Q&A #166 – Are new nonprofits required to file BOI reports under the Corporate Transparency Act?
Question: I am in the process of forming a new 501(c)(3) nonprofit organization, and expect to file a Form 1023 application in the near future. A Board member alerted me to a new federal requirement to file a report on an entity’s directors and officers to the U.S. Treasury. I’ve read that tax-exempt organizations are exempt from this requirement, but does this exemption apply to new organizations that have not yet had their tax-exempt status approved?
Answer: While the Corporate Transparency Act (“CTA”) exempts most tax-exempt organizations from the requirement to file beneficial ownership information (“BOI”) reports, there has been some confusion about whether these exemptions apply to new organizations that were just recently formed. A careful reading of the CTA statute and regulations strongly suggests that most newly formed nonprofit organizations are exempt from the BOI reporting requirements, even if their tax-exempt status has not yet been formally approved by the IRS.
The CTA, enacted in 2021, requires many types of business entities to file BOI reports with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury beginning in 2024. The BOI reports must disclose certain information about the entity and its “beneficial owners” (the people who own or control the entity) and are designed to help curb illicit financial activities such as money laundering, fraud, and the financing of terrorist activities. The penalties for willful violations of the CTA are potentially severe, including civil fines of up to $500 for each day the violation continues (with adjustments for inflation, this amount is currently set at $591 per day) as well as criminal fines of up to $10,000 and up to two years imprisonment, as described in this Frequently Asked Questions page on the FinCEN website.
Fortunately, in light of the extensive Form 990 reporting requirements that already apply to many tax-exempt organizations, the definition of a “reporting company” subject to the BOI reporting requirements under 31 U.S.C. § 5336(a)(11) excludes most nonprofit organizations. Specifically, the CTA exempts organizations that are tax-exempt under section 501(c) of the Internal Revenue Code (the “Code”), which includes 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6) organizations, among others. The CTA also exempts political organizations that are exempt under section 527 of the Code, and certain charitable and split-interest trusts described in section 4947 of the Code. See also 31 C.F.R. § 1010.380.
Based on the conflicting summaries and analyses of the CTA that are found online, it appears there is confusion about whether this exemption extends to new organizations that have not yet received an official letter from the IRS approving their tax-exempt status. However, a close look at the statutory language reveals a strong indication that new nonprofits are similarly exempt from the CTA, at least until their tax-exempt status has been affirmatively denied or revoked by the IRS.
Under 31 U.S.C. § 5336(a)(11) and 31 C.F.R. § 1010.380, the exemption applies to “any organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code)” (emphasis added).
The reference to section 508(a) of the Code is important. This Code section provides, in effect, that organizations cannot qualify for 501(c)(3) status until a Form 1023 or (if applicable) Form 1023-EZ application has been submitted and approved by the IRS. This treatment is in contrast with other types of tax-exempt organizations for whom application to the IRS is technically optional, for example “self-declared” 501(c)(4) and 501(c)(6) organizations.
The fact that the CTA exemption applies “without regard to section 508(a)” means that it is possible for an organization that intends to qualify for 501(c)(3) status to be considered “described in section 501(c)” under the CTA even if it has not yet satisfied the section 508(a) requirement of filing a Form 1023 or 1023-EZ and getting IRS approval . The same principle very likely applies to other types of 501(c) organizations that have not received IRS approval of their Form 1024-A or 1024 applications.
Therefore, language of the CTA strongly suggests that new nonprofits may be considered exempt from the BOI reporting requirements so long as they are properly organized and operated in the manner consistent with the requirements of organizations “described in section 501(c),” even if they have not yet submitted an exemption application or received an IRS approval letter.
Planning Tip – Newly formed nonprofit organizations should discuss the exemption from beneficial ownership information (“BOI”) reporting requirements under the Corporate Transparency Act (“CTA”) with their bank early in the formation process. Bank representatives may not have an accurate understanding of how these rules apply to nonprofits, and it is possible some banks may ask for verification that BOI reports have been filed with FinCEN (in addition to the usual “beneficial owner” forms that banks are required to collect) even if your organization is exempt. Having these discussions early will not only help you avoid unnecessary delays and disruptions, it will also help you assess whether a prospective bank has sufficient familiarity with nonprofit organizations and willingness to work with you through initial start-up logistics.
However, be aware that your organization will probably not qualify for this CTA exemption to the extent that the IRS has affirmatively rejected or revoked your organization’s tax-exempt status, or declined to approve tax-exempt status retroactive to the date the organization was formed. Special rules and considerations will apply in these situations.
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