How to Avoid a Delaware Unclaimed Property Audit

A great deal has been written about the inordinate time and expense companies experience as result of being subject to a Delaware unclaimed property audit. In addition to the inconvenience of opening the organizations books and records to a third party contingent fee auditor, there is the uncertainty associated with how many internal and external resources will be required to satisfy the number of auditor initiated information document requests over the course of the audit period, which tends to range between two to four years (or longer).

An executive at a large industrial corporation that was charged with the responsibility of managing a Delaware audit said: “I don’t have to worry about going to hell, because I am living in it now.” This sentiment perfectly summarizes the current audit experience.

So, how does one avoid the inconvenience and cost associated with a Delaware unclaimed property audit?

In 2015, the State enacted legislation requiring the Secretary of Finance to permit companies a window of opportunity to voluntarily come forward and enter Delaware’s Unclaimed Property Voluntary Disclosure Agreement (“VDA”), before initiating an audit.1 This action was taken up by the Delaware legislature due to the outcry of companies that experienced the often aggressive audit practices of Delaware’s third-party, contingent-fee auditors, which is now documented in the Federal court decision Temple-Inland v. Delaware.Additionally, there was concern that several large public companies had changed their state of incorporation to more “user friendly” jurisdictions, and that more companies would jump ship if the State did not alter its draconian unclaimed property audit procedures.

However, this offer is not open ended. Companies that receive a notice to enter into an unclaimed property voluntary disclosure agreement have “60 days after the written request is mailed by certified mail to complete the form indicating the person’s intent to enter into a voluntary disclosure agreement.” 3

Experience has proven that an overwhelming number of companies that receive an “invitation” from Delaware’s Secretary of State’s (“SOS”) office to participate in its VDA program do not provide timely written responses to join in the program. Following the enactment of the statue in 2016, the SOS’ office sent written notices to hundreds of companies advising of Delaware’s VDA program. In fact, at that time the SOS’ office provided, in the form of three separate letters, an opportunity for companies to participate in its VDA program. Despite these repeated requests, we were advised that few followed through and completed the required application process (see further discussion below). And the remaining companies? Not surprisingly, they all received audit notices from the Secretary of Finance.

To further encourage participation in the Delaware Unclaimed Property VDA program, and to send a strong message to the market that receipt of these “invitation” letters was to be taken seriously, in early 2017 the SOS forwarded a series of such letters to less than 100 companies with little or no history of reporting unclaimed property to Delaware. This time, immediately after expiration of the 60-day window, all participants that did not respond were immediately served with a Delaware unclaimed property audit notice. Companies were no longer provided multiple opportunities to join in the VDA before an audit was initiated.

There are likely good explanations as to why a company may not have responded to receipt of invitations to participate in a Delaware VDA including:

  1. Given the adverse perception (and often reality) associated with a Delaware unclaimed property audit, many companies, without knowing the complete implications of not responding, are prone to disregard “invitations” to voluntarily subject themselves to the reporting regime;
  2. Some companies may have “received” the invitation letter, but the letter may not have been properly delivered to an authorized company representative that is versed in responding to such notices on a timely basis.4

So, what’s a company to do?

First and foremost, if a company receives an invitation to participate in Delaware’s unclaimed property VDA programDO NOT DISREGARD THE LETTER. Otherwise stated, “this is not a drill…or practice.” Take the notice seriously, as once a letter is received, a company most likely has either one of two outcomes: 1) either voluntarily participate in the state’s VDA program, or 2) it will be directed to participate in a state-initiated third-party contingent-fee audit within a relatively short period of time.

The benefits of coming forward voluntarily are significant, including abatement of interest and penalties and equally or more importantly, the opportunity to self-manage the review process, within certain limitations and avoid a long and often timely audit. For more information on the advantages of a Delaware and other state VDA programs, see the following articles:

There are a series of requirements that a company must complete to indicate its consent to participate in Delaware’s VDA program. Among the requirements is that a properly executed form VDA-1 be completed and certified copy be mailed before expiration of the 60-day period. For more information on the program requirements please contact us directly or visit www.vda.delaware.gov.

For those companies that have not yet received an invitation to participate in Delaware’s Unclaimed Property Voluntary Disclosure program?

If you are among the number of companies that have no record of receiving a Delaware VDA invitation letter, or it was not received by the appropriate designated person, all is not lost. The state may consider extenuating circumstances and permit late entry to demonstrate its willingness to encourage companies to voluntarily come forward. However, your ability to prevail will depend on your company’s specific facts and circumstances.

Also, we encourage all companies organized in Delaware, or have acquired businesses that are incorporated in the state and have not yet been subject to an audit, to not have to wait for an invitation to participate in Delaware’s VDA program.

We understand that the SOS will soon be initiating a series of “invitations”, inviting companies that may not have a history of reporting in the State to voluntarily come forward. Rather than wait for the invitation, we encourage such organizations to initiate a self-review to assess the magnitude of any potential liability, initiate steps to minimize or eliminate potential exposure and, equally or most importantly, initiate processes and procedures to maintain compliance in Delaware and all states and jurisdictions requiring the reporting of unclaimed property.

For more information on Delaware and other state VDA programs, please contact our Unclaimed Property and Tax Risk Advisory specialists.

 

Sources:
1 Pursuant to Delaware Ann. Code §1172 (a), “Effective July 1, 2015…. the State Escheator shall not initiate any new examination of records or an investigation of any person under this section unless the person has first been notified inwriting by the Secretary of State that the person may enter into an unclaimed property voluntary disclosure agreement, or the holder fails to otherwise comply with a requirement imposed on such holder pursuant to § 1173 of this title”, 
2 Temple Inland Inc. v. Cook, 192f. Supp. 3d 527, 06/26/2016
3 Delaware Ann. Code §1173(b) “If the form indicating the person's intent to enter into a voluntary disclosure agreement is not received by the Secretary of State by certified mail or by other means deemed acceptable by the Secretary of State within 60 days after the request to enter the voluntary disclosure agreement program was mailed by certified mail, the Secretary of State shall refer the person to the State Escheator for examination under § 1171 of this title.”[emphasis added.]
4 The statute does not include any specific reference to the manner in which such notice be delivered to a Company. As such we understand thus far, all such letters were addressed to the CFO as reflected in Delaware’s records (whether or not that person was at the Company and delivered via Federal Express or UPS. Many were delivered to the Company mailroom lacking signature from the named addressee.

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