Authors: Andrew Garcia and Gary Wallace, CPA
Because of the recent poor economic climate, states have been in search of additional sources of revenue. One potential source that has received an increasing amount of attention is unclaimed property (“escheat”). Unclaimed property is defined as any tangible or intangible property that has been unclaimed by its owner for an extended period of time. Common examples of unclaimed property include gift cards, un-cashed refund checks, insurance proceeds, deposits, etc. There are currently estimated tens of billions of dollars in unclaimed property throughout the U.S.
All 50 states have laws that require businesses (known as holders) who have unclaimed property to remit any money or property owed to the rightful owner to the proper state after a certain period of time, or “dormancy period,” has passed. This period typically ranges from one to five years, depending on the type of property.
Most states have now begun to use unclaimed property as a way to potentially reduce or eliminate their budget deficits while not technically raising taxes. This had led to a noticeable increase in unclaimed property audits. These audits can last for years, with look back periods that usually range from five to twenty years. In addition, penalties and interest that have to be paid by companies as a result of noncompliance can be considerable. If a business has not filed unclaimed property filings, the look back period may be unlimited.
In the financial services industry, unclaimed property audits can be a major area of risk. In this industry sector, unclaimed property may take the form of uncashed dividends, savings and demand deposit accounts, broker and account executive commissions, annuities, etc. In a recent poll of executives in the financial services industry, 42% indicated that their companies had gone through an unclaimed property laws.
Some states have been very aggressive in taking advantage of this high noncompliance rate, and in many states, unclaimed property audits can result in a major source of revenue for the government. Delaware, for example, is estimated to take in as much as $484 million in unclaimed property in 2013. Even though unclaimed property is not even considered a tax, it is still the state’s third largest source of revenue.
Delaware has been advantaged in the search for revenue because of the unique sourcing law concerning unclaimed property. The Supreme Court established a rule that if the address of the owner of the property is unknown, then the property remits to the holder’s state of corporate domicile. This law, in combination with the absence of any address records for a large portion of Delaware’s long look- back period and the fact that many businesses are incorporated in the state of Delaware, created the potential for Delaware to reap enormous gains.
Delaware recently opened a Voluntary Disclosure program (VDA), in order to provide relief to holders of Unclaimed Property. The VDA program limits the look- back period for non filers to 1996, rather than 1981. It also shortens the review time considerably and waives interest and penalties on past-due unclaimed property. In order to qualify for participation in the Delaware VDA program, holders must not be currently under audit or have received a notice of audit, and must enroll in the program by June 30, 2013 and enter a settlement and remit all past-due unclaimed property by June 30, 2014.
Financial Services businesses should be aware of the unclaimed property laws of the various states and take action to be in compliance. VDA programs, such as Delaware’s, may provide an opportunity to become compliant, while limiting the period of review, as well as exposure to substantial penalties.