Demystifying The Corporate Transparency Act For Tax-Exempt Organizations – Part 1: When To File A Beneficial Ownership Information Report

The Corporate Transparency Act (CTA) took effect on January 1, 2024 and some U.S. nonprofits and tax-exempt organizations are still debating how the CTA applies to them. This article provides newly-formed and existing nonprofits and tax-exempt organizations with a general overview of their CTA compliance obligations and exemptions. For information about the CTA compliance obligations and exemptions applicable to subsidiaries of tax-exempt organizations, please see Part 2: CTA Compliance for Subsidiaries of Tax-Exempt Organizations.

Please visit the Seyfarth Corporate Transparency Act page for general information about the CTA and how it applies to other organizations.

What Is the CTA and What Entities Are Subject to the CTA?

The CTA and the beneficial ownership information (BOI) regulations are designed to enable the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of Treasury, to identify individuals that own or exercise control of entities doing business in the United States, including, but not limited to, nonprofits and tax-exempt organizations.

The CTA requires certain entities (each, a "Reporting Company") to (1) report specific BOI to FinCEN, (2) disclose information about the individual who created the entity (the "direct filer") and the individual who prepared the formation document or who directed the direct filer to file the formation document (the "Company Applicant"), and (3) report any changes to previously reported BOI within a specified time period.

Are Nonprofits and Tax-Exempt Organizations Exempt From Filing a BOI Report?

A nonprofit organization may be exempt from filing a BOI report if any of the following four criteria apply:

1. it is an organization that is described in section 501(c) of the Internal Revenue Code of 1986, as amended (the "Code") (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code;
2. it is an organization that is described in section 501(c) of the Code and was exempt from tax under section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago;
3. it is a political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code; or
4. it is a charitable trust or split-interest trust described in section 4947(a)(1) or (2) of the Code, respectively.

What Is a Reporting Company?

Unless an exemption applies, a nonprofit organization is a Reporting Company if it was created by the filing of a document with a secretary of state or similar office under the laws of a U.S. state. A nonprofit corporation formed under the laws of a U.S. state by filing articles of incorporation with a secretary of state would be a Reporting Company. However, a charitable trust formed through a trust instrument that is not required to be filed with a secretary of state or similar office under the laws of a U.S. state would not be a Reporting Company.

Who Is a Beneficial Owner of a Nonprofit Organization?

A "beneficial owner" is an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the nonprofit organization.

The following persons are considered to be "beneficial owners" of nonprofit organizations:

• any "senior officer" (i.e., an individual who exercises the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, or an individual, regardless of official title, who performs a function similar to such officers);
• any individual with authority to appoint or remove certain officers or a majority of directors;
• any individual who "directs, determines or has substantial influence over important decisions;" and
• any individual who exercises "any other form of substantial control."

This list is not exhaustive and additional individuals may be deemed to exercise "substantial control" depending on the circumstances.

One common situation where substantial control will be evident is when a statutory/voting "member" of a nonprofit corporation has the ability to appoint and remove some or all of its directors and/or certain officers. Additionally, under many state laws, a member's consent may be required for certain actions like merging or dissolving. Accordingly, information about a member may need to be reported as part of an organization's BOI report.

What Information Must Be Reported?

A Reporting Company must disclose the following BOI with regard to each individual beneficial owner:

1. full name;
2. date of birth;
3. complete current residential street address;
4. ID number and jurisdiction of issuance for one of the following:
   1. U.S. passport,
   2. state, local, or Indian tribal identification document, or
   3. state-issued driver's license; and
5. an image of the ID from which the ID number was obtained.

When BOI previously reported to FinCEN changes, an updated BOI report must be filed within 30 days of the change. For example, if a Reporting Company's president changes residence, the Reporting Company must file an updated report with the new address (and new ID reflecting the new address when one is obtained) within 30 days.

In addition to the BOI, the Reporting Company must disclose the following information to FinCEN:

1. Full legal name of the entity;
2. Any trade names, doing business as (d/b/a), or trading as (t/a) names through which it conducts business;
3. The entity's complete current address of its principal place of business in the U.S.;
4. State, tribal, or foreign jurisdiction of formation; and
5. The entity's federal employer identification number (EIN), or federal individual taxpayer identification number (ITIN), or if these are not available, the taxpayer identification number from its country of residence.

FinCEN will issue a unique identifying number to beneficial owners (individuals or entities) upon request, which may be used in lieu of providing the information above directly to the Reporting Company by allowing the Reporting Company to report the beneficial owner's FinCEN identifier to FinCEN, rather than an individual's or entity's BOI.¹ This will be useful in instances where a beneficial owner does not want to disclose its BOI to the Reporting Company. If a Reporting Company reports a beneficial owner's FinCEN identifier rather than its BOI, this will also put the onus on the beneficial owner (rather than the Reporting Company) to report any changes to the beneficial owner's BOI.

When Must a BOI Report Be Filed?

For a nonprofit organization formed before January 1, 2024, a BOI report must be filed with FinCEN no later than January 1, 2025. For a nonprofit organization created in 2024, a BOI report must be filed within 90 calendar days after receipt of notice of formation. For a nonprofit organization created in 2025, a BOI report must be filed within 30 calendar days after receipt of notice of formation.

A nonprofit or tax-exempt organization that was previously exempt from filing a BOI report and loses its exemption is subject to similar filing deadlines (i.e., 90 days in 2024 and 30 days beginning in 2025). Importantly, a tax-exempt organization that loses its tax exemption has 180 days before losing its CTA exemption and becoming obligated to file a BOI report.

You can access the form of the BOI report from FinCEN through their web-based application.

Is a Newly Formed Nonprofit Organization a Reporting Company?

Questions have arisen as to whether a newly formed nonprofit organization that would otherwise qualify for exemption under section 501(c) of the Code is exempt from the BOI reporting requirement given that the Internal Revenue Service (IRS) may recognize the organization's tax exemption retroactive to the date of formation. Because a newly formed organization may not yet be recognized as tax-exempt (and a 501(c)(3) cannot represent to donors that it is tax-exempt until it has received its determination letter from the IRS), nonprofits risk violating the CTA if they take the position that they are not required to submit a BOI report because they expect the IRS to recognize their tax-exemption retroactive to their date of formation. The deadline to file a BOI report may pass by the time the IRS issues a retroactive determination letter.

Although conservative, this approach is consistent with FinCEN's discussion of the final BOI regulations, which specifically rejected comments to the proposed BOI regulations recommending that entities that had applied to the IRS for tax-exempt status but were still awaiting determination should be exempt from filing a BOI report.²

What Does a Newly Exempt Organization File?

If a nonprofit organization that previously filed a BOI report becomes tax-exempt, it may file an updated BOI report indicating that it is no longer a Reporting Company. An updated BOI report for a newly exempt entity requires only that the entity (1) identify itself; and (2) check a box noting its newly exempt status.

What Are the Consequences for Not Filing a BOI Report?

The CTA provides for both civil penalties (currently $591 per day up to a maximum of $10,000) and criminal penalties of up to 2 years in jail for the willful failure to file a report or willfully providing false or fraudulent BOI.

Conclusion

Though not all organizations will choose or even be advised to do so, since the willful failure to file a BOI report carries both civil and criminal penalties, it may be prudent for a newly formed nonprofit organization to file an initial BOI report if, before the deadline passes, it still awaits IRS issuance of a determination letter, notwithstanding a near certain expectation that its tax-exempt status (and, effectively, its CTA exemption) will be issued retroactively. A nonprofit organization can easily update its BOI report (asserting its exemption from further updates/CTA reporting) with FinCEN once it receives its determination letter.

Furthermore, a tax-exempt organization that loses its exemption (e.g., its exemption was automatically revoked for its failure to file a Form 990, 990-EZ, or 990-N) and does not want to submit a BOI report must promptly submit the necessary documents (e.g., the missing returns and a Form 1023, 1023-EZ, 1024, or 1024-A) and restore its exemption within 210 days of losing the exemption or it will need to submit a BOI report.³ Alternatively, the now taxable nonprofit organization could dissolve within 210 days of losing the exemption, which would also eliminate the need to file a BOI report.

Footnotes

1 You can apply for a FinCEN identifier through FinCEN's web-based application.

2 See 87 Fed. Reg. 59498 (September 30, 2022) at 59541. "[S]ome commenters asserted that the exemption should cover entities that applied to the IRS for tax-exempt status but were still awaiting a determination." In adopting the final rules as for tax-exempt entities as proposed, FinCEN stated that it "believes the proposed rule, which is almost identical to the statutory language, sufficiently identifies the tax-exempt entities that are covered by the exemption. Additionally, FinCEN declines to adopt any additional exemptions at this time." However, "FinCEN will continue to consider suggestions for additional exemptions, including those proposed by these commenters" (that is, including the proposal to provide an exemption for entities that have applied to the IRS for tax-exempt status but were still awaiting a determination).

3 The exemption from filing a BOI report is lost on the 180th day after the exemption is revoked and the BOI report is due 30 days thereafter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.