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Legislation (AB 2280) introduced in the California Assembly on February 16, 2022, would allow the California State Controller's Office (CA SCO) to establish a voluntary compliance program (VCP) for certain unclaimed property holders (Holders), allowing them to report past-due unclaimed property without having to pay interest.

VCP requirements

As currently proposed, the CA SCO, which administers the state's unclaimed property reporting law, would be authorized to waive interest for Holders that complete all VCP requirements.¹ To be eligible to participate in the VCP, the Holder would have to:

• Enroll and participate in an unclaimed property educational training program provided by the CA SCO (within three months after the CA SCO notifies the Holder of their enrollment in the VCP, unless the CA SCO sets a different date)
• Review its books and records for at least the previous 10 years (starting from June 30 or the fiscal yearend before the CA SCO notifies the Holder of their enrollment, unless the CA SCO sets a different date)
• Report the unclaimed property as described in California's unclaimed property law ² to the CA SCO (within six months after the CA SCO notified the Holder of its enrollment, unless the CA SCO sets a different date)
• Make reasonable efforts to notify owners of reportable property by mail or electronically, as applicable (at least 30 days before submitting the report to the CA SCO)
• Submit to the CA SCO an updated report of unclaimed property and pay or deliver to the CA SCO all escheated property specified in the original report ³ (no sooner than seven months and no later than seven months and 15 days after the CA SCO received the original report)

The CA SCO would have the right to reinstate interest if the above conditions are not met.

VCP eligibility

The VCP would not be available to all Holders. In addition to the typical conditions that preclude a Holder from participating in a voluntary disclosure agreement with most states (e.g., an ongoing or impending state audit or being the subject of civil or criminal prosecution related to unclaimed property compliance), a Holder would not be eligible to participate in the California VCP if it received an interest assessment from the CA SCO within the past five years that was waived or remains unpaid. In other words, any interest assessment imposed on a Holder by the CA SCO in the five years prior to applying to the VCP would negate the Holder's ability to enroll in the program.

Recovery claims contract change

In addition to the introduction of the VCP, AB 2280 would amend provisions of California's unclaimed property law relating to third-party assistance in recovering unclaimed property. As presently proposed, the bill would invalidate an agreement with a third party to locate and recover unclaimed property if it requires the owner to pay the third party a fee before the claim is approved and the owner is paid.

Implications

The proposal to enact a VCP should be welcome news for Holders who wish to come into compliance with California unclaimed property laws but have been dissuaded by the statutory 12% interest imposed on past-due property. In addition to imposing interest on audit assessments (including audits conducted by state-hired third-party audit firms), California, unlike other states, routinely issues interest assessments to Holders who discover past due unreported unclaimed property when filing their annual compliance reports.

The VCP proposal follows on the heels of another legislative action that requires, as of January 1, 2022, all California taxpayers to respond to unclaimed property compliance questions on their 2021 state business tax reports filed with the California Franchise Tax Board (CA FTB). Under the recently enacted law, the CA FTB is authorized to share compliance responses with the CA SCO, which could aid in more swiftly identifying non-compliant Holders, possibly resulting in increased state audit activity with respect to unclaimed property compliance (see Tax Alert 2022-0244).

While the establishment of a VCP would appear to provide incentives for many Holders to come into full compliance with California's unclaimed property laws, the eligibility requirements appear restrictive. For example, Holders that have reported past due property within the last five years would be ineligible for the VCP. Likewise, if an eligible Holder successfully completes the VCP, it would be precluded from participating in the VCP for another five years, which is unusual and generally much more restrictive than the programs sponsored in other states.

Further, the currently proposed six-month time frame to review 10 years of books and records (with limited procedural guidance) may not be enough. Thus, if it is enacted, Holders that anticipate participating in the VCP should consider beginning the record review process before submitting the VCP application.

Given the potential for a new VCP, Holders may want to consider reviewing their unclaimed property reporting compliance and consider the following:

• The capability of their underlying accounting procedures to identify and track unclaimed property transactions and liabilities
• Their unclaimed property audit history, including whether California participated in any unclaimed property audit, whether by itself or with other states
• Estimating their unclaimed property reporting exposure, either broadly for all states or specifically for California in order to understand how the VCP could apply to their situation

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ENDNOTES

¹ AB 2280 includes proposed amendments to Cal. Code of Civil Proc. Section 1577.

² Specifically, Cal. Code of Civil Proc. Section 1530(b), (c), and (e).

³ Cal. Code of Civil Proc. Section 1532.