Feds Enforcing Unconstitutional Reporting Law Against Most Businesses

Early this month, a federal judge in Alabama held the Corporate Transparency Act unconstitutional and granted plaintiffs in a lawsuit summary judgment against enforcement of the wide-reaching law, which went into effect this year. For many Americans this raises the questions: "What in hell is the Corporate Transparency Act? Does it affect me?" The quick answer is that it's a big deal, and if you own an incorporated business, you'll probably still suffer its intrusive requirements even after the ruling.

Significant Regulatory Punch in a Small Package

"When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act ('CTA'). Although the CTA made up just over 21 pages of the NDAA's nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department's criminal enforcement arm," Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama's Northeastern Division handily summarized in this month's ruling.

Large businesses are exempt; the law applies to companies with 20 or fewer employees.

Justifications for the law laid out in early versions of the legislation invoked a laundry list of alleged financial horribles including money laundering and tax evasion. The word terrorism appears, too, of course, because that has been the lazy, default justification for legislation for 20-plus years. Basically, the law is targeted at anything that might involve a modicum of financial privacy.

To that end, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) set up an online reporting system through which business owners "are required to report information to FinCEN about the individuals who ultimately own or control them." FinCEN started compiling reports for such "beneficial ownership information" (BOI) on January 1, 2024 with a deadline for compliance of January 1, 2025, or 30 days after creation for companies registered following that date.

A Regulation With a Nasty Sting

Is there a penalty for noncompliance? Of course there is. According to FinCEN, "a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000."

This might be a problem for those many Americans who have established corporations or limited liability companies for making a living, but don't keep track of the federal government's diligent efforts to stamp out the scourge of terroristic money launderers among retail storefronts and Etsy vendors. I received a heads-up from reader Rick Wakefield, who forwarded a memo from his accountant. I dug through my email and found a similar note from my own accountant, dated two days before Christmas. Another accountant with whom I work told me she'd been waiting on the outcome of litigation against the law.

Business Owners Strike Back

That litigation came in the form of National Small Business United v. Yellen, launched by the National Small Business Association and NSBA member Isaac Winkles against the federal government.

"The CTA will create a cumbersome reporting process for small businesses that are rarely equipped with compliance teams or staff attorneys," argues the organization. The group adds that the feds already have the relevant information supplied via bank due diligence rules, and the law adds a new layer of D.C.-based complexity. "The CTA lays the groundwork for a federal takeover of entity formation and self-governance practices."

Importantly, the plaintiffs argued that the reporting requirement is worse than cumbersome, it's unconstitutional. They say it allows the federal government to usurp roles reserved to the states, imposes unreasonable searches and seizures, and makes up vague terms such "beneficial owners" which are not normally used by businesses or state agencies.

Judge Burke agreed. In dismantling the government's claims that the CTA is justified as an exercise of federal authority over foreign policy, national security, and taxing power; and under the Commerce Clause, and Necessary and Proper Clause; he slapped Congress for sloppy drafting that doesn't even hand-wave a claim of a constitutional basis.

Law Cannot Be Justified Under the Constitution

"The text of the CTA is missing a crucial component of valid substantial effects legislation," Burke wrote. "It 'has no express jurisdictional element which might limit its reach to a discrete set of [activities] that additionally have an explicit connection with or effect on interstate commerce.'"

"So commonplace are these jurisdictional phrases," he commented while marveling at the oversight, "that, for purposes of statutory interpretation, courts assume that 'Congress uses different modifiers to the word "commerce" in the design and enactment of its statutes.'"

As a result, he concluded, "the Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress' enumerated powers. This conclusion makes it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments."

That's good news—but so far, only for the plaintiffs in National Small Business United v. Yellen.

Unconstitutional, But Still Enforced

"The government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024)," concedes FinCEN. "Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time."

That means the unconstitutional law is still being enforced against everybody who wasn't party to the lawsuit.

"When coupled with the fact that FinCEN put virtually no effort into informing the public about the obligations of small businesses under the CTA, FinCEN's unwillingness to suspend enforcement shows a clear disregard of America's small-business owners," warns NSBA President and CEO Todd McCracken. "FinCEN should immediately reverse course and suspend enforcement of the CTA for all until these issues are finally resolved."

The American Institute of CPAs also called for suspension of enforcement after the court decision. It had already raised concerns, saying "many remain broadly unaware of their reporting requirement."

For now, though, despite the federal court's finding that Congress had no constitutional authority to impose "beneficial ownership information" reporting requirements on the country's business owners, the rule remains in place, with a deadline of next January 1. You may want to check with an accountant and spread the word to those who haven't yet heard of this dangerous regulatory burden.