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May 10, 2022

Unclaimed Property is All the Rage in California

This tax season California regulators have updated requirements, instituted an amnesty program, and launched new fraud prevention efforts in an effort to encourage unclaimed property compliance. These changes increase the risk of exposure for businesses holding unclaimed property and not taking adequate steps to address the problem.

In the following, our tax team breaks down what this might mean for you if you filed a partnership, corporate, or LLC tax return — and what you’ll need to do to avoid an audit or additional costs.

What is unclaimed property?

Unclaimed property refers to property or accounts that have not generated any activity or engagement with the owner for three years or more (known as a dormancy period), after which it is labeled “unclaimed.”

Common examples of unclaimed property include uncashed checks, stocks, safe deposit box contents, gift cards, insurance payments, or refunds. For example, California hosts a database for taxpayers to verify whether the state may be holding any unclaimed property in their name (or related to their properties).

If your business or organization is holding unclaimed property, you must either return it to its owner, or, if unable to locate the owner, turn it over to the state once the dormancy period has ended (called “escheating”). Any holder that knows unclaimed property exists but has not sought to effectively address the issue can face expensive consequences.

California’s updated unclaimed property requirements

Currently, there is a low reporting rate of unclaimed property in California, which has prompted the state to act. It is estimated that businesses are withholding close to $18 million in escheatable funds, and the Legislative Analysts’ office estimates only 2% of businesses are compliant with the current unclaimed property reporting laws.

But now California tax returns will require taxpayers to answer the following questions regarding unclaimed property compliance:

  • Have you previously filed an unclaimed property holder remit report with the state controller’s office?

    • If so, when did you last file the report?
  • What was the amount last paid?

Your answers will be shared with the state controller’s office, potentially spurring an unclaimed property audit. And if your business is located outside of California, any audits you are subjected to would be referred to third party collection companies, meaning you might be susceptible to a multi-state unclaimed property examination.

Possible unclaimed property respite via Assembly Bill 2280

The California State Assembly is deliberating a new assembly bill to provide an amnesty program for businesses looking to report unclaimed property in California, interest-free. This is due in part to the regulatory challenges unclaimed property poses for organizations in nearly every industry.

To be eligible for the voluntary compliance program, companies cannot 1) be currently under examination in California, 2) be involved in criminal or civil action for unclaimed property noncompliance, or 3) have been alerted to unclaimed property interest in the past five years. California will forgive the company’s unclaimed property interest if the company:

  • Takes part in an educational training program.
  • Makes a diligent effort to reunite unclaimed property with its rightful owners.
  • Promptly files reports and submits unclaimed property spanning the past 10 years.
  • Reviews its accounting records for unclaimed property spanning the past 10 years.

California Attorney General: “Corporate evasion is corporate fraud.”

Unclaimed property is also an increasingly hot topic for enforcement because of the high stakes for unclaimed property compliance and risk.

In a March 2022 press release, the California Attorney General brought unclaimed property into the spotlight alongside a complaint filed by the state, which alleges a California healthcare provider chain failed to report and remit unclaimed funds. Not only did it violate the California Unclaimed Property Law, but it also allegedly concealed the funds instead of simply failing to report them.

With the California Attorney General’s involvement in unclaimed property enforcement, it stands to reason that other companies should examine their own compliance to avoid additional penalties.

How you can avoid unclaimed property issues

The focus on unclaimed property compliance is growing, and noncompliance with the laws can prove costly: California charges a 12% interest rate on back filings, and its audits can reach back as far as 10 years.

To avoid unclaimed property issues, you must:

  1. Identify the unclaimed property

  2. Perform due diligence by notifying the proper owner of the property

  3. Remit the unclaimed property to the state.

If you think you might have compliance gaps in your company’s history, or you have knowingly neglected to report unclaimed property in the past, an internal review of your exposure is crucial.

How MGO can help

If you have questions about your unclaimed property compliance or think your organization could benefit from understanding its level of exposure and vulnerability in case of an audit, MGO’s Tax Controversy team can guide you through best practices. Contact us to learn how you can avoid additional compliance costs.

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