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7/23/15 10:00 AM

New Delaware Unclaimed Property Audit Guidelines Set Precedent for Less Ambiguity and Lower Liability

by Greg VerMulm

delaware-unclaimed-property-law-udpatesUnclaimed property audits are about as welcome as toothaches in most holder organizations: they are difficult to ignore and can be painful to resolve. Long overdue changes in Delaware unclaimed property law could make things a bit easier.

The new laws provide a more transparent, less punitive process for unclaimed property audits and Voluntary Disclosure Agreements (VDAs). Because Delaware has one of the most robust unclaimed property compliance programs in the U.S., it is expected other states will follow suit with similar changes.

Primary features of the new law and impact to holders

The new Delaware law, S.B. 141, is based on recommendations made by a recently-formed Delaware Unclaimed Property Task Force. The changes serve as an acknowledgement by Delaware that the state’s unclaimed property compliance program needed improved transparency for holders and a reduction of total penalties potentially so high they served as a discouragement to reporting. 

The state has moved very quickly to make changes, which could encourage more holders to come forward after years of noncompliance.

Key provisions of the new law include:

VDA opportunity before audit. Before the Delaware State Escheator’s office begins the audit process for any company, they must give fair warning to holders and offer an opportunity to enter into a VDA, with 60 days to respond. Because VDAs are usually less time consuming than audits and assessments are often smaller, this is expected to reduce holders’ financial burden. The law makes the VDA program permanent, which means more holders can benefit from VDAs in the future.

New VDA administrator. Previously, the Delaware VDA program was administered by the state’s Department of Finance. One of the most significant changes in S.B. 141 is the transference of this duty from finance to the Secretary of State. This creates a separation between audit assignment and voluntary compliance and takes the VDA process away from the influence of revenue goals. Past experience suggests Secretary of State protocols are generally more moderate than Department of Finance protocols, which could mean more moderate assessments.

Reduced audit lookback. Before S.B. 141, auditors could assess past-due payments, penalties and interest extending back to 1981 (34 years for audits initiated in 2015). Potential lookback increased by a year with every passing year. Extrapolation of past due amounts for all those years could add significantly to the financial burden of initial compliance. Thanks to the new law, assessments in the future will extend back no longer than 22 years, which includes 17 years of transactions plus five years of dormancy. The lookback period gradually decreases until the 17-year limit becomes permanent.

Limited lookback period for VDAs. Similar to the new guidelines for audit lookback, the new law establishes gradually shorter limits on VDA lookback. By 2017, lookback will be limited to 19 transaction years. VDAs must be completed within 30 days of the two-year payment period to keep from being referred to the State Escheator for audit.

Automatic notification of filing obligation. Holders must provide a single point of contact for the state, and Delaware will notify them annually of their obligation to file. This will make the filing obligation clear and help companies get reporting processes on the calendar.

How the law benefits the state of Delaware

It’s important to realize, in addition to benefitting holders, Delaware’s new law also provides benefits for the state and supports its efforts to gain income from unclaimed property.

Increased voluntary compliance. The provisions above make it more likely holders will come forward voluntarily, which should increase the number of companies reporting and boost revenues for the state.

Reinstated interest provision. A previously defunct interest provision was reinstituted through S.B. 141, allowing the state to charge interest on past due unclaimed property payments. This will offset the reduction in income expected as a result of shorter lookback periods.

Gradual reductions over time. Lookback periods for both audits and VDAs will gradually reduce over the next few years, so the state budget won’t have to sustain a sudden loss of incoming funds.

Beginning a trend toward reasonable unclaimed property enforcement?

In the past, it sometimes seemed states had too much power to inflate assessments against holders in the interest of maximizing state income. Changes in the law such as those contained in Delaware S.B. 141 are perhaps a sign that lawmakers have heard the frustrations of holders and are willing to make enforcement more reasonable. 

Topics: Delaware, Compliance, Voluntary Disclosure Agreements