United States: Delaware Legislation Reduces Unclaimed Property Audit Frustrations But Reanimates Interest Assessment

On July 22, 2015, the governor signed Senate Bill 141, which makes significant revisions to the Delaware Abandoned and Unclaimed Property statute. Senate Bill 141 is the legislature's third set of revisions to the Delaware unclaimed property statute in a period of just over a year. From the perspective of holders of unclaimed property, Senate Bill 141 represents two steps forward and one step back.

Senate Bill 141 amends the statute in several ways that are beneficial to holders. First, it shortens the look-back period for audits. Second, the legislation extends the unclaimed property voluntary disclosure program (the "VDA Program"). However, to recoup some of the revenue that will be lost because of the shortened look-back period, the legislation reinstates the State Escheator's authority to impose interest in an amount of up to 25% of the total unremitted unclaimed property, after having repealed that authority just last year.

Delaware Unclaimed Property Audit Notification Process Revised and Look-back Shortened Senate Bill 141 provides that the State Escheator cannot initiate any new examination until the holder has been notified in writing by the Secretary of State that the holder may enter into the voluntary disclosure program. The holder then has 60 days, from the postmark date of the notification, to opt to participate in the VDA Program, or face a likely audit by the Department of Finance thereafter. This is a significant departure from current enforcement practices. While preparing a self-audit in order to submit a VDA requires some additional effort on the part of the holder, it is much less intrusive than an audit by a contract auditor hired by the state, and it can be completed in significantly less time. Although a final decision in the Temple-Inland case1 has the potential to alter the audit landscape, currently, for most holders, the overall investment of resources required for participation in the VDA Program pales in comparison to a contingent fee audit.

The VDA Program option does not help holders currently embroiled in an unclaimed property audit, but Senate Bill 141 gives such holders a slight break by limiting the audit look-back period to January 1, 1986, rather than to 1981, thereby reducing the look-back period by five years. However, holders receiving a new audit notice between July 22, 2015, and December 31, 2016, who choose to opt out of the VDA Program, will have an audit look-back period to January 1, 1991. Under Senate Bill 141, starting January 1, 2017, the look-back period for unclaimed property audits will be limited to 22 years prior to the report year. Senate Bill 141 transitions the look-back period from a fixed date of 1981 to a rolling look-back. At 22 years, the rolling look-back period for Delaware audits is still twice as long as the look-back periods for most other state audits (which are often 10 years or fewer).

Delaware Voluntary Disclosure Program Extended The Delaware Legislature is inducing holders to participate in the Secretary of State VDA Program by offering them the option of conducting a self-audit for a shorter look-back period, rather than being subject to an onerous audit by the Department of Finance. For holders that entered the VDA Program offered by the Secretary of State from July 1, 2013, through September 30, 2014, the look-back period originally was 1993. Under Senate Bill 141, all holders that enter the VDA program on or before December 31, 2016, will be entitled to a 1996 look-back period.

In addition, Senate Bill 141 extends the VDA Program offered by the Secretary of State, which had ended pursuant to a sunset provision in the enabling statute. Further, it creates a rolling 19 year look-back for participants that enter the VDA Program on or after January 1, 2017. The statute also specifies that holders must complete their obligations under the VDA Program within two years. It should be noted that the legislation does not allow holders that have previously entered the program and dropped out, from re-enrolling under these better terms.

The Return of the Interest Assessment A little more than one year ago (June 30, 2015), the Delaware Legislature enacted Senate Bill 228. Under Senate Bill 228, interest on unremitted unclaimed property was eliminated. Senate Bill 141 reinstates the assessment of interest of 0.5% per month on unremitted amounts from the date the amounts were due, until paid up to 25% of the total unremitted amount. The interest will be waived, however, if the holder can show that the failure to timely remit amounts was the result of reasonable cause and not willful neglect. Interest will only be assessed on unclaimed property that is reported and remitted on or after March 1, 2016. Accordingly, holders currently under audit have an incentive to close their audit prior to March 1, 2016, in order to avoid the interest charge.

Delaware Compliance Revised Senate Bill 141 also provides that the State Escheator must send, at least 120 days prior to the annual March 1 compliance deadline, a reminder to all holders that have filed reports in the past five years notifying them of the potential obligation to file a report. This notice requirement does not create an obligation for a holder to file a negative or zero report if no property is currently escheatable to the State of Delaware. Senate Bill 141 also adds a provision requiring holders to designate an employee contact for all correspondence with the state for reporting and remittance. No allowance is made to designate a non-employee to prepare reports for the holder.

Senate Bill 141 falls short of incorporating all of the recommendations of the Delaware Unclaimed Property Task Force, including those that would have protected holders making annual unclaimed property filings with the State Escheator from audits that were initiated after a reasonable record-retention period, and provided clarification as to when audits beyond the three-year limitations period could be commenced.

Summary If Delaware's revised VDA Program attracts holder participation, it offers a model other states may wish to follow. Holders can forgo the intrusive, lengthy and costly process of a contingent fee audit by opting into the VDA Program, and simultaneously cut three years off the standard audit look-back period. The VDA Program creates a deadline for compliance by requiring completion within two years. But, an audit can often take five to seven years to complete. Further, contingent fee auditors are cut out of the process, putting more money into the state coffers both sooner and at far less expense than when using the contingent fee auditors. It also avoids the aggressive audit tactics and the perception of bias associated with the use of contingent fee auditors. Senate Bill 141 demonstrates that the Delaware Legislature listened to many of the frustrations of the holder community over audits, and saw the success of the VDA Program as a viable alternative.

Footnote

1. Temple-Inland challenges, among other things, the use of estimation to identify purported unclaimed property, and the retroactive enforcement of a 2010 amendment to the Delaware statute that permitted estimation where records no longer exist. The federal court in Delaware denied the state's motion to dismiss Temple-Inland's Constitutional claims. Trial is scheduled for January 2016.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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