Unclaimed Property and Voluntary Disclosure Agreements: An Olive Branch for Companies to Consider

I have been helping companies get into (and stay in) unclaimed property compliance for more than a decade now, and one thing has not changed in that time - accountants in Corporate America still cringe at the thought of the tedious process that involves ensuring all liabilities are properly captured and escheated to the appropriate States.  

Why is that?

Well, for starters, unclaimed property is not considered a tax, so it generally is not “owned” by a particular function group within a company.  As a result, this responsibility can get passed around like a hot potato and oversight can be marginal at best. Secondly, unclaimed property is a very specialized area that is generally not taught in college accounting or CPA prep courses, and unfortunately is something most accountants aren’t very familiar with.  Unclaimed Property compliance issues are especially palpable in organizations with parent companies outside of the United States.  These foreign entities do not fully understand the unclaimed property laws that are unique to each State and are thus very reluctant to turn over uncashed checks (or unused credits) to a government entity when the funds truly belong to a customer, vendor or former employee.  As an unclaimed property professional, one of my jobs is to meet with companies that are not in compliance and convince them that taking the necessary steps to get ‘into compliance’ is not only the law, but can help mitigate future liability if they are ever the target of an audit.

More than half of all corporations in this country are incorporated in the State of Delaware, and for good reason.  The State provides advantageous incorporation regulations as well as rules that can limit corporate legal liabilities.  So, how does this apply to unclaimed property?  Because under an audit or Voluntary Disclosure Agreement (“VDA”), only a Company’s state of incorporation can estimate for years where records do not exist.

Until recently, Delaware was estimating liabilities back to 1981 under an audit, and back to 1991 as part of the VDA process.  These reviews became a real hit to the bottom line of many companies with settlements exceeding millions of dollars.  Typically, unclaimed property payments are Delaware’s second or third largest source of revenue - annually totaling in the hundreds of millions of dollars and making up approximately 15% of the State’s budget.  In addition, the vast majority of the money the State receives is from the aforementioned estimations.  This means that there is no name and address associated with these items, and Delaware claims this money as revenue.

In 2012, the Secretary of State’s office began managing the VDA process as opposed to the Division of Revenue.  Delaware did this in an effort to appear more “business friendly.”  The Division of Revenue remained (and still remains) in charge of the audit function.  However, it is important to note that even under the new VDA program, the entire process can take anywhere from 6-12 months.  If an organization has not already been audited or filed a VDA, this is a laborious (but necessary) function that all companies with operating entities incorporated in Delaware will eventually need to tackle.

As of July 1, 2015, Delaware passed additional initiatives in order to extend another “olive branch” to corporations incorporated in the State. Under the new initiatives, Delaware now cannot initiate an audit unless a company has first been invited via letter to enroll in the State’s VDA program.  Furthermore, the State has enacted shorter rolling look-back periods for both audits and VDAs.

If you receive an invitation letter from the Secretary of State’s office, I strongly urge you to take this matter seriously and act soon.  By sending a letter, the State is informing you that you are officially ‘on notice’ and could be the target of an audit if there is no response.  The benefits of enrolling in a VDA far outweigh being subject to an audit.  These benefits include a reduced look-back period, no penalty or interest incurred for late property and a more efficient process.  As previously noted, a VDA can take anywhere from 6-12 months while it’s not uncommon for an audit to span anywhere from 3-5 years.

If your company is not incorporated in Delaware, it should be noted that other states are also increasing audit initiatives.  These states are hiring additional in-house audit staff and/or outsourcing the audit function to third-party audit firms that, in many cases, work on a contingent basis.  States are becoming increasingly desperate in the search for money to balance their budgets and unclaimed property revenues are becoming an attractive option to help close those shortfalls.  If you believe you are not completely fulfilling your company’s unclaimed property compliance obligations, it is important to be proactive now.

Want additional info on Unclaimed Property in your state? Contact Eric Mauldin.