For organizations based in or doing business in California, it has never been a better time to focus on unclaimed property. A recent study performed by the state determined that only 2% of businesses that operate in California submitted holder reports.1 Therefore, the state has developed a plan for increasing enforcement and identifying noncompliant organizations. Although the idea of increased audit activity is daunting, on Sept. 13, 2022, the California governor signed Assembly Bill 2280 (AB 2280) into law, offering a rare voluntary compliance program (VCP) opportunity. This provides companies the chance to come into compliance without facing the state’s mandatory interest assessments.
As this continues to develop, organizations will need to prepare now and act fast to take advantage of this lucrative opportunity. It’s important to note that because California unclaimed property rules largely are determined by the state in which the payee is located or by the incorporation state of the company – not the state in which the business is based – organizations that have customers in California or conduct business with vendors in the state also should keep up with these changing guidelines.
Background: Increased state enforcement presents risk
Through the ongoing pandemic, California, like many states facing budget shortfalls and other financial challenges, has shifted its focus to a more rigorous pursuit of unclaimed property – money owed to an individual or organization that has not yet been claimed. This includes liabilities such as uncashed payroll, vendor, and refund checks; aged accounts receivable credit balances; unused gift card balances; and inactive bank accounts and securities. Because most of the owed individuals will never discover such amounts were turned over to the state, California may anticipate a windfall without raising taxes. The increased reliance on unclaimed property by the states has come with increased audit activity.
Because noncompliance with California’s unclaimed property laws presents such significant financial exposure due to the state’s mandatory interest of 12%, organizations essentially have been disincentivized from coming into compliance. California’s focus on increasing its enforcement of unclaimed property reporting, including compliance examinations, has been a catalyst for legislative change.2
As evidence that the state is ramping up its unclaimed property collection, tracking, and audit efforts, the California State Assembly passed AB 466, effective Jan. 1, 2022. The state now has authorized the California Franchise Tax Board to collect information regarding prior unclaimed property reporting, or lack thereof, on income tax returns and disclose to the state’s unclaimed property division such information. Organizations not filing unclaimed property on an annual basis might receive notice from the state of potential noncompliance or, worse, be targeted for a compliance examination.
Hope on the horizon: VCP legislation has been signed
Amid this challenging climate of increased unclaimed property enforcement, organizations operating in California should be aware of a positive development: AB 2280. This bill, originally introduced in the California Assembly in February 2022, could offer organizations doing business in California a rare opportunity to enter a VCP that could help them avoid the state’s mandatory interest assessment.3
The bill allows the state controller to enact a VCP, which, if enacted (which seems likely), will offer organizations a release from interest assessed on unclaimed property held for historical periods (up to 13 years). Organizations that have never filed a report and those that have filed but have gaps in their unclaimed property reporting history (due to M&A history or transition of personnel) with California can enroll in the program. A holder must meet certain other requirements to qualify, including:
- Completing an unclaimed property educational training program (provided by the California state controller) within the first three months of enrollment in the program
- Reviewing its historical books and records for unclaimed property in California
- Completing the VCP within six months (extensions might be available under certain circumstances) of the date on which the holder was notified of enrollment in the program
A holder would be ineligible to participate in the VCP if any of the following apply:
- The holder is under an examination of records by the state of California.
- The holder is under litigation by California for unclaimed property.
- The holder has prior interest assessments that have not been paid. (Holders subject to an outstanding interest assessment may file or refile a request to enroll in the VCP after resolving the outstanding interest assessment.)
- The holder has received a waiver of interest from California in the past five years.
Taking advantage of this voluntary compliance program, which might be a one-time-only opportunity, could be paramount to minimizing the financial burden California companies face when coming into compliance. The VCP has the potential to be less strict than an audit and gives participants more control over the process.
Proactively managing California unclaimed property risk
Regardless of whether a company has an unclaimed property filing history or not, taking advantage of this opportunity to come into full compliance and close existing process gaps and areas of exposure could be a tremendous benefit. Proactively managing unclaimed property can help mitigate a company’s risks, including costly penalties and interest assessments, notice of audit, financial reporting implications (such as not following generally accepted accounting principles or Sarbanes-Oxley Act provisions), and reputational damage.
Organizations should not wait for an auditor to approach before getting their unclaimed property in order. Companies should act sooner rather than later to minimize unclaimed property compliance risks and preempt a potential audit. Following are some steps organizations can take to limit unclaimed property exposure:
- Know the organization, including its entity structure, state of incorporations, and operating areas.
- Understand the organization’s filing history and California’s unclaimed property reporting requirements.
- Review the organization’s books and records (including disbursements and cash receipts) for the past 13 years.
- Identify areas of potential exposure (for example, unapplied or unidentified cash, write-offs, and amounts owed through third-party administrators).
- Determine if the organization has a significant risk in unclaimed property in California and other states.
- Develop an action plan, including policies and procedures, to address identified risks going forward.
- Gain familiarity with AB 2280 and determine whether entering a VCP would be a good fit for the organization.
Unclaimed property specialists can help
Keeping up to date with evolving state guidelines and proactively managing and reporting unclaimed property before auditors come knocking is crucial. Although the benefits are clear, navigating the unclaimed property landscape and understanding risk areas and exposure can be daunting.
Trusted unclaimed property specialists can help guide organizations through the various complexities and position them to take advantage of the opportunities available.
1 “The 2019-20 Budget: Increasing Compliance With Unclaimed Property Law,” California Legislative Analyst’s Office, March 15, 2019, https://lao.ca.gov/Publications/Report/3978
3 “AB-2280 Unclaimed Property: Interest Assessments and Disclosure of Records (2021-2022),” California Legislative Information, Sept. 14, 2022, accessed Oct. 7, 2022, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB2280