The Sunset Before the Darkness: The End of Delaware's Unclaimed Property Voluntary Disclosure Program and the Resurgence of Unclaimed Property Audits

 
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Unclaimed property is any intangible property that is owed by a company and has gone unclaimed for a specific period of time by the rightful owner.  As previously discussed in our June 26, 2012 True Alert and March 22, 2013 True Update, every company is likely to generate unclaimed property and has a legal responsibility to report and remit that property to the appropriate jurisdiction.  In a nut shell, if a company in possession of unclaimed property, known as a “holder,” has the name and address of the owner of the property, it reports the property to the state of the owner’s last known address.  If the holder has no owner information for unclaimed property in its possession, the property is reportable to the holder’s state of incorporation.  Generally, there is no statute of limitations on a holder’s unclaimed property liability.  As a result, the holder’s state of incorporation has the legal authority to demand that a report be filed where the holder has adequate records, or it may estimate a potential unclaimed property liability for periods where actual records are not available.

Given that many companies are incorporated in Delaware (the “State”), changes to its reporting and auditing processes can have a significant impact on most holders.  The State’s new Delaware Voluntary Disclosure Agreement program (“Program”) was enacted on July 11, 2012, and is administered by the Delaware Secretary of State (“DE SOS”).  The Program provides favorable settlement terms for companies having uncertain, incomplete, or non-existent compliance histories with Delaware’s unclaimed property reporting requirements.  In addition, the Program affords protection to companies with well-established reporting processes and histories from a Delaware-mandated unclaimed property examination being performed by a third-party, contingent-fee-audit firms down the road.

Prior to the new Program, holders entering into a voluntary disclosure agreement (“VDA”) with the State had to report all property generated from January 1, 1991, and forward to the current year.  When enacted, the Program provided a five- (5) year truncation of the reach-back period for holders that entered the Program prior to June 30, 2013 (i.e., shortening the reportable period to January 1, 1996 forward).  While the June 30, 2013deadline has passed, the Program can still provide holders that enroll in the Program before June 30, 2014, a two- (2) year truncation of the reach-back period (reportable period January 1, 1993 forward).

The benefit of the current truncated reach-back period is available to holders that enroll in the Program by June 30, 2014, and complete the required analysis, including payment, by June 30, 2015.  In addition, the Program still allows holders that previously entered into a voluntary disclosure agreement (“VDA”) with the State prior to June 30, 2012, to participate in the current Program with respect to any related entity, property types and/or periods not included in the earlier VDA.

It is critical to understand that based on the current statutory provisions, the DE SOS will not have the authority to accept a Notice of Intent (DE-VDA-1) to enroll a company into the Program after June 30, 2014.  Additionally, the legislation that created the current Program contains a sunset provision which becomes effective on July 1, 2015, whereby the DE SOS will not be authorized to continue working on any VDAs that have not been finalized by that date.  Barring legislative intervention, it is expected that any in-process VDAs not completed by June 30, 2015, will likely be reassigned to the Delaware Department of Finance, State Escheator (“Escheator”).  In addition, companies seeking participation in Delaware’s Program after the sunset date must work with the Escheator under the terms of the prior Program, including the original 1991 reach-back period.

The Resurgence of Delaware Unclaimed Property Audits
Between November 2012 and January 2013, the DE SOS sent outreach letters to over 1,000 companies advising them of the new Program.  Following the outreach effort, roughly 450 companies enrolled in the Program, while it appears the balance of the companies have not responded to the Secretary’s outreach efforts to date.

Although Delaware suspended the initiation of new audits between July 2012 and January 2013, the Escheator (which continues to oversee unclaimed property audits in the State) has resumed issuing audit notices.  Many of the companies receiving audit notices will likely include the companies that had previously received the outreach letters from the DE SOS but that have not yet enrolled in the Program or otherwise responded to the DE SOS’s outreach letter.  However, all companies, not just those that have already received outreach letters, remain at risk for an unclaimed property audit by Delaware and all other jurisdictions.

Notes from the Front Line
Though the Program became effective in July 2012, as of January 2014, it is our understanding that the DE SOS has closed fewer than a dozen of the roughly 450 VDAs initiated since the inception of the Program.  Due to number of in-process VDAs and the looming June 30, 2015 sunset of the Program, the DE SOS has strongly encouraged companies enrolled in the Program to retain third-party advocates for assistance through the process.  For companies who have not retained an advocate, there is an increased involvement of the accounting firms retained by the DE SOS to review submitted documentation, resulting in greater scrutiny throughout the entire VDA process, as well as of the final settlement proposal.

Who Does this Impact?
The Program can still be of benefit for any company that has not yet received an audit notice and desires to take advantage of it prior to June 30, 2014.  Companies most likely to benefit from the reduced reach-back period are those that may not be in full compliance with Delaware’s unclaimed property laws, and those companies that were incorporated/re-incorporated in Delaware prior to 1993.

The Program is available to companies that have:  (1) never reported unclaimed property to Delaware, (2) have omitted reporting dormant property on earlier reports or in earlier VDAs, (3) believe they are in substantial compliance but received an outreach letter and wish to perform a self-audit, or (4) did not receive a DE SOS outreach letter, believe they are in compliance, but want protection from a Delaware-mandated unclaimed property audit prospectively by performing a self-audit.

The Program is NOT available to companies that have an open VDA with the Department of Finance or, companies undergoing or have recently been contacted for a Delaware unclaimed property examination.  Finally, due to the current sunset of the Program, it is expected that all companies enrolling in the Program will benefit from an expedited process.

All companies that are eligible to participate, and especially those that may be holding unreported unclaimed property reportable to Delaware should consider taking advantage of this limited opportunity to get into compliance for all past-due property before the window of opportunity closes.

Our Expertise
True Partners Consulting’s Unclaimed Property Management Solutions Teamis comprised of a national group of professionals with diverse backgrounds, including industry and government.  As of January 2014, our team has assisted our clients by bringing closure to over a third of the VDAs settled by the DE SOS to date and can offer your company the best combination of experience, expertise, and resources to assist your company throughout the Program—regardless of your company’s industry.  Moreover, our team can also assist with quantifying and negotiating voluntary disclosures or remittances in jurisdictions other than Delaware for which your company may have unreported unclaimed property exposure.

We encourage you to contact one of our professionals to discuss any questions or concerns that you may have regarding unclaimed property or the current Delaware VDA program.

Contact Information:

Cathleen A. Bucholtz
Managing Director 
213.417.2501
Cathleen.Bucholtz@TPCtax.com
 
Jim Sadik 
Managing Director 
508.667.3408 
Jim.Sadik@TPCtax.com
 
Robert M. Tucci 
Managing Director 
214.438.3766 
Robert.Tucci@TPCtax.com
 
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