All U.S. states, the District of Columbia, Puerto Rico, and the Virgin Islands have laws requiring businesses to report and remit unclaimed property. The funds from unclaimed property compliance filings, amnesty programs, and audits have emerged as a material source of revenue for states. For example, in 2022, after accounting for reunited balances, Delaware's unclaimed property receipts were $349 million, or approximately 6% of the state's general fund.

Most companies do not fully understand the requirements and logistics related to unclaimed property and, as a result, may be subject to material risk and liability. Below is a discussion of unclaimed property laws, including recent developments in Delaware and California.

What Is Unclaimed Property?

Unclaimed property is intangible personal property that has not had owner activity for a certain amount of time (referred to as the dormancy period), including, but not limited to:

• Uncashed and voided vendor checks,
• Uncashed and voided payroll checks,
• Unused balances on gift cards/certificates,
• Credit balances in receivables,
• Write-offs or account reclassifications,
• Stocks and uncashed dividend checks,
• Royalty payments,
• Suspense accounts,
• Non-ERISA benefit payments, and
• Securities and related instruments.

Dormancy periods vary by jurisdiction and property type. Three to five years is the general dormancy period for vendor payments and accounts receivable credits. Companies, referred to as holders, must report and remit the property to the appropriate jurisdictions on an annual basis. The appropriate jurisdiction is generally determined by the unclaimed property priority rules established by the U.S. Supreme Court in Texas v. New Jersey, 379 U.S. 674 (1965), as follows:

• First – To the state of the owner's last known address if the address is known, and
• Second – To the state of the holder's incorporation if the address is unknown.

The states take custody of the unclaimed property until the rightful owner claims the funds, which may never happen. For example, California is holding more than $11 billion in unclaimed funds of which only $1.1 billion is held as a current liability. Most unclaimed property reviews span a period of 13 to 15 years, with no meaningful statutes of limitation. In the absence of complete and researchable records, states performing unclaimed property audits use gross estimation techniques to assess liability. It is not uncommon for holders to face higher estimated liabilities when compared to identifying the actual property upon which there has been no owner activity for the relevant dormancy period.

Given the amount of potential revenue at stake, it is no surprise that states actively audit companies for unclaimed property non-compliance. Audits are generally done by third-party, contingent-fee, or hourly based agents who contract with participating states. In our experience, most unclaimed property examinations have at least seven participating states.

Delaware Unclaimed Property

Delaware consistently identifies companies for unclaimed property non-compliance using a variety of information, including Delaware incorporation, Delaware headquarters or presence, merger and acquisition activity, filing history, and industry. The state reaches out to companies in the following ways:

• Voluntary Disclosure Agreement (VDA) Invitation Notices (90-Day VDA Letter),
• Third-Party Audit Notice, or
• Verified Report (Compliance Review).

VDA Invitation Notices (90-Day VDA Letter)

Generally, Delaware cannot audit a holder until the holder is given the opportunity to enroll in the VDA program. As such, Delaware routinely (quarterly) sends invitations to companies, giving them 90 days to enroll in the Delaware Secretary of State VDA program. Any company that fails to enroll within 90 days is referred to the Department of Finance Office and is subjected to an unclaimed property audit. Companies have two years to complete the VDA program with the possibility of extension. The VDA program abates interest and penalties and offers holders the ability to use more favorable testing methodologies to identify property owed when compared to audit. In exchange for this favorable treatment, the state expects that there will be a detailed review of books and records by a third party contracted by the state.

Third-Party Audit Notice

A company that fails to enroll in the VDA within 90 days can expect to receive an audit notice. Unclaimed property audits are an expensive undertaking for a business, both in terms of resources and assessed liability. Delaware uses third-party auditors to conduct the examinations. Most audit firms have contracts with additional states, resulting in a piggyback or multi-state review. Delaware unclaimed property audits have a 15-year look-back period and assessments include a mandatory interest rate of up to 50%. The state requests extensive records during the course of the audit. As a result, it is common for unclaimed property audits to last three to seven years.

Verified Report (Compliance Review)

Another method that Delaware can use to review records for potential non-compliance is its Verified Report and Compliance Review Process, which was enacted on June 30, 2022, under Delaware SB 281. Senate Bill 281 allows the State Escheator to review compliance returns for any reason. As such, Delaware sends out Verified Reports requesting companies to review, confirm, or make changes to prior returns, and provide policies and procedures for review. Failure to respond to a Verified Report within the deadline could put a company at risk for a third-party audit without the 90-day notification letter.

California Unclaimed Property

California has historically been a state that consistently enforced interest assessments (12% annually) on past due reported property and participated in third-party audits with no option of an amnesty program. An estimated 2% of California holders are in compliance with unclaimed property reporting. In an effort to increase compliance, California enacted AB 2280 on September 13, 2022. The new law permits the State Comptroller's Office (SCO) to offer holders a voluntary means to come into compliance and avoid certain costs otherwise imposed upon non-filers.

Voluntary Compliance Program (VCP)

By enrolling in California's VCP, businesses can come into compliance with the benefit of abatement of 12% annual interest. Companies are not eligible if they are under audit/received an audit notice from SCO, are subject to civil or criminal prosecution involving compliance with state unclaimed property laws, or have any unpaid interest for unclaimed property for the past five years. Currently, California requires companies to submit an intent form on the VCP website. Following the intent form, the state will provide an application to be submitted by the company. After review and acceptance by the SCO, the company will have six months (with the opportunity of extensions up to 18 months) to submit a final report.

This is an ongoing program that is evolving. The SCO will continue to accept applications and provide due dates.

New Discovery Law

While the VCP provides a carrot for holders to comply with reporting obligations, California enacted AB 466, which took effect January 1, 2022, as a stick to force reporting. The law authorizes the California Franchise Tax Board to provide the SCO with relevant business taxpayer information (including the taxpayer's entity status and revenue range) and requires any company that files a California income tax return to answer the following questions:

• Has this business entity previously filed an unclaimed property Holder Remit Report with the State Controller's Office? [Yes/No]
  • If “Yes,” when was the last report filed? _____________
  • Amount last remitted? $_______________

The requirement to affirm compliance with unclaimed property reporting highlights the need to perform due diligence and consider the VCP.

Other States/Notices

Unfortunately, Delaware and California are not the only states that have potential risks for unclaimed property audits, reviews, or interest assessments. New York, Pennsylvania, North Carolina, and others send questionnaires to companies inquiring about prior reporting and potential property owed to the state. Requests for self-audits have increased over the last two years in Florida, Illinois, Massachusetts, Utah, and Washington, D.C., jurisdictions that ask companies to report all past-due property within six months. Virginia and Florida also have a compliance review process and ask questions about prior filings, policies, and procedures. Most states also have contracts with third-party audit firms and routinely participate in mandated examinations.

The Takeaway

Unclaimed property audits and reviews can be extremely time-consuming, expensive, and burdensome for holders. Andersen's dedicated group of unclaimed property professionals can help your company understand its potential unclaimed property exposure, risk, reporting obligations, and possible mitigation options.