Huge Small Biz Break: Judge Suspends Enforcement Of FinCEN Reporting Requirement

Just a few weeks before a poorly-publicized Jan. 1 deadline, a judge has issued a nationwide injunction barring the enforcement of a controversial mandate that would compel tens of millions of small and large businesses to file beneficial ownership reports with an obscure federal agency. The ruling doesn’t kill the requirement altogether, but it does bar the Treasury Department from enforcing it until lawsuits challenging the requirement’s constitutionality are fully resolved. 

“There are now CTA cases pending in the Fourth, Fifth, Ninth, and Eleventh Circuits,” notes attorney and Forbes contributor Kelly Phillips Erb, posting as @taxgirl on X. “It’s looking more like it could end up at the Supreme Court.” There’s also the possibility that the next Trump administration — either unilaterally or via cooperation with Congress — could find a way to kill or at least narrow the requirement. 

The rule imposed by the Corporate Transparency Act (CTA) swept the vast majority of “legal entities created to do business in the United States” into a new bureaucratic net, directing them to dump information about themselves and their “beneficial owners” into a federal database managed by the Financial Crimes Enforcement Network (FinCEN) — which most Main Street businesses and single-member LLC’s have probably never even heard of. Those who failed to comply faced severe penalties, ranging from civil fines of up to $591 a day to criminal consequences of up to $250,000 and a five-year prison term.    

Advertised by the Feds as necessary to crack down on criminals’ use of shell companies, it’s the kind of heavy-handed bureaucratic burden that incoming president Donald Trump and his sidekicks at his nascent “Department of Government Efficiency” — Elon Musk and Vivek Ramaswamy — have promised to eradicate. Indeed, FinCEN itself estimated that compliance would cost $22.7 billion in the first year alone, and then $5.6 billion in subsequent years into perpetuity. 

The rule sought to put the ownership information of more than 32 million entities in a US Treasury database. It’s fair to say that a huge proportion of them had no idea that a deadline backed by harsh penalties was rapidly approaching — and still don’t. In August, FinCEN said fewer than 4 million had complied with the requirement. The CTA exempts 23 categories of entities from the reporting requirement — most of them are various types of financial institutions. 

Big news – FinCen BOI reporting has been delayed indefinitely..

A federal court out of Texas issued a sweeping order saying the government may not enforce a January 1 filing deadline.

You are still free to report, but this can seems to be kicked down the road for a while.

— Mitchell Baldridge (@baldridgecpa) December 5, 2024

Writing at at Forbes, attorney Matthew F. Erskine explains District Judge Amos Mazzant’s rationale for siding with the multiple plaintiffs in the case, which include the National Federation of Independent Business (NFIB), Texas Top Cop Shop and the Libertarian Party of Mississippi:  

Judge Mazzant’s opinion strongly rebuked the CTA for overstepping constitutional boundaries. He noted that corporate regulation has traditionally fallen within the states’ jurisdiction. By mandating federal oversight of corporate ownership, the CTA disrupts the balance of power foundational to the U.S. federalist system.

The Treasury Department quickly announced that it will appeal the ruling, with a spokeswoman claiming that the CTA “plays a vital role in protecting the U.S. financial system…We continue to believe—consistent with the conclusions of other federal courts—that the CTA is constitutional.” Not all courts feel that way: Earlier this year, an Alabama judge imposed an injunction that only applied to NFIB members, finding that the Constitution provides no basis for a law requiring the collection of ownership information. 

After the Texas judge issued his 80-page ruling on Tuesday, FinCEN posted an alert to its website informing business owners that “reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect.” In the meantime, entities are free to voluntarily submit the reports if they want to. A post pinned to the agency’s X account it “may take 20 minutes or less” — which is hardly encouraging. 

“This ruling is a huge victory for small businesses nationwide, and just in time” said Beth Milito, Executive Director of NFIB’s Small Business Legal Center. “Many Main Street small businesses…were a mere four weeks away from the deadline to file their information in accordance with the CTA. The BOI [Beneficial Ownership Information] reporting requirements are a harmful invasion of small business owners’ privacy and a misuse of their valuable time.”

There’s more to privacy concerns than just putting the names of beneficial owners in front of the Feds’ eyes: FinCEN has already demonstrated an inability to keep its reports secure from leaks. In 2020, Buzzfeed published a report drawing on more than 2,000 leaked “suspicious activity reports” that had been filed with the agency. 

Erskine is hopeful that the case – Texas Top Cop Shop v Garland –  could help bolster federalism: “Judge Mazzant reaffirmed that the Constitution’s constraints on federal power remain relevant even in addressing modern challenges. This case could set a precedent for courts to scrutinize federal initiatives that intrude into areas historically managed by states.”

Let’s hope so.