Federal Reporting Law Threatens 32 Million Small Business Owners’ Privacy

Texas Top Cop Shop, Et Al. v. Merrick Garland, Et Al.

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On January 10, CIR filed a Supreme Court brief urging the High Court to uphold the nationwide injunction blocking the enforcement of the Corporate Transparency Act. Late on December 31, the U.S. government filed an emergency application to the Supreme Court, requesting that it lift the nationwide injunction.

To lift the injunction, the government would need to show that it is likely to win on the merits of the case. As CIR’s brief points out, the government cannot prevail because Congress clearly had no authority to enact the CTA. While Congress has the power to regulate interstate commercial activity, the district court found that the CTA imposes its reporting requirements on 32 million small businesses and many nonprofits regardless of their activity. The Supreme Court has firmly rejected the idea that Congress can issue regulations on someone simply for existing.

The government would also need to show that its inability to enforce the CTA during the recently expedited review in the Fifth Circuit Court of Appeals would irreparably harm the government. The government’s own conduct contradicts the claim. It has been four years since Congress enacted the CTA, and the Treasury Department delayed implementing it in several ways. It is hard to imagine that giving the courts a few months to determine whether the law is constitutional could cause any serious or irreparable harm. And the harm of enforcing such an unconstitutional law is far worse for the scores of millions of Americans subject to potential criminal penalties.

The Supreme Court should uphold the injunction on the CTA both to prevent the irreversible harms caused by the enforcement of a sweeping and unconstitutional reporting mandate and to prevent the widespread chaos and confusion that would follow for millions of small business owners nationwide if their legal obligations under the federal regulations change for the fourth time in a month

As of January 10, 2025, the federal government is barred from enforcing the CTA’s reporting mandate.

The Corporate Transparency Act

The Corporate Transparency Act (CTA) is a sweeping and unconstitutional law that requires more than 32 million small businesses and nonprofit organizations to supply “beneficial ownership reports” to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) by December 31, 2024 under threat of criminal punishment.

FinCEN will then allow state and federal law enforcement agencies to search its database of confidential information for evidence of crimes.

CIR has filed a suit challenging this invasive law for exceeding Congress’ legislative authority under the Commerce Clause, violating First Amendment free association rights, and subjecting tens of millions of Americans to unconstitutional warrantless searches.

The Prying Eyes of Government

The CTA mandate applies to almost every pre-existing or newly formed “corporation, limited liability company, or other similar entity that is” “created by the filing of a document with a secretary of state.” Each entity must file a report that contains the name, address, date of birth, and a copy of an unexpired passport or driver’s license of each “beneficial owner[].” 

The term “beneficial owner” is far broader than appears at first glance.  Any person who exercises “substantial control” over an entity qualifies as a “beneficial owner” whether they “own” anything at all. The language is dangerously unclear and could even capture family members of a small business owner who provide start-up loans and exercise informal influence. These determinations will be made by unaccountable enforcers at the Treasury Department.

The act was pitched as a way of countering financial crimes by disclosing the identities of corporate decision-makers, but lobbyists for 23 categories of corporate entities secured statutory exemptions, including those most likely to be involved in financial crimes—banks and financial services, publicly traded corporations, and large closely held corporations. Unfortunately, that leaves mostly small businesses and some nonprofits to comply or suffer criminal liability.

By the government’s count, the law reaches 32.6 million existing businesses and 5 million new businesses per year. Any entity that fails to submit a report by December 31, 2024 is subject to criminal penalties and a $500 per day fine for every day that the report is late, incomplete, or inaccurate. Sadly, most Americans do not even know that the law exists and cannot submit a report, even if they have no objections to compliance. Only a small percent of the obligated businesses have submitted reports. The remaining companies will be subject to penalties at the Treasury Department’s discretion.

It’s Not Just Bad, It’s Unconstitutional

CIR filed a federal lawsuit on behalf of a coalition of small businesses, such as lead plaintiff, Texas Top Cop Shop, as well as the Libertarian Party of Mississippi, who rightly object to providing the government with confidential and sensitive information. The suit is also joined by the National Federation of Independent Businesses, an advocacy organization that speaks for nearly 300,000 small business members nationwide.

The CTA violates three separate provisions of the Constitution.  First and foremost, the Constitution gives Congress no authority to supervise internal corporate governance, which has always been an exclusive state law responsibility. While the Constitution does allow federal regulation of interstate commerce, it does not grant regulatory authority over purely local activity, including advocacy on local issues.

The CTA also violates the First Amendment. In NAACP v. Alabama (1958), the Supreme Court struck down an Alabama law that required organizations registered in the state to provide its membership rolls, hoping to suppress political organizations like the NAACP.  The Court found that “compelled disclosure of affiliation with groups engaged in advocacy may constitute as effective a restraint on freedom of association” as outright suppression. One of the original sponsors of the CTA, Senator Sheldon Whitehouse, argued that it would help the federal government track “dark money” that was used for advocacy he didn’t like.

The CTA also violates the Fourth Amendment, by forcing millions of entities to file reports disclosing admittedly confidential information with no individualized suspicion or judicial process.

This case marks the first challenge in CIR’ Project to Restore Competitive Federalism. Victory will set a precedent that undermines expansive readings of the Commerce Clause used to put every aspect of American life under the control of federal agencies.

Ongoing Litigation

On December 3, 2024, Federal District Judge Amos Mazzant issued a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (CTA). The injunction came less than one month before the January 1, 2025 reporting deadline after which businesses that failed to file a report, or whose reports contained errors or omissions, would be liable to civil and criminal penalties including fines of up to $500 per day.

Immediately following the District Court’s decision, accounting and law firms around the country promptly informed their clients that they were no longer under an obligation to comply with the CTA’s onerous and invasive regulatory burdens. And the U.S. Treasury Department confirmed on its official website that the filing deadline had been suspended pending further court rulings, approximately 24 days before it was set to go into effect.

After eight days of inaction by the federal government, the U.S. Department of Justice filed an appeal, asking the Fifth Circuit to halt the injunction, and seeking an emergency ruling lifting it so that the January 1 deadline could go back into effect. In its latest filing on December 13, the government asked the appellate court to rule by December 27 to reimpose the January 1 deadline, which would give tens of millions of people one business day to comply with the complex filing.

It’s Christmas Time in the Circuit

On December 23, a three-judge panel of the Fifth Circuit stayed the District Court’s December 3 nationwide preliminary injunction on the Corporate Transparency Act, reinstating the CTA’s filing obligations.

In response to the confusion that the government’s appeal has caused for millions of small businesses, the Treasury Department pushed back the filing deadline; the new date is January 13. Even with the pause, the court’s decision to reinstate the CTA leaves businesses with only a very brief window during and shortly after the holiday season to comply with its invasive and burdensome mandates.

On December 24, CIR filed an emergency appeal to the Fifth Circuit, petitioning the court to rehear the case en banc (that is before the full bench of all the Fifth Circuit judges). Within a few hours, the Fifth Circuit asked the federal government to file a response to CIR’s petition by 12 PM on December 31. Under local rules, the opposing counsel is not allowed to file a response until the court requests one. Traditionally, when the court requests a response, it means that at least on one of the judges has taken a strong interest in the case. That combined with the sudden turn around suggests that the court is inclined to take the case.