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Unclaimed Property

The California Franchise Tax Board (FTB) has added an unclaimed property reporting questionnaire to certain business tax returns. After the passing of Assembly Bill 466 on July 16, 2021, the FTB is allowed to share the filer’s answers to these questions with the state controller’s office, which will use this information to increase audits of potential holders of unclaimed property. Here, we share everything you need to know about this update.  Data sharing Assembly Bill 466 will lead to heightened reporting compliance for unclaimed property by amending California’s income tax disclosure provision under section 19554, which permits the FTB to provide information to the state controller’s office. Starting with 2021 returns, the FTB may now share the following information with the controller: The taxpayer’s entity status and the date that the FTB last updated the taxpayer’s entity status The taxpayer’s revenue range Whether the taxpayer previously filed an unclaimed property report with the controller, and if applicable, both of the following:  The date filed of the taxpayer’s last report  The amount remitted on the taxpayer’s last report After the enactment of Assembly Bill 466, the FTB worked with the controller’s office to compile a list of questions to include on business tax returns of corporations, partnerships and LLCs that could increase awareness of, and compliance with, the unclaimed property reporting requirements. The questions include the following: Has the business entity previously filed an unclaimed property Holder Remit Report with the State Controller’s Office? [Yes/No] If “Yes,” when was the last report filed? What was the amount last remitted? The controller’s office will then use this information to increase unclaimed property audits of business entities, expand unclaimed property reporting compliance and raise revenue through penalties and interest. Penalties California has steep penalty and interest provisions for late unclaimed property reports. Non-compliant businesses face up to a $10,000 penalty per late report, $5,000 for failing to deliver escheatable property and 12% interest based on the amount of property subject to escheatment.  Additionally, the interest charge can surpass the actual reportable property in some cases. No voluntary disclosure program An unclaimed property audit by California is especially troublesome because the state does not offer a voluntary disclosure program. Many states have a formal or informal voluntary disclosure program that allows uncompliant businesses to come into compliance without facing penalties or interest. Under a voluntary disclosure program, the business will conduct some form of self-audit, attempt to contact the rightful owners of the unclaimed property and report the remaining unclaimed property to the state.  In February 2022, the California legislature considered a bill to establish the California Voluntary Compliance Program, which would allow businesses to come into compliance and avoid interest assessments in the process. While the program would increase compliance, it is still too soon to gauge the chances of this bill becoming law. Expansion to other states While California’s questionnaire approach has not been adopted by other states yet, every other state has similar annual reporting requirements where the failure to be in compliance can result in penalties and interest.  Typically, when a state proceeds with a compliance audit, it engages a third-party auditor, who is generally paid on a contingency basis. These auditors can significantly increase their compensation by expanding the scope of the audit and including additional states. By transforming a single state audit into a 20, 30 or 50-state audit, the third-party auditor can significantly increase its overall compensation, as well as the penalties and interest owed by the non-compliant business. Because of this, it’s important to note that even nonresident businesses should be aware of these changes so they can accurately answer the questionnaire.   Learn more about unclaimed property audits California taxpayers will most certainly receive more scrutiny from the state regarding their unclaimed property obligations in the coming years. Businesses filing California business income tax returns must be prepared to accurately respond to these unclaimed property questions to minimize audit exposure.  For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The California Franchise Tax Board (FTB) has added an unclaimed property reporting questionnaire to certain business tax returns, increasing the likelihood of scrutiny for California businesses. 

California adds unclaimed property to its income tax return

Unclaimed property is rapidly assuming a new role as a state revenue generator. States are taking aggressive measures to capture unclaimed property by legislating shorter dormancy periods, engaging contingent auditors as bounty hunters to examine reporting and noncompliant holders of unclaimed property, and offering amnesty programs. To help organizations become better familiar with unclaimed property reporting requirements, Baker Tilly compiled a state-by-state guide on unclaimed property laws. Use the guide as a starting point for learning more about the unclaimed property laws of the states in which you have reportable property.
  Download this guide: Unclaimed property: State-by-state guide. For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team. This guide is updated as needed to reflect state changes.

Learn about the unclaimed property laws of your state.

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Unclaimed property: state-by-state guide

 Many states contract with third-party auditors to administer unclaimed property audits. Third-party auditors primarily consist of law and accounting firms. These third-party audits are frequently adversarial and invasive, in large part because the third-party auditors have financial incentive to identity as much escheatable property as possible. On April 3, 2018, Wisconsin enacted Assembly Bill 773, 2017 Wis. Act 235, which establishes when the Secretary of Revenue can use contingency fee agreements with third parties conducting unclaimed property audits. As in many other states, Wisconsin’s Department of Revenue has contracted, in recent years, with auditing firms to conduct unclaimed property audits on a contingency fee basis. Holders of unclaimed property have often criticized such arrangements, contending that such agreements incentivize these third-party firms to conduct overly aggressive audits and drive up compliance costs. Under the new Wisconsin law, the restrictions on contingency fee arrangements for unclaimed property audits differ depending on whether or not the unclaimed property holder is domiciled in Wisconsin. For Wisconsin-domiciled holders, the Secretary of Revenue is prohibited from entering into an agreement allowing a third party to conduct an unclaimed property audit on a contingent fee basis or to purchase information arising from the audit, except for information received from the federal government. Such contingency fee-based arrangements can still be used for unclaimed property audits of holders domiciled outside Wisconsin. But the contingency fee for these arrangements is now capped at 12 percent of the total amount of unclaimed property disclosed by the audit. Further, auditing firms can no longer use statistical sampling in order to estimate the property holder’s liability unless the holder consents to such an estimate. The Wisconsin Department of Revenue currently does not have a formal voluntary disclosure agreement (VDA) process, but it is working to develop one. Despite the lack of a formal process, Wisconsin does waive penalties and interest for taxpayers who come forward to voluntarily disclose that they have not previously reported unclaimed property. The recent legislative changes are arguably holder-friendly; however, these changes signal increased audit activity in Wisconsin. As such, holders are well-advised to come into compliance as soon as possible. For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Wisconsin establishes rules for unclaimed property audits conducted by third-party auditors

 On Dec. 4, 2017, the Third Circuit Court of Appeals vacated a lower court’s dismissal of the Marathon Petroleum Corporation’s (Marathon) challenge to aspects of Delaware’s unclaimed property laws in Marathon Petroleum Corp. v. Secretary of Finance., 876 F.3d 481 (3d Cir. 2017). The Court of Appeals confirmed that holders of unclaimed property have standing under federal common law to challenge a state’s authority to conduct an unclaimed property audit. Background Marathon and Speedway, LLC (Speedway) are Delaware corporations with their principal places of business in Ohio. Marathon and Speedway use Ohio subsidiaries, Marathon Prepaid Card LLC and Speedway Prepaid Card LLC, respectively, to issue Marathon- and Speedway-branded gift cards. In March 2007, Delaware initiated an unclaimed property audit of Marathon and Speedway. As part of the audit, Delaware’s third-party auditor, Kelmar Associates, requested extensive and detailed information regarding the Ohio subsidiaries. Marathon and Speedway produced documents demonstrating that the Ohio subsidiaries were incorporated in Ohio and had no property in Delaware. Delaware did not therefore have authority, Marathon and Speedway argued, to escheat any unredeemed gift card amounts. Kelmar nonetheless demanded further documentation and threatened to refer the matter to Delaware’s Attorney General for possible enforcement action if Marathon and Speedway did not provide the documentation. In February 2016, Marathon, Speedway and their Ohio subsidiaries filed suit in the District Court of Delaware, arguing that Delaware’s audit requests were preempted by the federal common law priority rules and constituted an unreasonable search under the Fourth Amendment. The District Court granted Delaware’s motion to dismiss, holding that Marathon and Speedway’s claims were ripe but that the federal common law rules set forth in Texas v. New Jersey applied only to disputes between states and did not create a private right of action. The District Court also dismissed the Fourth Amendment claim, stating that the audit and information requests did not constitute searches. Marathon and Speedway appealed the dismissal of their preemption claim. The decision The Court of Appeals concluded that federal common law created a private right of action to challenge Delaware’s authority to conduct an audit and escheat abandoned property. The court noted that the protections against escheatment set forth in the Texas v. New Jersey line of cases would “in many instances, become a dead letter” if a private cause of action were not available. Observing that one of the original defendants in Texas v. New Jersey was a private party, the court remarked that it would be nonsensical to require a private party to wait to be sued by a state before asserting its rights. If a private party can be a defendant when its rights are at stake under the federal priority rules, that party should be able to sue for enforcement of those same rights. The Court of Appeals also reaffirmed its holding from New Jersey Retail Merchants Ass’n v. Sidamon-Eristoff that the priority rules set forth in the Texas v. New Jersey line of cases are exclusive. If neither the property owner’s last known state of residence nor the property holder’s state of residence are willing or able to escheat the unclaimed property, no other state may attempt to do so. Although the Court of Appeals reversed the District Court on the question of whether Marathon and Speedway had standing to sue, the Court of Appeals nonetheless dismissed the suit. The Court of Appeals said there were two ways to construe Marathon and Speedway’s challenge to Delaware’s audit: (a) as a challenge of Delaware’s authority to initiate and conduct the audit in the first place or (b) as a challenge to the scope of the audit. To the extent Marathon and Speedway were challenging Delaware’s authority to conduct the audit, the Court of Appeals determined that Delaware “plainly” had such authority. A state must be able to determine who the holder of escheatable funds is. Delaware must be permitted to examine Marathon and Speedway’s relationships with their Ohio subsidiaries to determine the true holder-owner relationship with respect to the abandoned property in question, i.e., the gift cards. To the extent Marathon and Speedway were challenging the scope of the audit, the Court of Appeals held that the claim was not ripe because Delaware had taken no enforcement action to compel compliance with the audit. But the Court of Appeals specified that its decision did not “foreclose the possibility that a state’s demands for information may become so obviously pretextual or insatiable” that the priority rules would be triggered and preemption would apply. Takeaways Although the suit was dismissed, the decision is, overall, a win for property holders. While Delaware can investigate the relationship between affiliated entities, the Court of Appeals clarified that the scope of such an investigation is not unlimited and can be challenged by holders. The opinion confirms that holders have standing under the federal common law priority rules and can bring suit when a state abuses the investigation process. States can examine subsidiaries records to confirm that those subsidiaries are not alter egos of the parent. But states cannot use document requests to go on fishing expeditions. Holders can decline to provide information in response to unreasonable document requests because the requests are outside the scope of the state’s audit authority. If the state does not agree, it will be forced to take enforcement action and be prepared to litigate the matter. Finally, the opinion affirms that the only two states with the right to escheat unclaimed property are the state of the property owner’s last known address and the state of the property holder’s incorporation. If neither of those states escheats the unclaimed property, other states cannot attempt to escheat the property on other grounds, such as being the state where the unclaimed property sale occurred. The opinion is precedential and applies to the jurisdictions of Delaware, New Jersey, Pennsylvania and the United States Virgin Islands. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Unclaimed property holders can challenge state’s authority to audit

Our Client’s Need A manufacturer of precast concrete products was in negotiations with a buyer. The buyer’s due diligence uncovered unclaimed property as a potential area of liability. Like most companies, the concrete manufacturer was unaware of its unclaimed property and how it would be a material weakness. In some cases, when the unclaimed property exposure is large enough, the buyer will walk away. Baker Tilly’s Solution The manufacturer engaged Baker Tilly in an unclaimed property review. Our unclaimed property practice professionals identified any potential unclaimed property exposure and worked with our client to remediate uncashed checks and credit memos. Baker Tilly then analyzed all relevant unclaimed property laws, including business-to-business exemptions. Finally, our team drafted a comprehensive memo to document the review process, remediation efforts and relevant law. Baker Tilly quantified the client’s exposure, met with the buyer to answer any questions and made recommendations on how to further reduce exposure through voluntary disclosure agreements. Results Baker Tilly reduced the buyer’s originally proposed exposure by more than 75 percent. Most importantly, our professionals helped ensure that unclaimed property was not a major issue in the sale. For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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Concrete maker doesn’t let unclaimed property sink deal

Unclaimed property is a hidden cost for many companies, but the ability to track such property as well as stay current with changing legislation, rulings, filing and escheat requirements is overwhelming.

Our unclaimed property professionals recognize these challenges and provide customized services to assist you with identifying risk and managing the overall process. With Baker Tilly on your team, you can strengthen your position by establishing long-term solutions that minimize the risk of audit and the burden of unclaimed property compliance. We proactively help you implement or enhance critical processes and procedures, often enabling you to bring properly vetted property back into income and improve your financial results.

Performing unclaimed property compliance reviews

Providing advanced planning and restructuring for unclaimed property matters

Identifying unclaimed property liability and legal exclusions

Determining compliance needs and reporting issues

Negotiating favorable voluntary disclosure agreements

Defending abandoned and unclaimed property audits

Complementing law firms during unclaimed property audits

Designing unclaimed property management systems

Assisting with unclaimed property due diligence and reporting

Assisting with company unclaimed property recovery

Baker Tilly can help you with all unclaimed property issues, including:

We help you identify and report any unclaimed property on your books – saving you from penalties and improving your bottom line.

Our unclaimed property team will help you identify and report any unclaimed property on your books – saving you from penalties and improving your bottom line.

Peter Noce, a partner with Baker Tilly, has more than 15 years of tax-focused public accounting experience and has been with the firm since 2015.

Baker Tilly offers specialized federal tax compliance and planning expertise to help businesses optimize value while minimizing their tax burden.

Baker Tilly provides IRS audit and appeals representation and supports IRS installment agreements and offers in compromise, requests for penalty relief, private letter ruling requests and IRS voluntary disclosures – offshore and domestic.

Baker Tilly's tax advocacy and controversy team understands what you need to do to lower your risk of audit, but also knows how to help you if you are faced with a federal or state examination.

Our state and local tax professionals offer specialized expertise to help businesses and individuals understand increasingly complex state and local tax rules.

Unclaimed Property

California adds unclaimed property to its income tax return

Unclaimed property: state-by-state guide

Wisconsin establishes rules for unclaimed property audits conducted by third-party auditors

Unclaimed property holders can challenge state’s authority to audit

Concrete maker doesn’t let unclaimed property sink deal

Federal Tax

Tax Advocacy & Controversy Services

State & Local Tax

Unclaimed property is a hidden cost for many companies, but the ability to track such property as well as stay current with changing legislation, rulings, filing and escheat requirements is overwhelming.

Concrete maker doesn’t let unclaimed property sink deal

Baker Tilly can help you with all unclaimed property issues, including:

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