United States: Delaware Unclaimed Property Voluntary Disclosure Program Ends September 30, 2014

Delaware is currently offering an unclaimed property voluntary disclosure program (VDA) through September 30, 2014. The program is especially suited for companies that are incorporated or organized in the state and have not filed unclaimed property reports in the past. Companies that enter into the VDA can avoid not only penalties and interest, but also the notoriously difficult audits that are anticipated to increase dramatically starting October 1.

Importance of Unclaimed Property

Unclaimed property is tangible or intangible personal property in the possession, custody or control of any person ("holder") that is due and owing to another ("owner").1 After a period of inactivity during which the holder has no contact with an owner (the "dormancy period"), the holder must either (i) reunite the property to the owner or (ii) report and remit the unclaimed property to the applicable state. The property must either be reported to the state of last known address of the owner or, if the address is unknown or in a state that does not provide for escheat of the property (or in a foreign country), the property is reported to the state of incorporation of the holder.2 The state takes custody of the property and holds it in trust for the owner. In Delaware, the dormancy period for most property types is five years.3 Holders with unclaimed property due to Delaware must report and remit the property annually.4 Most companies' unclaimed property takes the form of vendor and payroll checks that were voided after remaining uncashed, customer receivable credits that remained unapplied and reversed, or small balances that were "written-off" to income. As these transactions are typically removed from balance sheet accounts, they are often overlooked. However, states consider unclaimed property to be due to their citizens—and consider it to be a significant source of revenue—and pursue it aggressively.5

Company May Have Material Liability Due to Delaware

Delaware has the right to claim from any company that is incorporated or organized in Delaware unclaimed property due to any owner for whom the company has no address, as well as any Delaware-addressed or foreign-addressed unclaimed property. Delaware will require a company to research all complete, existing records to identify this property. Importantly, Delaware will also estimate a liability for all years for which a company does not have complete records using the company's global unclaimed property liability, and Delaware's audit look-back period can reach as far as 1981. The multiplier-effect of this long estimation period coupled with the imposition of penalties and interest can create a material liability. Further, a Delaware unclaimed property audit involves a detailed review of many years' of accounting records and can last several years.

Terms of VDA Program

Holders of unclaimed property may enter into the VDA program through September 30, 2014.6 If they enter the program, holders will have until June 30, 2016 to make payment or enter into a payment plan.7 The look-back period under the VDA program extends to 1993.8 Delaware will waive all penalties for participants.9 Otherwise, the penalty for failing to file any annual report is equal to the lesser of 5 percent of the underlying property per month that the report is late, up to 50 percent in the aggregate, or $100 for each day the report is late up to $5,000.10 The penalty for failing to pay unclaimed property on time is 0.5 percent of the underlying property per month up to 25 percent in the aggregate.11

Commentary

Companies that are incorporated or organized in Delaware and have not filed unclaimed property reports to any state in the past are at risk for being audited by Delaware. As stated above, audits are expected to increase after the sunset of the VDA program on September 30, 2014. Consequently, all noncompliant holders of unclaimed property are strongly encouraged to enter into a VDA before the conclusion of this program.

Footnotes

1 DEL. CODE ANN. tit. 12, § 1198(7), (8), (11).

2 Texas v. New Jersey, 379 U.S. 674 (1965).

3 DEL. CODE ANN. tit. 12, § 1198(9).

4 DEL. CODE ANN. tit. 12, §§ 1199; 1201.

5 In 2013, Delaware estimated that it would collect approximately $566.5 million in unclaimed property. This would make unclaimed property 16 percent of the state's total general fund revenue and the third-largest source of revenue after individual income and franchise taxes.

6 DEL. CODE ANN. tit. 12, § 1177(b)(2).

7 Id.

8 Id.

9 Delaware Voluntary Self Disclosure Agreement (Form VDA-2). Note that interest is no longer imposed for failing to file or pay a report.

10 DEL. CODE ANN. tit. 12, § 1159(a).

11 DEL. CODE ANN. tit. 12, § 1159(b).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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