Delaware's much-anticipated unclaimed property audit regulations went into effect on October 11 and now the state is identifying some holders as “likely being out of compliance” with the new law and requesting they enroll in the voluntary disclosure agreement (VDA) program.

Matt Hedstrom, partner, and Michael Giovannini, senior associate, at Alston & Bird, recently sat down with Inside Counsel to discuss the implications of the audit.

“Holders must weigh options and prepare for VDA conversion, if that is their selected option,” said Hedstrom, a partner in Alston & Bird's State & Local Tax Group. “Holders that are not currently under audit should carefully monitor correspondence from the Secretary of State's office requesting enrollment in the VDA program to avoid losing the ability to opt into a VDA and having to deal with an audit.”

According to Giovannini, the deadline for holders under audit to convert their audits into Department of State-administered VDAs or to opt into the new expedited audit program is now approaching. Alston & Bird has learned that the final date for making this decision is officially December 11th.

The regulations require application of a 30-day void rule rather than a 90-day void rule for determining whether uncashed checks are included in the population of potential unclaimed property. According to Hedstrom, this means that on audit, a check that was voided by the holder 30 days or more after the date of issuance would be considered potentially escheatable and thus required to be researched and remediated. Delaware has historically applied this standard on audit, which is much less favorable than the 90-day rule applied in a VDA context.

“Utilizing the 30-day rule will likely result in a much higher population of checks to be remediated, and any unremediated check would factor into the 'error ratio' for estimation purposes,” he explained.

The more concerning thing is that the regulations require checks issued to payees in all jurisdictions to be includable in the population of potential unclaimed property, rather than just checks issued to Delaware (or unknown) payees, per Giovannini. There is also no exclusion for checks that were exempt from being considered unclaimed property in another state or that were in fact escheated to another state.

Today, the regulations indicate that the Department of Finance is required to publish an “Intent to Expedite Completion of Examination,” which will outline the expectations of the holder in this regard. The department has published this form, though unfortunately it does not provide many details beyond what are outlined in the statute.

“The form requires the holder to agree that the hold notice contained in the original audit authorization letter remains in effect during the expedited audit,” said Giovannini. “It also indicates that a Schedule A will spell out the specific details regarding the holder's response requirements. However, no sample Schedule A is provided. Holders are looking for additional guidance around the process, timing, nature of the review, etc.”

Delaware attempts to arrive at an aggregated, unapportioned estimate of liability by considering all items of unclaimed property during the base years, not just those that are due and payable to the state of Delaware, according to Hedstrom. This would include all checks owed to payees in states other than Delaware, for example.

So, what are the steps required to convert an audit to a VDA by December 11?

“Luckily, this is as simple as completing, executing, and submitting the form NOI CONV, which is available at the Delaware VDA website,” said Giovannini. “The form requires only basic information to be included, such as when the audit was initiated and the relevant holder contact information. The form may also be emailed and need not be physically mailed.”

Amanda G. Ciccatelli is a Freelance Journalist for Corporate Counsel and InsideCounsel, where she covers intellectual property, legal technology, patent litigation, cybersecurity, innovation, and more.