Delaware makes changes to unclaimed property compliance review process
On June 30, 2022, Delaware Gov. John Carney signed into law Senate Bill 281 making important changes to the state’s unclaimed property compliance review process.
Delaware unclaimed property law section 1172(a) provides that a property holder cannot be audited by the state related to unclaimed property until they are first notified by the Delaware Secretary of State that they may enter into a voluntary disclosure agreement. While audit initiations have been limited by this notification requirement, the state has historically been able to initiate a “compliance review” in situations where a filed unclaimed property report was believed to be “inaccurate, incomplete or false” without having to meet the notification requirement of section 1172(a). Pursuant to Senate Bill 281, effectively immediately, revised section 1170(b) expands the state’s ability to initiate a compliance review for any reason, removing the condition that reports must be believed to be inaccurate to initiate a review. Additionally, the law expands the state’s ability to initiate full audit examinations in situations where: 1) the holder does not complete the compliance review within the required one-year timeframe before the Delaware State Escheator must issue its report, 2) the holder fails to respond to a request for a verified report or compliance review or 3) the holder receives a notice of deficiency as a result of the compliance review and fails to pay the deficiency within 90 days. The bill also grants the State Escheator the right to refer the holder to the Delaware Department of State to apply to participate in the voluntary disclosure program, as prescribed under section 1173, rather than initiating audit procedures. Section 1170(b) also clarifies that a compliance review is not required to be conducted prior to an audit initiation under section 1172.
Compliance reviews are intended to be limited in scope and focused on verifying information presented in a filed unclaimed property report, similar to a ‘desk audit.’ However, in practice, compliance reviews often involve requests for a substantial amount of data and may be difficult to feasibly complete within one year. This practical insight, combined with the fact that the law authorizes the state to initiate a compliance review for any reason, raises concern that the state may be able to use the compliance review process to force property holders into an audit at the end of a one-year period. This practice could potentially circumvent the requirement that property holders be notified of the Secretary of State voluntary disclosure program before being selected for audit by the state.
Other miscellaneous changes to the unclaimed property law include the following:
- Excludes from unclaimed property the following: property where the apparent owner is a foreign government, the federal government, any state government or any local or municipal government not with Delaware and any payment or credit arising under the 2022 Delaware Relief Rebate Program
- Extends the period for required records retention for holders who have received a notice of an examination or who has submitted an election to enter into voluntary disclosure to 10 years from the present day plus the applicable dormancy period until the completion of the examination or voluntary disclosure agreement
- Requires retained records to also include sufficient records of items not reported as unclaimed to allow for review for compliance
- Removes the requirement that the State Escheator send written notice to an owner of a security or other property presumed abandoned prior to liquidation of that property and grants the state the authority to “take reasonable steps to correct, update or validate” owner addresses.
- Clarifies that the 120-day period for a claimant to appeal to the Tax Appeal Board includes the State Escheators initial attempt to pay or delivery the property to a claimant
Takeaways
Participation in the Delaware Secretary of State’s voluntary disclosure agreement program related to unclaimed property can have substantial benefits for holders, including relief from penalty and interest, more expedient resolution of outstanding issues and the certainty that years covered in the agreement will not be subsequently subject to audit. Historically, property holders have been shielded by the notification requirements of section 1172(a), which preserve a holder’s option to participate in the voluntary disclosure process before being subject to audit. The new law may allow the state to effectively navigate around this notification requirement by initiating a compliance review and forcing the property holder into audit at the end of the compliance review timeline. As the legislative changes are effective upon enactment, the new procedures also apply to compliance reviews currently in process that may already be nearing the one-year timeframe for completion.
Holders who receive any outreach from Delaware and/or may have exposure related to Delaware unclaimed property should carefully consider how to proceed in light of the new guidance. Though it is not yet clear how the state will leverage these expanded authorizations related to compliance reviews, the risk of unclaimed property audit seems to be elevated as a result of the law’s passage. Please consult your unclaimed property adviser for additional information on Delaware’s unclaimed property process and potential strategies to manage risk.