An introduction to integrated tax compliance and reporting following the Corporate Transparency Act
Governments and international organizations have been implementing additional measures to strengthen tax compliance and increase transparency with respect to beneficial ownership of entities and investment structures, with the goal of combating tax evasion, terrorism financing, money laundering, and related crimes. Although tax compliance and transparency are desirable, implementing and adhering to the resulting reporting and filing requirements is challenging for all parties involved.
Countries all over the world are focusing on tax compliance and implementing transparency measures. The United States has had some recent significant developments in income tax filing and reporting requirements. US federal, state and local levels are already complex, and with the introduction of certain additional reporting requirements and transparency rules, they are becoming difficult to navigate even for taxpayers and fiduciaries (including private trust companies and family offices) who are accustomed to the regulatory world.
And now, with the passage of the Inflation Reduction Act of 2022 (the “Act”) that made it through both chambers of Congress on Aug. 12, 2022, and allocated $80 billion to the United States Internal Revenue Service (the “IRS”), understanding and navigating the US compliance rules has become even more critical as the IRS will have the funds needed to strengthen the enforcement of US tax rules and to ensure adherence to transparency measures. With the additional support from the Global Wealth Squad, which was formed in 2009 to take a holistic approach to auditing and collecting tax from high-net-worth taxpayers and related entities by conducting comprehensive audits revealing the taxpayer’s entire economic picture, it is essential to understand and comply with the US tax compliance and transparency rules.
The Withers Compliance and Reporting Project Team in the US and our tax and reporting compliance teams in many other jurisdictions worldwide can help manage this process.
Key areas of compliance and reporting
Given the complexity and multitude of US tax compliance and transparency requirements, the Withers Compliance and Reporting Project Team can ease the process by reviewing, analyzing, and managing the US tax compliance obligations and addressing the relevant transparency rules while minimizing redundant responsibilities among key persons.
Some of the key areas for compliance reporting integration and coordination:
- Corporate Transparency Act (“CTA”) - NEW for 2022. Any entity formed in the US or registered to do business in the US will need to make a federal information filing to report the identity of those who form, own, and control such entities.
- State-level entity formation or registration to do business. This requires the identification of the direct applicant and sometimes the identification of the person who manages the entity, depending on state requirements.
- IRS Form SS-4. This is a federal Application for a US Tax Identification Number, and it requires the identification of a “responsible person” for the entity.
- IRS Form 8865 and related forms. Federal US partnerships compliance documents require the identification of a “partnership representative,” which can be any person as long as it has a “substantial presence” in the United States.
- IRS Form 5472. This federal information return requires the disclosure of non-US owners of US disregarded entities and the reporting of certain transactions between the US disregarded entity and related parties.
- IRS Form 8858. This federal information return requires the disclosure of US owners of non-US disregarded entities and detailed financial information about the entities.
- Bureau of Economic Analysis (“BEA”). These complex annual and periodic filings require reporting inbound and outbound investment activities.
- FATCA and CRS. These annual and periodic filings require managing and reporting various banking, financial, and investment accounts to the IRS or other tax authorities, as applicable.
Enforcement
The significant funding boost allocated to the IRS for the next decade will allow the IRS’s Global Wealth Squad to audit high net worth taxpayer’s personal filings and to find entities, trusts, and structures related to such high-net-worth taxpayers. The IRS believes it can significantly increase tax revenues that will surpass the budgeted $80 billion it is being allocated to carry out such audits.
How Withers can help
We specialize in assisting high-net-worth individuals, and their related entities meet their various US tax compliance and transparency-related filing obligations, and, through our international offices, we help satisfy the requirements internationally.
We can address these issues as follows:
- Identify owners and controlling persons of entities and structures to evaluate reporting obligations under the CTA, BEA, FATCA, CRS, and/or other annual and periodic reporting obligations.
- Identify a designated person who can be consistently appointed as the owner / controlling person / contact person of an entity for US compliance and transparency purposes.
- Coordinate reporting obligations, timing, and data management for reporting.
- Execute reporting obligations.
- Identify and subsequently minimize risks of confusing or conflicting information arising from diverse US compliance obligations.
- Coordinate with relevant government agencies to avoid or mitigate compliance lapses.
- Compliance with US and/or non-US know-your-client and anti-money laundering requirements.
- Support ongoing transactional and related compliance needs.
