North Carolina Association of CPAs State and Local Tax Conference Escheats Overview December 10, 2014
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Agenda Overview of unclaimed property Unclaimed property enforcement landscape North Carolina and Delaware developments Proactive analysis/remedies 2
Overview of unclaimed property The area of unclaimed property is often times characterized by the public as a tax because of the administrative, procedural, and conceptual similarities to taxation; especially sales and use taxation. Among the most common types of unclaimed property are outstanding payroll checks, AP vendor checks, customer balances, and gift certificates. Broadly defined as assets being held by a holder in a fiduciary capacity for an owner for which there have been no documented transactions or contact with the owners for a statutory period of time known as the dormancy period. Three primary factors for reporting UP: a. Does the item constitute unclaimed property? b. Has the requisite dormancy period elapsed? c. Contact between holder and owner. 3
Overview of unclaimed property (continued) The rationale for the reporting of unclaimed property to a particular jurisdiction is that while holders may not be in existence when an owner subsequently requests his/her unclaimed property, jurisdictions will be in existence. Apparent Owner = Clearinghouse to locate property Jurisdiction = Keep the interest and some of the extrapolated principal Holder = Administrative requirement similar to the sales tax. 4
Overview of unclaimed property (continued) United States Supreme Court case, Texas v. New Jersey, 379 U.S. 674 (1965) espoused a general two part rule: a. The unclaimed property laws of the last known address of the apparent owner govern; b. If the holder is not in possession of the last known address of the apparent owner, the unclaimed property laws of the state of formation/incorporation of the holder govern. 5
Overview of unclaimed property (continued) North Carolina reports generally due on or before November 1. Life insurance company reports due May 1 North Carolina payroll, utility deposits, membership fees, refunds and rebates, and certain court deposits have a one year dormancy period. Example: Payroll checks escheatable to North Carolina and issued between July 1, 2012 through June 30, 2013 are due on the North Carolina November 1, 2014 report. Most other North Carolina property has a five year dormancy period Example: Checking accounts escheatable to North Carolina last accessed between July 1, 2008 through June 30, 2009 are due on the North Carolina November 1, 2014 report. Shorter or longer periods may apply; always check dormancy period of the specific property Examples: Certain retail credit balances, securities, and insurance proceeds have a 3 year dormancy period; safe deposit box contents have a 2 year dormancy period Examples: Certificates of deposits have a 10 year dormancy period; travellers checks have a 15 year dormancy period 6
Overview of unclaimed property (continued) Delaware reports generally due on or before March 1. Financial institutions reports due Nov. 10; life insurance companies reports due Dec. 20. Delaware property is generally a 5 year dormancy period. Investment property, e.g., stocks, bonds, securities, interest, dividends, etc., has 3 year dormancy period Five-year property escheatable to Delaware and issued during the 2008 calendar year was due on the March 1, 2014 Delaware report. 7
Unclaimed property Increased enforcement = Why now Low Compliance Rates Wall Street Journal article dated June 19, 2013, reflects only 6% of Delaware incorporated taxpayers voluntary file UP reports. Use of Bounty Hunters Revenue Neutral Nature of Unclaimed Property Information Sharing Agreements. Lengthy Statute of Limitations (Delaware conducts audits for non-filers back to 1981) Imposition of Interest and Penalties Inapplicability of Nexus Statutes Increased Technological Capabilities of Jurisdictions 8
Unclaimed property NC developments North Carolina now inquires about a taxpayer s unclaimed property posture on page 1 of the North Carolina corporate income tax return (CD-405) and page 1 of the North Carolina S corporate tax return (CD-401S), respectively. This page 1 unclaimed property declaration highlights the increased scrutiny North Carolina is employing to enforce their unclaimed property laws and increase the rate of unclaimed property compliance. 9
Unclaimed property NC developments (continued) 10
Unclaimed property Delaware developments Governor Markel signed Senate Bill 258 into law, establishing a new, secondary unclaimed property voluntary disclosure agreement (VDA) program administered by the Delaware Secretary of State. This new VDA program, which is administered by the Secretary of State, is markedly different from the current Delaware Unclaimed Property VDA administered by the Delaware State Escheator s Office. 11
Unclaimed property Delaware developments (continued) Issue Delaware Escheator Delaware secretary of state Look-back date for property covered under VDA 1991 if holder files the AP DE-1 with the Office of Escheator 1996 if application received by June 30, 2013; or 1993 if application received by June 30, 2014. Interest and penalties Abatement of interest and penalties Abatement of interest and penalties Length of VDA period Limitations on participation Seldom less than 9 months, and often in excess of two years Open to all holders: a) Who are not currently filing Delaware Unclaimed Property Reports, b) Who are not currently under audit; c) Who are not in receipt of a notice/inquiry from the Office of Escheator Guidelines suggest period of 9 months or less, although the Secretary amenable to allowing holders additional time as long as progress is being made. Open to all holders: a) Who are not currently filing Delaware Unclaimed Property Reports, b) Who are not currently under audit, c) Who are not in receipt of a notice/inquiry from the Office of Escheator 12
Unclaimed property Delaware developments (continued) Senate Bill 228, which was enacted on June 30, 2014, extended the deadline to enter into the Secretary of State s VDA program to September 30, 2014. In addition, the bill extended the sunset date of the program from July 1, 2015, to July 1, 2016, to provide participants and the Secretary of State additional time to complete VDA agreements. 13
Unclaimed property Delaware developments (continued) Senate Bill 228, also revises the penalties and interest applied to holders of Delaware unclaimed property that fail to remit property in a timely manner. Previously, holders of unclaimed property that fail to file an unclaimed property report are subject to a penalty equal to 5 percent per month of the amount required to be shown on the report. The maximum penalty cannot exceed 50 percent in the aggregate. Under Senate Bill 228, the revised penalty for failing to file an unclaimed property report is the lesser of 5 percent per month or $100 per day. The maximum penalty that can be imposed is 50 percent of the amount required to be shown on the report not to exceed $5,000. The bill also eliminates the assessment of interest on the amount of a holder s outstanding unreported unclaimed property. Previously, interest charges could equal up to 50 percent of the amount required to be reported. 14
Unclaimed property Proactive analysis Date of Formation State of Formation State of Primary Operations Secure Sample Unclaimed Property Report for Jurisdiction of Primary Operation 15
Proactive remedies While each jurisdiction has guidelines as to the terms and conditions for allowing a company to participate in their unclaimed property VDA program, some jurisdictions will permit a holder to anonymously come forward and participate provided that they have not received a notice from the jurisdiction and/or have not previously registered and filed unclaimed property reports/returns. At its core, a VDA usually permits a holder to conduct a self audit and report all unclaimed property due and owing for a specified period, commonly known as the lookback period. For periods prior to the lookback period, unclaimed property principal, interest, and penalties are usually forgiven pending successful completion of the VDA. On an ongoing basis and as part of the terms and conditions of the VDA, a holder has to agree to prospectively file their unclaimed property reports/returns. From the jurisdiction s perspective, such an amnesty program is beneficial to the jurisdiction since it facilitates increased taxpayer compliance without significant expenditures of the jurisdiction s resources. In addition, the jurisdiction is able to secure the outstanding unclaimed property to hold in its fiduciary capacity on behalf of the owners and recognize any interest arising from said unclaimed property. 16
Proactive remedies (continued) From the holder s perspective, participation in a VDA program usually permits the holder to secure an abatement of penalties as well as limit its exposure for the years prior to the lookback period. An additional advantage of a VDA program is securing fiscal certainty with respect to potential unclaimed property exposure. 17
Unclaimed property conclusion With the increasing use of outside unclaimed property auditors who are often times compensated on a contingent basis combined with improved technological capabilities to monitor reporting compliance, jurisdictions are more vigorously enforcing their unclaimed property reporting statutes. While some holders may believe their potential unclaimed property liability to be insignificant, the number of years which a jurisdiction can audit, which when combined with the imposition of interest and penalty, may be significant. 18
Unclaimed property Questions/contact information Marc Grossman mgrossman@kpmg.com KPMG LLP 303 Peachtree Street, Suite 2000 Atlanta, Georgia 30308-3210 (404) 222-3508 (P) (404) 506-9069 (F) (404) 849-0916 (C) 19
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