2022 - The year of the unclaimed property audit

According to the Chinese Zodiac calendar, 2022 is the Year of the Tiger. For corporate Tax and Accounting professionals, 2022 is proving to be the Year of the Unclaimed Property Audit. The new year has started with a bang and many states have initiated unclaimed property enforcement activity.

By far, the Delaware Unclaimed Property Voluntary Disclosure Agreement Program (VDA), run by the Delaware Secretary of State (DE SOS), and the Delaware Unclaimed Property Audit Program, run by the Delaware Department of Finance Office of Unclaimed Property (DE DOF), are the most impactful programs in the United States.

The DE SOS mails hundreds of “invitations” to US corporations to enter into the Voluntary Disclosure Agreement Program twice a year. Recipients have 90 days to accept the invitation, or, by statute, they will receive a notice of audit from the DE DOF. If there is a silver lining, it is that corporations may not be audited by the DE DOF until they have received and failed to respond to an invitation.

The DE SOS mailed invitations on February 18th and will send out a second round on May 20th, 2022. While an invasive effort, the DE SOS VDA program is more favorable than the DE SOF Audit program.

While Delaware can be counted on for annual outreach, so too can the State of New York. Every year, the Office of Unclaimed Funds, part of the Office of the State Comptroller, mails their invitations to companies suggesting enrollment in the Self-Directed Audit Program (SDCP).

A round of letters was sent in late 2021 and follow-up letters to non-respondents on January 6th and 7th, 2022. The SDCP is a self-directed unclaimed property audit and the procedures outlined must be adhered to. 

A key component of this audit is that company must submit a report within six months of acceptance into the SDCP, so time is of the essence. 

Another well-known initiator of unclaimed property outreach is the State of Illinois. The office of the Illinois State Treasurer has been actively reaching out to companies ever since their 2017 overhaul of Illinois unclaimed property law, highlighted by the repeal of long-standing business-to-business exemptions. This effort appears to be focused on inviting companies with nexus in Illinois to prove their compliance via the state’s voluntary disclosure program.

Which jurisdictions will lead the enforcement of unclaimed property reporting?

While additional jurisdictions like Massachusetts and the District of Columbia are active in their outreach and audit activities, perhaps the development with the potential to be widely impactful to companies, other than Delaware’s, are those of the State of California.

It is widely accepted in the unclaimed property industry that compliance with the State of California’s unclaimed property law is low. In fact, in 2019 the California Legislature’s own Legislative Analyst’s Office (LAO) released a study on how to increase compliance with California’s unclaimed property law. That study estimated that only 2% of companies in that state file unclaimed property reports.

And of course, many and perhaps most, companies around the country are holding unclaimed property that is owed to that state. The study concludes that California’s mandatory (12% per annum) interest on late property, in addition to hefty fines, and lack of a voluntary disclosure agreement program are among the reasons for non-compliance, which it believes is often willful. The report suggests an awareness campaign as well as an increase in audits.

As a result, California passed a law that became effective in January 2022 directing the State of California Franchise Tax Board (FTB) to add questions about a filer’s compliance with the state’s unclaimed property law to California business entity tax returns, and to share the filer’s identity and response with the California State Controller’s Office (SCO). The SCO runs the state’s unclaimed property collection program and with that information, we would have expected California to initiate numerous unclaimed property audits in 2022 and beyond.

In a massive development, on February 16, 2022 bill AB 2280 was introduced in the California State Assembly to create an unclaimed property voluntary compliance/VDA program that would allow for the waiver of interest by the SCO.

If enacted, this program will allow corporations around the country to remit past due property to the state in exchange for a waiver of the 12% per annum interest. The bill proposes typical timelines, conditions, and deadlines on holders of unclaimed property. Perhaps most importantly, the bill will require corporations to complete a self-audit and file a report with the SCO within six months of enrollment in the program.

If this program is approved, all corporations would be well advised to begin an exercise as soon as possible to identify and quantify potential out-of-compliance unclaimed property liability due to California to ensure that ample time will exist to comply with the expected requirements of the California VDA program.

It is believed that people born in a Year of the Tiger are predicted to be brave, confident, competitive, and perhaps unpredictable. In this Year of the Unclaimed Property Audit, we are seeing exactly those traits from the states and their unclaimed property enforcement regimes.