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10/22/15 2:10 PM

Happening Now: A Closer Look at Delaware's Revolutionary New Audit Process

by Greg VerMulm

delaware-unclaimed-property-law-udpatesRecently Delaware has made stunning changes in legislation that truly change the way the state carries out its responsibility to protect consumer property. The usual pull-the-rug-out-from-under-you style of unclaimed property audit exists no longer.

This is one of the most important evidences to date that the state has listened to frustrations of holders. If most holders take advantage of the VDA option after notification, this new law could substantially reduce involvement of third-party contingent-fee auditors—one of the most challenging aspects of unclaimed property management.

We consider the VDA notice portion of the newest bill to be one of the most important aspects of the legislation. However, this bill contains other notable changes. Here is a list: 

Important Aspects of Delaware Senate Bill 141

In the holder’s favor:

  • Requires state to notify holder in writing that the holder may enter into a VDA program with a shorter look-back period and a self-audit, rather than a third-party audit; if not entered into within 60 days, the state may initiate an audit
  • For holders currently under audit, reduces audit look-back period by five years to January 1, 1986, from the previous January 1, 1981
  • For holders receiving an audit notice between July 22, 2015, and December 31, 2016, and choosing to opt out of the VDA program, establishes a look-back period to January 1, 1991, rather than January 1, 1996; this is also a savings of five years’ potential liability
  • Establishes a rolling audit look-back period to 22 years, beginning January 1, 2017
  • Extends the state’s unclaimed property VDA program, which is much less intrusive than an audit and requires substantially less time
  • For holders entering the state’s VDA program from July 1, 2013, through September 30, 2014, the law establishes a VDA look-back period three years shorter (changed from 1993 to 1996)
  • For VDA participants entering the program on or after January 1, 2017, creates a rolling look-back period of 19 years, rather than 22 years, a savings of two years’ potential liability
  • Requires holders to designate an employee contact for all correspondence with the state regarding unclaimed property reporting  

In the state’s favor:

  • Reinstates imposition of interest at a rate of .5% per month on unremitted amounts from the dates the amounts were due, up to 25% of the total unremitted amount (this is presumably to help the state recover a drop in revenue resulting from shorter look-back periods and fewer audits); interest will be waived if a holder can show that failure to remit amounts in a timely manner is a result of reasonable cause and not willful neglect; interest will only be assessed on property reported on or after March 1, 2016, which means holders currently under audit should try to close the audit before this date to avoid interest
  • VDA participants must complete obligations of the VDA program within two years
  • The statute does not allow holders to reenroll if they have previously entered the program and dropped out
  • The revised VDA program is expected to increase holder participation and incentivize timely completion, which is expected to add state revenue sooner
  • Because fewer contingent-fee auditors are likely to be used, this removes an expense for the state
  • The reduction of aggressive audits associated with the new law could improve relations between holders and the state of Delaware

Over the last 10 years or so, holders have been subjected to a lengthy Delaware examination process with holders being given little insight into the way the process was managed. The new legislation provides some of the clarity and guidance needed, while reducing the adversarial relationship between holders and state administrators. However, it’s important to remember the 22 year rolling look-back is still twice as long as most other states.

There is no noticeable difference in the way holders should be addressing their unclaimed property compliance obligation as a result of this law. Holders still need to be mindful of their reporting obligations. Even though Delaware has provided a “kinder and gentler” option for coming into compliance, the state is continuing to enforce their unclaimed property compliance program with extensive reach-back. Holders must continue to be vigilant in assessing and mitigating risk.

Topics: Delaware, Audit