The deadline to enroll in an unclaimed property coverage program to convert Delaware's property audits to voluntary disclosure agreements (VDAs) took place on December 11, 2017. Joseph Carr, BDO's national unclaimed property practice leader, sat down with Inside Counsel to discuss what companies need to know about state unclaimed property compliance and audits, what qualifies businesses to file a VDA in Delaware or Illinois, how they will be affected by regulatory changes, which industries could be most affected and what companies need to know about state unclaimed property compliance and audits.

As the landscape of unclaimed property continues to change, it is important to understand each state's compliance requirements. All companies have filing responsibility if they have amounts to report, and many states require companies to submit negative reports ($0 filings) even when they are not reporting any unclaimed property for that year. Unclaimed property compliance returns are either due in the fall or the spring, so penalties and interest may apply for late filings. In addition, according to Carr, most states require sending due diligence letters between 60 and 120 days from the filing date to attempt to reunite the property with the rightful owner.

As of late, more and more states are cracking down on unclaimed property compliance violations by turning to third-party commission-based auditors to conduct examinations on their behalf. Often paid on a contingency fee basis, these auditors are incentivized to find noncompliance, and at the same time, unclaimed property has become an important source of states' revenue.

“As a result, the volume of audit notices issued has skyrocketed in recent years,” he explained. “These audits can last three to seven years and are very intrusive. Companies should operate under the assumption they could be audited at any point. Thus, companies should assess their unclaimed property risk and ensure records and compliance measures are up to date. Failure to comply with state escheatment laws significantly increases the likelihood of an audit.”

According to Carr, a common pitfall is failing to account for liability from, or insufficient recordkeeping for, prior years. The average state look-back period is 10 to 15 transaction years.  Most companies do not keep complete and researchable records back this far, creating extrapolation and estimation risk for periods where records don't exist or are insufficient. In fact, the estimation may be characterized by states as “assessment for estimated unclaimed amounts owed for years where no records existed” or a “penalty for failure to retain records.” Per Carr, some companies should consider taking advantage of available unclaimed property voluntary disclosure initiatives–known as VDA programs–offered by most states.

So, what exactly qualifies businesses to file a VDA in Delaware, in Illinois, etc.?

Generally, a business can file a VDA if it meets these general requirements: The business is not currently under unclaimed property audit by the state, has property to report to the state that has passed the state dormancy period and enters the program via standard boilerplate state prepared agreement in good faith. Some states will require that you have not filed unclaimed property returns with the state in the past to qualify, and some states may require completion of questionnaires.

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.