State Unclaimed Property Enforcement Merits Proactive Planning

Unclaimed property generally refers to intangible property such as uncashed checks, unresolved customer credit balances, abandoned bank accounts, and unredeemed gift cards. In the US, unclaimed property law originally was enacted as a consumer protection measure designed for individuals with lost funds.

Over time, state enforcement of unclaimed property law—audits and voluntary disclosure programs—has shifted from consumer protection to a revenue-generating exercise, leading to more aggressive tactics in some states, including Delaware and California.

Businesses can proactively respond to this shift by studying their unclaimed property profiles, implementing new procedures across departments that generate and manage unclaimed property, and exploring voluntary disclosure agreements, or VDAs.

Risks and Consequences

Companies typically have unclaimed property filing requirements in all states where customers, vendors, and employees reside. Many large companies today have a national reach, triggering potential unclaimed property filing requirements in all 50 states. As a result, states continue to increase self-review and audit activity to enforce compliance.

Companies that haven’t filed or have a limited or inconsistent filing history are at high risk for state scrutiny. If material changes in reporting occur due to legitimate business reasons, providing an explanation to the state could prevent notices.

A legitimate shift in reporting might occur when a segment of the business is divested or a new one is acquired. By contrast, changes in reporting due to a newly enacted policy to write off stale checks or credits below a certain dollar threshold would raise concerns.

An organization targeted for an unclaimed property review typically receives one of two notices sent to its chief financial officer or similar role: a formal audit notice or self-review (or self-audit) notice. Both programs generally require a 10-year lookback, covering transactions 13 to 15 years from when the notice is received. Companies that don’t maintain records going back that far can be required to estimate a liability using more recent test periods.

States outsource almost all unclaimed property enforcement initiatives to third-party audit and law firms, including self-reviews, self-audits, VDAs, and traditional examinations. Auditors are paid on a contingent or hourly fee arrangement, which often leads to drawn out and overly burdensome reviews with no materiality thresholds.

State Initiatives

Over the past several years, almost all US reporting jurisdictions require holders to electronically submit annual unclaimed property reports. Online reporting allows states to aggregate data and analyze reporting trends year over year. States use this reporting data to benchmark companies of similar sizes and industries to identify audit targets.

California and Delaware have designed and implemented first-of-their-kind initiatives to enforce compliance with their unclaimed property statutes, efforts that other states might match in the future.

California. Companies are required to disclose the date and amount of their last unclaimed property filing on their annual income tax return. The California Franchise Tax Board shares this information with the California State Controller—the office that administers the state’s unclaimed property program.

The state also enacted its first voluntary compliance program. California might use this information to identify companies not filing annual unclaimed property reports for further scrutiny.

Delaware. Upon receipt of a verified report notice, which is different from a traditional VDA and allows the state to test compliance with less time and fewer resources than required in a VDA or audit, companies are required to perform a limited review of their most recent filing.

Verified reports must be notarized by an officer of the company and have a firm 180-day time frame for completion. The last verified report notices were mailed in August by the Delaware Department of Finance, and more are expected to be sent in the coming months.

Delaware’s VDA program is the most complex of any. Companies may opt in voluntarily but often are invited to the program by the secretary of state. If a company doesn’t opt in, the company is referred to the Department of Finance for a formal audit or examination. It might be worth monitoring your company’s mailbox as Delaware had planned to mail another round of VDA invitations on Nov. 15. Formal audit notices went out the week of Oct. 25.

Companies in the diligence process or that recently completed an acquisition can enroll in the merger and acquisition voluntary disclosure process where the state uses tax diligence materials to fast-track a VDA analysis. Companies are permitted to settle based on amounts identified during diligence or to escrow an amount to remediate post-sale.

Proactive Steps

It’s easier to address and mitigate unclaimed property exposure before receiving a state inquiry. Every company should know its unclaimed property profile. If your company doesn’t have a handle on unclaimed property, a risk assessment and exposure quantification is the first step to achieving compliance.

This involves a detailed review of the company’s books and records to understand historic processes and identify amounts that could represent unclaimed property. A third-party service provider with expertise on state unclaimed property law and auditor tactics can assist with this review.

Companies also should consider implementing robust policies across all departments and functional areas (payroll, accounting, treasury, legal) that generate and manage unclaimed property.

Uniformity helps minimize unclaimed property and track it for potential reporting. A successful policy will define applicable property types, assign contacts to manage the process, and detail procedures to confirm compliance. For example, your company’s policy document could require each functional area to periodically review property and make efforts to resolve discrepancies directly with property owners.

Finally, VDAs are a great way to settle past-due exposures with select states in exchange for abatement of applicable penalties for noncompliance. VDAs often are considered after an exposure quantification is performed and based on states identified to have material past-due exposures.

VDAs are performed in-house and usually have more lenient review procedures than audits. But voluntary compliance generally isn’t available to companies under audit and sometimes isn’t available to companies that have a previous filing history.

There isn’t a one-size-fits-all approach to tackling unclaimed property compliance. Consider arming your company with the tools, resources, and knowledge to stay a step ahead of the states and their third-party partners, and proactively prepare to address state inquiries.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Zachary Robbins is a state and local tax principal at Crowe.

Jacob Garcia is a state and local tax senior manager at Crowe.

Kristen McClellan is a state and local tax manager at Crowe.

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