As a tax attorney, I often stress to clients the importance of looking forward. In the context of financial accounting, that can be a challenge. End-of-year accounting does not always happen in the same fiscal year, and often passthrough returns and financial information (despite best efforts) are not seen until the third quarter of the following year. This leaves a very narrow slice of the year—Sept. 15, through Dec. 31, to restructure and plan with fairly complete information.
However, there are two significant changes that truly make 2023 a critical year to plan: Increased IRS funding and the beginning of Corporate Transparency Act (CTA) reporting on Jan. 1, 2024.
The CTA was enacted on Jan. 1, 2021. Treasury recently released regulations implementing the Act. There are still several open questions as to how reporting will work, but in general, the CTA requires the following:
· Virtually all business entities organized in the United States will need to register their beneficial owners with the Treasury’s Financial Crimes Enforcement Network (FinCEN) beginning Jan. 1, 2024.
· A beneficial owner is the entity or individual that owns at least 25% of the entity’s equity or has “control” over the affairs of the entity.
Given Treasury’s estimate that 32,556,929 entities will need to register in 2024, the implications of the CTA are staggering.
The Supercharged Internal Revenue Service
The Inflation Reduction Act enacted in August 2021 provided $80 billion in funding to the Internal Revenue Service (IRS). Earlier this month, the IRS released a “Strategic Operating Plan” detailing how the funds will be spent. The Plan outlines a 21st century IRS, where fax machines are replaced with a secure document exchange portal, taxpayers have individual account status pages, and IRS staff uses AI-assisted chat to answer common tax questions. However, the $7.5 billion funding directed at those consumer assistance measures pale in comparison to the $47.4 billion that will be spent to “focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap”. That’s a nice a way to say—taxpayers with incomes over $400k should expect a visit from the IRS.
Given those changes, here are some tips to get started on 2023 corporate spring cleaning:
· Build a file for each entity, and ensure that all applicable corporate documents are in place (operating agreement, articles of organization, tax returns, etc.).
· Review applicable Secretary of State registrations to confirm the entity is appropriately registered and active.
· Build an organizational chart showing the following: control, ownership, state of organization, tax status and Taxpayer Identification Number.
· Review with appropriate counsel the operating agreement for each entity against the applicable tax return to ensure alignment. Critically, confirm the “cap table” is current and the tax filing status matches the entity’s agreement.
· Consider merging or winding down unnecessary or redundant entities.
· Coordinate with counsel on appropriate accounting controls and mechanisms. Generally, each entity should have its own bank account to allow for expedited reconciliation in the context of an audit.
The above foundation will help make meeting with advisors more efficient to discuss potential areas of concern and to prepare for the upcoming environment of corporate scrutiny.
Ross P, Keogh is a shareholder in the firm’s rapidly growing Missoula, Montana office and chairperson of the firm’s tax practice. His practice focuses on helping clients create and manage tax-efficient business structures and capital syndication, particularly in the context of start-ups, real estate and the Opportunity Zone incentive. He is also a core team member of Parsons’ venture capital and start-up focused vertical, Parsons Lift.