California to allow unclaimed property voluntary compliance program

TAX ALERT | September 16, 2022

Authored by RSM US LLP

On Sept. 13, 2022, California Gov. Gavin Newsom signed into law Assembly Bill 2280. Among other changes, the legislation authorizes the state’s Controller to create a voluntary disclosure program for unclaimed property. 

The voluntary compliance program

California typically imposes a 12% interest rate on unclaimed property that is not timely reported, paid, or delivered to the state. Acknowledged by the legislature in the bill, this interest rate presents a significant deterrent to reporting past-due unclaimed property for holders who may have either underreported or never filed unclaimed property reports to the state. There has not been an opportunity for holders to come into compliance with California’s unclaimed property reporting requirements, without interest assessments, since the last time California offered an unclaimed property amnesty program in 2001-2002. The Voluntary Compliance Program (VCP) described in the bill would allow eligible holders to report unclaimed property to the state and receive a waiver of associated interest, removing some of the existing barriers to becoming compliant with the state’s unclaimed property laws. 

Participation in the program will be up to the discretion of the Controller; however, there are several instances in which a property holder would be excluded from eligibility for the VCP. Eligible property holders must not:

1. be under audit by the state related to unclaimed property,
2. be the subject of civil or criminal prosecution related to non-compliance with state unclaimed property laws,
3. have an unclaimed property interest assessment within the last five years that remains unpaid at the time of application, or 
4. have received a waiver of assessed interest within the last five years, although an exception may be granted if the holder has unclaimed property to report as a result of a merger or acquisition. 

Property holders who have historically filed reports with the state but have failed to properly report a specific category(ies) of property and/or the accurate amount of unclaimed property past due for escheatment are eligible to participate in the VCP, provided they otherwise meet the eligibility criteria noted above. 

After acceptance into the VCP at the discretion of the Controller, property holders must:

• Enroll and participate in an unclaimed property education program within three months of the date of acceptance into the VCP
• Review their books and records for the past 10 years to identify unclaimed property 
• Make reasonable efforts to notify owners of reportable property, as required by law, at least 30 days prior to the filing of an unclaimed property report with the state
• File an unclaimed property report within six months of enrollment in the VCP, unless an extension has been explicitly granted
• Submit an updated report no sooner than seven months and no later than seven months and 15 days from the filing of the initial report and deliver all escheated property to the state

Assuming all requirements listed above are met by the property holder, the Controller is authorized to waive the 12% interest which would normally be imposed. The Controller is also authorized to create guidelines and forms in order to administer the VCP. 

Importantly, while the legislation itself is effective 90 days after enactment, the new program will not be operative until an appropriation is made for the program in the annual budget. Accordingly, holders can likely anticipate the program sometime in 2023. However, preparation for the program and evaluating unclaimed property exposure should begin now. Holders that have not reported, have underreported and/or believe they have California unclaimed property exposure should consider that while the VCP has been authorized, a program has not yet been established, potentially impacting some holders’ compliance planning.   

Takeaways

The authorization of the VCP comes at a moment where holders face increased scrutiny related to unclaimed property compliance. While the California Controller is responsible for the administration of the state’s unclaimed property regime, the legislature recently authorized the California Franchise Tax Board (FTB) to collect information on unclaimed property compliance through required disclosures on income/franchise business tax returns. Tax year 2021 income/franchise business tax forms for all entity types have been updated to include questions about whether a taxpayer has historically filed unclaimed property reports, the date of the most recent report and the amount remitted with the most recent filing. The FTB will share this information annually with the state Controller’s office, and the Controller may use this information to identify holders who are not in compliance with the state’s unclaimed property laws. 

With a typical audit lookback period of 10 years plus the applicable dormancy period, and a 12% interest rate, unclaimed property non-compliance in California presents a significant risk for affected property holders. The authorization for this new program represents the first opportunity in 20 years for holders to come into compliance voluntarily without the imposition of interest on all past-due property. The program will allow eligible property holders to achieve compliance and avoid substantial interest assessments. 

Property holders who are currently non-compliant in California should carefully consider enrollment in a VCP as well as consider how to address any upcoming income tax form filing deadlines and unclaimed property-related disclosures. Please consult your unclaimed property adviser If you have questions related to California unclaimed property in general or the authorization of the VCP.