California to enact landmark unclaimed property voluntary compliance program

On August 17, 2022, California’s legislature passed AB 2280, which will create California’s first-ever unclaimed property voluntary compliance program (VCP) when signed into law by Governor Gavin Newsom.

As the state continues to tighten compliance efforts, California corporate income tax filers must attest to unclaimed property compliance in 2022 in order to avoid penalties. In this Insight, we discuss the background of California’s unclaimed property law, critical tax filing dates, and what steps you can take next.

California’s unclaimed property law

As we pointed out earlier this year, California is undergoing a substantial change in unclaimed property compliance efforts.

While most states have formal or informal voluntary compliance programs, also known as voluntary disclosure agreement programs (VDA), California was alone in its lack of a program to waive interest on past due unclaimed property filings.

Thus, compliance with California’s unclaimed property law is extremely low, in fact, it is estimated that only 2% of companies in that state file reports. The state has historically assessed a mandatory 12% per annum compounded interest on all late-filed unclaimed property.

Unclaimed property law is driven by the state of the last known address of the owner of the property. It is assumed that most companies in the United States are at risk for potentially material out-of-compliance liability in California.

How to participate in the voluntary compliance program

Following a law that became effective in January 2022, the State of California Franchise Tax Board (FTB) added questions to the 2021 tax return regarding corporate franchise tax (income tax) filers’ compliance with California’s unclaimed property statute. All corporate income tax filers in California must reveal in 2022 if the business has filed unclaimed property reports previously, when the last filing occurred, and how much was remitted.

The statute directs the FTB to share responses with the California State Controller’s Office (SCO), the agency that enforces the state’s unclaimed property laws. It is presumed that the SCO will use this information to identify companies for audit. Presumably, the SCO would prefer that companies take advantage of the new opportunity to voluntarily comply via the voluntary compliance program. Requirements to participate in California’s voluntary compliance program include:

• Completion of a training program offered by the SCO within three months of enrolling in the VCP

• An attempt to contact the owners of the unclaimed property no later than thirty days before filing

• Submission of an initial filing within six months of enrollment in the VCP and a final filing no sooner than seven months and no later than seven months and fifteen days from the initial filing (note that the SCO may grant an extension to eighteen months total)

• Companies may not participate in the VCP if currently under audit by the SCO, if involved in criminal or civil prosecution with the SCO over unclaimed property, if an unclaimed property interest assessment is currently owed, or if a waiver of interest had been granted within the last five years (exclusions exist for acquisitions)

Important tax filing dates

Franchise tax filing dates vary. Certain business types have a March 15th filing date with a September 15th or October 15th extension date, while others have an April 15th filing and November 15th extension date. In any case, all companies that do business in California will have had to answer these questions this past spring or must do so this fall.

Next steps

Overall, these developments appear highly beneficial to companies around the United States. It is widely assumed that 2023 will see a massive increase in compliance with California’s unclaimed property statute. Corporations are encouraged to consider the benefits of enrolling, weigh the risks, and retain advice from a trusted partner. We will continue to update this Insight as developments occur.