Unclaimed Property: Delaware Receives a “D-” Score

Delaware, “the first state”, may be called the “worst state” when it comes to grades for unclaimed property laws.  The Council on State Taxation (COST) recently assigned a D- to the state.  The full report is found here.

Unclaimed property laws were originally implemented to protect consumers and provide a way for them to reunite with their uncashed paychecks, abandoned bank accounts, etc.  Businesses with unclaimed property report and pay that amount to the state, who then seeks to locate the rightful owner and return their property.

However, Delaware has managed to make unclaimed property its third-largest revenue source.  This “tax” that is assessed against firms engaged in business in the state often has no relation to actual unclaimed property due to the unrealistic inflation of assessments in the event the business cannot produce the records covering the entire lookback period, plus interest and penalty.
Delaware’s lookback period has gone all the way back to 1981.  Most firms do not have that documentation anymore, no matter how good their recordkeeping.  Delaware then happily extrapolates the unclaimed property for the years where records no longer exist and essentially bills the business for an amount that can never be returned to a rightful owner, because it likely was never in existence in the first place.

In addition, Delaware has hired private audit firms to do their dirty work.  These private audit firms are on a contingent fee basis.  In 2012, Delaware seized $319.5 million in unclaimed property but only returned $18.9 million.  In the last six months of that year, Delaware paid a private audit firm $30 million in fees.  Think about that.  The payout to the auditor for the last half of the year was almost twice as much as was returned to rightful owners for the entire year.

What can your business do to prepare for such an audit?  Short of inventing a time machine to go back and preserve those records from 1981, there is little to be done.  Delaware is making available a Voluntary Disclosure process which can ease some of the pain, but it is not available to businesses currently under audit and is somewhat limited in scope.  Delaware is losing business to tax-friendlier states as a result.
Delaware can improve its D- grade if it would bring its unclaimed property statutes back to reality.  Implementing a reasonable statute of limitations and getting rid of contingent fee auditors would be a step in the right direction.

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