Insights on Developing State Compliance Efforts

As unclaimed property regulations continue to change and the methods that states implement to engage holders evolve, it is important for holders to gain from the lessons learned and make adjustments to remain compliant and effectively manage unclaimed property liabilities. The following information captures just a few of the insights and lessons Sovos learned throughout the last year.

Historically, states performed audits as the predominant means to confirm that holders were in compliance with state regulations. Today, that is not the case as states are introducing various methods to engage holders which include formal audits, Voluntary Disclosure Agreements (VDA), Compliance Reviews (CR) and Compliance and Reporting Outreaches (Self-Reviews). In the last year, Sovos has seen holders receiving unclaimed property compliance and reporting outreach notices from states such as Illinois, Iowa, Louisiana, Maine, and Massachusetts. These states are contracting with third party firms like Kelmar Associates, LLC (Kelmar) and Kroll Government Services (KGS) to perform the administration of the outreach process.

Delaware has been particularly active with the introduction of the Compliance Review process. Compliance Reviews are conducted by the Delaware Department of Finance, includes a document request very similar to an audit and is limited to the most recent report year. Managing the volume of information required to be submitted and responding to the state within the allotted time can be challenging to holders. The following example demonstrates how Sovos worked with a client to successfully navigate the compliance review process:

• A mid-sized company recently received a Compliance Review notice (CR) from the Delaware Department of Finance related to its 2020 filing. The CR of the unclaimed property report for the reporting cycle ending on 12/31/2020 was limited to the content of the report filed for that year and all related supporting documents.
• The supporting documentation request was very extensive. It included a multitude of requested documents such as: a list of legal entities included in the report filed by the holder in 2020, a corporate organizational chart, federal tax returns with consolidating reports, financial statements, chart of accounts, trial balances, apportionment schedules by state on a legal entity basis, outstanding check registers, aging reports, full narrative of the unclaimed property policies and procedures and other documents typically requested for an audit. The state requested the data be provided for years 2015 through 2020 within 30 days and communicated that additional items may be requested at a later date.
• Due to the large number and complexity of documents requested, short turnaround to submit to the state, and lack of clarity around what constitutes “supporting documents” – the holder was overwhelmed and engaged Sovos to assist. As a result of Sovos’ involvement, Sovos was able to reduce the request and provided the information only for the years that were relevant to the unclaimed property filed in 2020. The responses were submitted to the state within the allotted period and saved the holder a significant amount of time and effort.

In addition to the introduction of the CR process, Delaware is contacting holders who completed the Secretary of State’s VDA program to verify that they remain in compliance for the three-year period following completion of the program. Per the terms of all Delaware VDA-2 agreements signed with the Secretary of State, Holders must continue to comply with Delaware annual reporting requirements and file reports to Delaware in the subsequent three report years after the execution of the VDA-2 to maintain the protections that were afforded through the VDA program – even if you determine that you have no reportable property due to Delaware. If you completed the Delaware VDA, it is extremely important to remain in compliance and demonstrate that you recognized the obligation to continue monitoring and reporting property when it comes due. In those instances where there is no property due to Delaware, the voluntary filing of a negative or zero report can prove beneficial. Once you receive a communication from the Secretary of State’s office, we highly recommend that you respond promptly. If your organization failed to remain in compliance, Sovos can help coordinate communications with the state and work with you to come back into compliance.

Conclusion

As we have seen, Delaware is placing much effort on ensuring annual reports filed by companies are complete and accurate, and reserves the authority to conduct a compliance review if it believes there are inconsistencies in the report. Along with Delaware, we have seen states focus unclaimed property inquires (VDAs, audits, self-reviews, etc.) on holders that meet one or more of the following:

• Holders that never filed annual unclaimed property reports or not consistently filed each year.
• Holders with historical filings that contain inconsistencies on the amounts reported and/or property types.
• Holders filing unclaimed property reports related to the area of primary risk but excluding General Ledger property types (e.g., an oil and gas company including royalties checks and mineral proceeds but not accounts payable and payroll).
• Holders that have recently undergone mergers and acquisitions.

Unclaimed property compliance will continue to present its challenges to the holder community due to its volatile nature. It is important that you develop strategies to potentially reduce unclaimed property exposure, ensure policies and procedures are in place to track potential unclaimed property and comply with the applicable state reporting requirements. Sovos Consulting practice can help respond to a state or auditor’s request, expedite the audit timeline, simplify the process, educate personnel regarding unclaimed property obligations, limit organizational disruption, and minimize the assessment and potential penalties and interest.