United States

Delaware voluntary disclosure agreement program for unclaimed property

Real benefits, real questions

INSIGHT ARTICLE  | 

The State of Delaware is offering an updated unclaimed property voluntary disclosure agreement (VDA) amnesty program to make it easier to come into compliance around unclaimed property. With nearly 50 percent of companies incorporated or domiciled in Delaware, this program will have a far-reaching impact. Unknown property, including extrapolated amounts, generally escheats to the state of incorporation, and many companies may have significant unclaimed property exposure in Delaware.

Due to budgetary pressures in recent years, the Delaware Department of Finance – State Escheator (the Department) has increased its unclaimed property enforcement efforts through audits, including those conducted by third-party audit firms. Since unclaimed property is a contractual liability rather than a tax, traditional nexus standards do not apply. If audited, companies may have potential unclaimed property exposure back to 1981 or the date of the company’s incorporation, whichever is later. Further, interest and penalties can be significant. Accordingly, Delaware’s new voluntary disclosure agreement program may provide companies an opportunity to reduce their unclaimed property exposure. However, since companies only have until June 30, 2014, to enter into the program, they must act quickly.

Why consider the new VDA program? The following table outlines the benefits:

Issue

VDA Program

Audit

Look-back period

Review of books and records back to 1993

Review of books and records back to 1981. If records are not available back to 1981, sample base periods are reviewed to derive an error factor, and liabilities are extrapolated/estimated back to 1981 or the company’s date of incorporation, whichever is later

Audit protection

State will not audit participants who successfully complete the program

Companies that do not complete a VDA could be audited at any time

Duration

Guidelines suggest process is designed to be completed in nine months

Audits can take as long as five years

Penalties and interest

Penalties and interest are waived

Interest is imposed at a rate of 6 percent annually and is capped at 50 percent of the total liability per report year

60 percent penalties can be imposed, up to half the value of the property reported in each report year

Administered by

Delaware Secretary of State

Delaware Department of Finance – State Escheator

Background on unclaimed property

Unclaimed property is tangible or intangible property that has gone unclaimed by its owner after a period of inactivity, known as the dormancy period. Delaware’s dormancy period for most property types is five years.

Common types of unclaimed property include, but are not limited to:

  • Accounts payable
  • Payroll
  • Accounts receivable credits
  • Gift cards and merchandise credits
  • Small balance write-offs
  • Deposits and refunds
  • Commissions
  • Equity property, including dividends
  • Bank accounts
  • Retirement assets
  • Safe deposit box contents
  • Mutual fund shares

The above is not an all-inclusive list, and your company’s unclaimed property risk will vary depending on the nature of your industry and related accounting policies and procedures.

State laws require companies to report unclaimed property to the state in order to reunite lost owners with their property and to protect the holder from subsequent claims by owners. Unclaimed property laws ensure that unclaimed property proceeds benefit the state and its citizens in the event the rightful owner cannot be found.

Should you participate?

You may benefit from participating in the Delaware VDA if your company is incorporated or organized in Delaware and has at least one of the following triggers:

  • Not filing unclaimed property reports or only reporting one or two property types
  • Decentralized business operations
  • Significant merger or acquisition activity
  • Received a notification letter from Delaware
  • Entered into a Delaware VDA in the past and did not report all property types or did not bring all legal entities into compliance at that time

Between November 2012 and April 2013, the Delaware Secretary of State issued notification letters to companies that gave the appearance of potentially benefiting from participation in the new VDA program. A list of companies that had not yet enrolled in the new VDA program was provided to the Department. Therefore, if your company received such a letter, it is already on the state’s radar. Further, the Department and its third-party audit firms continually work to identify potentially non-compliant holders for audit selection.

Consider these questions:

  • Do you currently file unclaimed property reports? If so, do they cover the full spectrum of potential unclaimed property types, or do they only address one or two of the most obvious property types?
  • Has your company had significant merger or acquisition activity?  Was unclaimed property risk evaluated during the due diligence process?  When you acquire another company, you may acquire their historical unclaimed property liabilities.
  • Do you have the time and resources to deal with an unplanned unclaimed property audit?  Many companies balk at entering the VDA program because of the time and effort it will take to complete it. However, an audit has an even longer look-back period and exposes a company to interest and penalties as well. Addressing unclaimed property issues through a VDA is generally both faster and cheaper than dealing with an audit.

What to expect

During the VDA process, you will be required to conduct a thorough review of your books and records to identify applicable property types and self-quantify an estimate of prior-period exposure. It is important to note that the VDA program is not an audit; therefore, it is not conducted by the state. Enrollees are expected to perform a thorough and detailed self-review of their books and records to determine their historic unclaimed property liability. Being prepared upfront will assist you in moving through the VDA process faster and more easily.

Given that all enrolled companies must complete the VDA by June 30, 2015, the sunset date of the program, your company must dedicate the necessary resources to conduct the self-review in a timely manner or engage a third-party advocate to assist with the process. Completing the VDA program will take effort that will cut across a wide variety of departmental boundaries. You will need someone within the company with the appropriate skill set and level of authority to take ownership of the process and to work with your third-party advocate, when appropriate. Third-party advocates generally understand where to look for, how to look for, and how to report historic unclaimed property liabilities and can assist you in managing any legal or accounting issues that arise as part of the VDA.

If you do choose to participate in the Delaware VDA program, you should consider looking at your unclaimed property exposure in other states at the same time. This can be an opportunity to efficiently come into compliance across your company and to document and implement procedures to ensure appropriate tracking and reporting going forward. This can be a beneficial and long-lasting side result of participating in any VDA program.

Status of the VDA program

As of Jan. 31, 2014, 466 companies had enrolled in the Delaware VDA program. During the next six months, the Delaware Secretary of State plans to close out many of the VDAs for holders that enrolled prior to June 30, 2013, to allow it to focus on the numerous new companies expected to enroll by the June 30, 2014, deadline.

What next?

Some companies may believe their Delaware unclaimed property exposure is insignificant. However, the imposition of interest and penalties coupled with extrapolated amounts for periods for which a holder does not have the books and records to refute an audit assessment can be quite costly.

Accordingly, now is the time to consider entering into the new VDA program by June 30, 2014, in order to secure the numerous benefits and mitigate risks.

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