Significant changes in Delaware Unclaimed Property law may put more companies at risk of audit. An unclaimed property audit can last for years, stress a company’s resources and may result in a substantial liability that could include interest and penalties.
Unclaimed property refers to certain types of “intangible property” (such as uncashed checks, securities, refunds, customer overpayments, etc.) that a business owes to its employees, customers, vendors, creditors or shareholders where there has been no activity/contact with the owner of the property for a specified period of time (“dormancy period”). After the dormancy period has lapsed (generally three to five years) with no owner contact or activity, the property becomes “unclaimed” and must be turned over to the state of jurisdiction. All U.S. states and territories have enacted unclaimed property statutes.
Because unclaimed property remittances have, in many cases, become a sizable part of annual revenues, enforcement efforts by the states continue to increase. The state administrators may use multiple metrics to identify audit targets, including: a company’s legal and/or physical domicile in the jurisdiction; the type of business in which a company is engaged; and gaps in or lack of prior reporting, among others. Whether it is a retailer, manufacturer, healthcare facility or financial/professional services firm, any entity can be targeted for unclaimed property review. States may also employ third-party, contingent fee audit firms to lead these efforts. These audit firms have an incentive to maximize the assessment and will invite multiple states to participate in the audit.
Delaware Senate Bill 281 Signed into Law on June 30, 2022
Prior to the enactment of this Delaware law, there were limited circumstances when a holder could be audited by the State Escheator without having first been notified in writing by the Delaware Secretary of State (“DE SOS”). This notification from the DE SOS would allow the holder to enter into an unclaimed property voluntary disclosure agreement (“VDA”) in lieu of an examination. One of the most significant changes of the newly enacted bill expands the State Escheator’s ability to authorize examinations without first giving the holder the option to enter into the DE SOS’s VDA program.
As a result of the expanded language, the State Escheator may now authorize an examination without a DE SOS VDA invitation in the following circumstances: (1) as a joint examination initiated by another state, where the State Escheator no longer is required to consult with the DE SOS prior to authorizing an examination; and, (2) when the State Escheator determines that the holder has not completed or responded to a verified report or compliance review.
Other Notable Changes
The requirements for the State Escheator to request a verified report have also been modified under the new Delaware law. The State Escheator may now request a verified report from any holder for any reason. Prior Delaware law only allowed the State Escheator to request a verified report if (1) the holder did not file a report, or (2) the State Escheator believed the holder may have filed an inaccurate, incomplete or false report.
The new Delaware law also permits the State Escheator to authorize a compliance review for any reason. Like the discussion above, prior law only permitted a compliance review when the State Escheator believed that a holder may have filed an inaccurate, incomplete or false report.
Delaware Senate Bill 281 clarifies the definition of property to exclude property where the apparent owner is a foreign government, the federal government, any other state government or any local or municipal government not within the state of Delaware. The new law also expands record retention requirements for holders undergoing examination, participating in the DE SOS VDA program, or participating in any related appeal or litigation.
Be on the Alert for Communications From the Delaware State Escheator’s Office
In order to manage exposure to liabilities for unclaimed property, it is imperative that companies be alert to any communication from the Delaware State Escheator’s office, so that all personnel within a company understand that these communications must not be ignored. Failure to timely respond may result in the authorization of an examination without any opportunity to take part in the DE SOS VDA program.
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