By: Karen T. Syrylo, CPA
The state of Delaware on October 1, 2017 finalized the Department of Finance regulations pertaining to its Abandoned or Unclaimed Property Reporting and Examination Manual, without significant differences from the second proposed version of August 1. See our prior coverage. The effective date of the regulations is October 11, 2017.
Additionally, on September 29, 2017, Delaware’s Secretary of State sent a letter to professionals indicating its plans to begin issuing notices in October to Holders who have been identified as “likely being out of compliance with Delaware law as it relates to reporting dormant abandoned or unclaimed property.” Given that Delaware is the incorporation home of a great many of the nation’s corporations, all of whom are subject to Delaware’s unclaimed property law, there are probably many such letters being issued.
The importance to businesses
Per the Secretary of State’s letter, holders will have 60 days from the date of their notice to enroll in the Voluntary Disclosure Agreement (VDA) program. Those who do not will be referred to the State Escheator for commencement of audit procedures, and once an audit notice is issued the Holder is no longer qualified for the VDA program.
The October 1 regulations at section 2.12.3, in concert with Senate Bill 13 that was enacted on February 2, 2017, contain the requirement that the State Escheator shall not initiate any new audit unless the Holder has first been notified that they may enter into a VDA. The Secretary of State’s letter says that the VDA program “was put in place to respond to concerns about Delaware’s ongoing audit program, and to encourage more companies to come into compliance with their legal responsibilities as they relate to abandoned property.” (“Concerns,” included those described in the Temple-Inland case in which a federal judge said that the Delaware audit process “shocks the conscience.” The state had waited 22 years before auditing Temple-Inland even though the company had routinely filed unclaimed property reports, and then because the company could not produce detailed accounting records for 22 years, the auditors used a form of extrapolation calculation based on sales amounts; one unreported unclaimed property item in the amount of $147 was found and the extrapolation produced an assessment of $1.4 million.)
The new regulations include provisions on many of the mechanical aspects that were concerns in prior audits, including records requirements and sampling/extrapolation techniques. The jury is still out as to how much these changes will improve businesses’ audit experiences.
60 days in which to make decisions and communicate your election
Businesses have choices to make, as to whether to elect into the VDA program and do a self-audit, or to wait and undergo an audit by Delaware’s auditors, in many cases a third-party audit firm. Some of the benefits of the VDA program are: the automatic waiver of penalties and interest, and more control in the review process because it is mostly a self-audit in which the Holder reviews its records and does its own calculations of amounts due. Some companies that are already currently under audit also have an option to convert into an “expedited audit program;” this decision must be made by December 11, 2017, 60 days from the regulations’ effective date.
Given the 60-day requirement, time is of the essence for these decisions. Remember, if your business is incorporated under Delaware’s corporate law, you are among the businesses subject to the state’s unclaimed property laws. And under longstanding U.S. Supreme Court decisions, the state of incorporation is the one owed any unclaimed amounts for which you do not know the correct last address of the intended recipient, including amounts that are calculated under sampling and extrapolation techniques for years in which you no longer have the detailed records.