By Cydney Posner
This morning Compliance Week published an article titled, "Time for Voluntary Disclosure Agreements on Unclaimed Property?" The article discusses the recent aggressive strategy of "revenue-starved states" to audit companies with the goal of seizing unclaimed property or imposing unpaid property tax as a result of unclaimed property. (Think, for example, equity-related property such as stock or dividends, as well as payroll, accounts payable, accounts receivable, gift cards and rebate programs.)
The change is not in the actual requirements, but rather in the intensity of the enforcement, especially in the past few years. According to the article, a number of "aggressive" states, especially Delaware (which, as the state of incorporation for 850,000 public and private companies, reportedly funds one-third of the state's budget through unclaimed property) have engaged auditors on a contingency-fee basis to "sniff out and seize whatever they can," and companies have been required to prove that the property is not unclaimed. Other "enterprising' states include New York, Texas, California and New Jersey. Typical company record-keeping may not suffice because many companies have not "kept adequate records to document unclaimed property as far back as statutes allow states to reach. For most states it's around 10 years, but in Delaware, it's all the way back to 1981." One commentator cited in the article contends that "'Compliance officers are thinking their systems are set up properly and they know what's supposed to happen…. Now they're hearing that their systems are not good enough.'"
Some experts cited in the article are advising companies to create a matrix summarizing their historical unclaimed property filings by state and by property type to assess what they have paid and what the risk may be. According to one commentator, "Based on the risk a company might identify after it assesses its compliance in light of the current environment, experts are advising companies to consider whether they want to enter voluntary disclosure programs that most states have established in recent years. Most states have some provision to reduce the look-back period and forgive interest or penalties…. Delaware in particular has dangled a voluntary disclosure incentive with the terms sweetest if companies apply by June 30, 2013, but some companies are fearful doing so will expose them to a huge liability. 'The problem is a lot of companies have filed and then the state is auditing them and blowing them up, saying you didn't give us enough money… Either they agree and accept the voluntary disclosure or they'll not accept it. There is that risk.'" While some companies have reportedly attempted to challenge the states' claims, so far, they have not been successful and the discovery involved has been especially burdensome.
The article also suggests that few public companies have booked reserves for the possibility of unclaimed property audits because, under accounting rules, they only do so when the potential liability is probable and can be reasonably estimated. The increased activity by the states in this area means that companies may need to take a "harder look at the probability." Apparently state-engaged auditors "can find some pretty large liabilities using the estimation methodology that Delaware finds acceptable."