August 28, 2020
Immediate action recommended for companies receiving letters from Delaware on voluntary disclosure agreements for unclaimed property
On August 21, 2020, the Delaware Secretary of State (SOS) announced that its office was mailing approximately 200 letters to businesses and organizations identified as holders of unclaimed property (collectively, holders) that it has determined are likely to be out of compliance in reporting dormant, abandoned or unclaimed property under Delaware's Escheats Law.
Holders that respond within 60 days of the letter's mailing can enter into Delaware's voluntary disclosure agreement (VDA) program. Under this program, a holder would perform a self-review of its books and records in exchange for the state's waiver of interest and penalties on late-filed unclaimed property. As explained in the letters, holders that do not timely enroll in the VDA program will be referred to the Delaware State Escheator and Department of Finance for an audit to be conducted by a third-party auditor. Once audited, holders can no longer participate in the VDA program. Because third-party auditors contract with multiple states, a Delaware audit could also lead to a multistate audit of holders' unclaimed property.
Delaware's unclaimed property VDA program
Before beginning an abandoned or unclaimed property examination/audit, the Delaware unclaimed property administrator must notify a holder in writing that it may enter into the VDA program. A holder has 60 days from the date the notice was mailed to request acceptance into the VDA program. The VDA lookback period is 15 years (i.e., 10 reporting years plus a 5-year dormancy period).
Benefits of participating in the VDA program rather than a third-party audit include:
Under the long-standing priority sourcing rules developed in a series of US Supreme Court cases,1 the holder's state of incorporation can claim unclaimed property when the holder does not have adequate books and records identifying the last known address of the owner. Under the VDA program, the SOS can lookback 15 years for assessment of unclaimed property exposure and estimate or extrapolate exposure for the years in which no records are available. This estimated exposure amount then escheats to the state of incorporation. Holders that participate in the VDA program will be able to self-disclose their records and present their own estimation of unclaimed property instead of having the third-party auditors perform the estimate. Accordingly, recipients of a Delaware VDA notice would be wise not to ignore it.
Alert all departments to look for notice
Unclaimed property is not a tax, so the SOS may send the VDA notice to a department other than the holder's tax department. Mostly commonly, such notifications are sent to a holder's chief financial or executive officer. Therefore, personnel in all business organizations, especially including the tax professionals who are commonly responsible for unclaimed property law compliance, should communicate broadly within their organizations to identify VDA notices and timely determine what action the holder's organization will take.
Holders should be aware that they do not need to receive a VDA notice from the Delaware SOS to participate in its VDA program and can approach the Delaware SOS about a VDA at any time unless they are already under audit.
Personnel at all levels of a business organization with legal entities incorporated or domiciled in Delaware should monitor incoming mail for VDA program letters from the Delaware SOS office and fully appreciate the time sensitivity of responding. These letters are generally mailed out quarterly. Many holders that have been contacted in the last few rounds of mailings have significant unclaimed property compliance programs already in place or do not have significant operations in Delaware.
The VDA review process can look different from holder to holder. Holders should consider planning and scoping the VDA review to balance the cost and investment of participating compared to the potential exposures that may be identified.
1 See e.g., Delaware v. New York, 507 U.S. 490 (1993); Pennsylvania v. New York, 407 U.S. 206 (1972); Texas v. New Jersey, 379 U.S. 674 (1965).