the freelancer to pay the state income tax. This is an issue some courts are still working on today.
3. Influencers and vloggers are considered contract workers. Technically, people in these professions should get a 1099 to account for what money they made in various states or locations. However, not all companies follow this protocol, and it is becoming a legal issue. The IRS is notifying content providers, and some influencers and vloggers are receiving an IRS notice that they have not been properly accounting. This has resulted in an influx of clients from these professions seeking legal counsel on what effect the notification may have on their taxes.
4. There is a benefit to paying your self-employment taxes quarterly. Quarterly tax payments are more advisable because it may enable the individual to avoid penalties. It helps a taxpayer avoid the shock of having to pay hefty taxes all at once on April 15, especially if they don’t have that money.
5. Be able to keep track of your revenue. Put the money you make in a bank account and make sure you get accounting statements so you can figure out how much money you are actually getting paid on a quarterly and annual basis so you can keep up with taxes.

A Word About International Taxes

Depending on the situation, international taxes may apply to freelancers and gig workers. If the person is working internationally, there are additional tax issues to work through. Some countries are havens for internet workers because these countries do not collect income taxes (or at least require relatively low amounts of income tax paid in to that government), and that attracts business to the country. Other countries have high income tax burdens that can make it far more complicated. Either way, a freelance or gig worker must understand the international tax implications for their revenue.

For example, if I am physically residing in and working from the United States, and I do something to get revenue from Japan, it is counted as income in the U.S. It will need to be included in my income whether I receive a 1099 or not.

If I am an U.S. citizen, but reside in Costa Rica and doing the work from there, I am still responsible for income tax to the U.S. government and can be taxed on my worldwide income. While there are tax treaties between large industrial countries which can make international taxes easier to coordinate, international tax considerations can make international freelance and gig work tricky.

In contrast, there are people who are citizens of other countries who do freelance and gig work in the United States. This can also be a tricky situation that may come with transfer pricing issues.

Will the IRS Really Know I’m Making Money If I Don’t Report It?

Although there will be people tempted to make money and simply not declare it, hoping the IRS will not take notice, this is not advised.

The money you make is traceable to an extent. For example, if someone pays for a service, the payor can deduct it on their end. This means there will be some sort of calculation triggered that lets the IRS know that money was made even if it was not reported by the earner. In this modern era, heavy with reporting by payors, the IRS has the ability to monitor payments and look at various other factors (like subpoenaing your bank records) to figure out how much money you are probably making, even if you do not report it.

Bottom line: Report your income. It will be found sooner or later, whether you report it or not.

When it comes to tax planning for freelance and gig workers, the takeaway is to keep track of revenue and deposits, be able to pay for things to run your business so you can deduct them and account for them, and make sure you have a good accountant and tax preparer. If any issues are anticipated or have already occurred, enlist the help of a reputable tax attorney.

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

Most employers understand that the US government expects them to collect employment and excise taxes from their employees’ pay, and that this withholding is to be paid over to the IRS. It can be tempting to use this money towards other business expenses, but employers should resist the impulse. Not all employers realize the impact of unpaid employment trust and how that relates to personal liability. The fact of the matter is if the employment trust isn’t paid, managers can be held personally liable to the IRS.

How Unpaid Employment Trusts Can Affect Personal Liability

The impact of unpaid employment trusts can be enormous for individuals. Despite the expectation that a business filing bankruptcy will extinguish all debts, including to the IRS, this is not the case. And even if the business itself has gone bankrupt and cannot pay employment trust liability, the IRS will find someone to hold personally liable for that debt. Much of this standard was set by the case of Begier vs the IRS from 1990. While it is a bit of an older case, it still sets the precedent and is very much applicable today.

However, before we break the case down, it is important to establish a couple of talking points first:

1. Trust fund taxes are essentially employment withholding taxes due to the Internal Revenue Service.
2. Employers pay their employees but hold some money out of those payments to pay the government taxes such as FICA, Social Security, and Medicare. This is called an employment trust. (Contrary to popular believe, a trust is not just something established by a person in the event of their death or incapacitation.) At its root, the definition of trust means having someone hold onto something for the benefit of another.

Now, back to Begier vs the IRS. In this situation, American International Airlines fell behind in paying its employment trust fund taxes, which the Internal Revenue Service was aware of. It was not a small sum by any standard. The airline eventually filed for Chapter 11 bankruptcy. For the first 90 days of the bankruptcy, they acted as a debtor in possession and, during that time, decided to reconcile the trust fund money they owed to the IRS. After 90 days, the court appointed a trustee to come in and take over for existing management.

When the appointed trustee found out about the large sum of money the airline had paid to the Internal Revenue Service when there were many debts still owed to other airline creditors, the trustee sued the IRS to attempt to recover the money. The argument the trustee made was that the IRS was no more superior to other creditors and thus should not get priority over available funds.

The court in Begier held that the money held in trust was never the airline’s money to begin with. So when they went into bankruptcy, those employment trust funds were not part of the “debtor’s estate.” The trustee was not able to recover those funds

But the bigger question is why the airline managers decided to pay off employment trust taxes rather than pay off some of the other airline creditors, especially knowing that some of the other debts were just as large, if not larger, than the IRS debt. While the intentions of the managers cannot be known exactly, it is very likely that they understood that if that particular debt was not paid before the company had no money left, that debt would not be extinguished in the bankruptcy and the human individuals responsible for running the business would be held personally liable for those debts for years to come.

This is important, so we will repeat it again: business managers who are signatories on the company bank account and the people responsible for signing the checks to the IRS, known as “responsible parties” , may be held personally liabile for employment trust and excise taxes if is the business does not pay this money over to the IRS. It may not happen immediately, but if substantial sums of money are due for employment or excise taxes, individuals will eventually receive notices from the IRS that their liability is under examination and they may be personally, and singularly, responsible for potentially millions of dollars owed to the IRS. That is precisely why the airline chose to take the remaining chunk of money they had and paid it to the IRS rather than other creditors.

One would expect that that if a business files bankruptcy, that much of the business’ debt can be forgiven. Employers take note: trust fund liability on the employer’s part does not go away. It is not a dischargeable debt. While federal income tax liability has a statute of limitation and may eventually be discharged, trust fund taxes cannot. A former employer can be retired and living off social security, the business long since dissolved, and the IRS will still expect payments to be made towards employment trust taxes that were never paid.

 

When a Company Is Liquidated and Trust Fund Taxes Are Still Due

There could be an instance in which a company files bankruptcy, is liquidated, and now no longer exists. Some wrongly think the taxes due will just go away.

Instead of the taxes being forgotten, the IRS will then search for the responsible parties. A responsible party is typically defined as someone who is an officer at the company and has the ability to sign checks.

Now, let’s assume that the IRS has found a responsible party. The options can vary and may include one of the following:

• File an Offer In Compromise. In this scenario, the responsible party will state their assets and income and estimate what money they will have available after living expenses during the next five years. This is not a popular option among attorneys and clients because they are a lot of work and a satisfactory compromise, from the individual’s perspective, is hard to reach. .
• Enter into an installment agreement and make regular payments. This is an agreement where the responsible party admits to owing the total amount the IRS requests and allows the responsible party to pay money to the IRS over time in installments. The IRS will then have the ability to garnish bank accounts directly, typically withdrawing monthly installments.
• Run and hide. This is exactly what it sounds like. If the responsible party does not have the money to pay, they may opt to permanently leave the country. Some people choose to find jobs overseas where they can function. However, if the amount owed is large and criminal, the Internal Revenue Service can seek extradition.

Technically, the IRS has a 10-year collection statute in which they have to collect or reduce the assessment to a judgement. If it is a relatively small amount owed, it is possible the IRS will choose not to pursue you.  Should the amount owed be between $50 million and $100 million, they likely will pursue you. The clients we see are often held personally liable to amounts between $1 – $25 million. Often, international relocation is not an option – these clients have family and personal responsibilities in the USA, or the idea of leaving their home is unfathomable. Staying and dealing with the debt may mean having to give up 50% of their social security checks to the IRS every month.

The bottom line is that if employers do not realize the impact of unpaid employment trust they may be penalized heavily for it. Companies should pay over the trust fund taxes as soon as they are due and make it their priority to do so before the court can take that ability away from them.

If you are business owner, current or former, and you are dealing with personal liability for unpaid employment trust taxes, a reputable tax attorney can assist.