Building and maintaining a program to ensure compliance with the ever-changing unclaimed property laws is challenging, costly and time consuming. As a result, many companies put off or delay coming into compliance or do not put enough resources into creating a robust program. Those delays, erratic reporting and even ignorance that unclaimed property laws exist can have serious and costly consequences.
The chances of suffering these consequences are at an all-time high in the current environment, where states are focusing on locating non-compliant entities with the intent of bringing them into compliance through either outreach programs or aggressive audits.
Like most unclaimed property compliance requirements, the consequences of noncompliance vary depending on the state and the specific circumstances. However, understanding some potential consequences may persuade decision makers to make some changes sooner rather than later.
Penalties and interest with unclaimed property laws
Each state and reporting jurisdiction requires companies to report and remit unclaimed property annually. Each reporting jurisdiction has the authority to issue interest and/or penalties for non-compliance. As a result, failure to report and remit unclaimed property on time may result in penalties and interest charges that can accumulate over time and become quite substantial.
Audits
Each state also has statutory authority to audit companies for their compliance with the unclaimed property laws. Unclaimed property audits are notoriously long and burdensome, as they can last from 5-8 years and are typically administered by third-party audit firms on behalf of multiple states at one time. While some state laws have statutes of limitation, the auditors rarely acknowledge that the statute applies. This allows for a long look back period for review, typically between 10-15 years.
Third-party audit firms are often paid on a contingency fee basis, incentivizing them to find as much liability as possible which includes using creative methodologies that boost liability. As more audit firms have entered this industry, so does the number of audits. And as states rely more on the revenue brought in from audits to plug budget deficits, unclaimed property audits continue to increase in size and scope.
Delaware VDA Invitation letters
The State of Delaware sends out invitations to join the state’s Voluntary Disclosure Agreement (VDA) program in February and July. Delaware’s unclaimed property law provides that a company must be invited to enroll in Delaware’s VDA program before being selected for a Delaware unclaimed property audit. Failure to respond within 90 days or choosing not to enroll leads to an automatic referral for audit. If the decision to enroll is made and the company is accepted into the program, the company will be subject to an intensive two-year review of its books and records.
Delaware Requests for Verified Reports
Delaware was recently authorized to send out requests to verify reports filed with the state. These letters request companies to certify that the most recent report submitted to the state is complete. Or, if no report was submitted, the company must certify that there was truly no property to report.
Delaware primarily sends these requests to companies with significant variances or those not filing reports for the most recent year. Variances may include property types dropping off or reappearing, significant changes in the amount reported or differences compared to other companies in the same industry.
Holders receiving a verified report request are asked to provide a copy of their unclaimed property policies and procedures and a list of legal entities included in the Verified Report. Failure to respond or complete the verified report results in audit referral, eliminating the chance of participating in the VDA program.
Delaware Compliance Reviews
Delaware recently amended its law authorizing the State Escheator to perform a compliance review of a report for any reason. If one of these notices goes unanswered, the state may initiate an audit without sending a VDA invitation letter.
Initially, compliance reviews were intended to be limited in scope. However, in practice, compliance reviews have proven to be a bit more far-reaching, often involving requests for a substantial amount of data. Similar to failing to respond to Verified Report request, companies failing to respond to the Delaware Compliance Review will be referred to the Department of Finance for audit and will not be given the opportunity to participate in the VDA program.
Self-Audit Notification letters
States have learned that they can initiate more audits while incurring fewer expenses by sending out self-audit notices to companies. As a result, companies are receiving letters mailed on a state’s official letterhead advising companies of their obligation to comply with the unclaimed property laws. The letters typically state that the company has never or only rarely reported unclaimed property to the state.
Companies complying with the request will not be assessed interest or penalties. However, if a company does not respond or the review is deemed insufficient, the state can refer the company to a third-party auditor for a full audit which could ultimately subject the company to penalties and interest.
False Claims Act litigation
A recent unclaimed property industry trend involves lawsuits under state False Claims Acts (FCA) for alleged underreporting of unclaimed property. Typically, these cases come about when a company’s employee or former employee alleges the company defrauded the government by intentionally paying the government less than what is owed. The person bringing the lawsuit, known as the relator, can earn up to 30% of the ultimate recovery to the state.
Violations lead to treble damages, penalties, interest and attorney’s fees.
To mitigate these consequences, companies must establish and maintain robust policies for unclaimed property laws, ensuring regular reviews and timely reporting to state authorities. Addressing employee complaints, conducting internal audits, and promptly responding to state inquiries can reduce the risk of False Claims Act claims.
Ignoring unclaimed property laws is not an option for businesses. Non-compliance can result in financial burdens, resource drain and damage to the company’s reputation. To avoid these pitfalls, companies should proactively develop and implement compliance policies, respond to state inquiries promptly and consider internal audits and voluntary disclosure agreements as proactive measures. Swift compliance efforts may be challenging but are far less painful than the alternative of adopting a wait-and-see approach.
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