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New Delaware Voluntary Disclosure Agreement Program Creates a Window of Opportunity for Holders Incorporated in Delaware

Freda Pepper, Esquire, Keane’s Director of Compliance

November 14, 2012

A new Delaware Voluntary Disclosure Agreement (VDA) initiative has been established. On July 11, 2012, Delaware Governor Jack Markell signed Senate Bill 258 (SB 258) into law. Under the new law, holders who have an escheat reporting obligation to Delaware will be given a window of time to report any past-due property without the threat of audit. At face value, the new program provides significant benefits to those who wish to come into compliance and avoid long and contentious audits with the State and third-party audit firms. The legislation will offer holders a unique opportunity to decrease their unclaimed property exposure.

The new program will be administered by the Delaware Secretary of State (SOS). The incentive is temporary, as the law provides that participants in the new program must enroll by the June 30, 2014 deadline, and complete the program by June 30, 2015, in order to take advantage of the shortened “look-back” periods. Prior to the enactment of SB 258, holders were required to include past due property dated from 1991.

Here are the details of the new Delaware Voluntary Disclosure Agreement:

  • Holders must complete and submit an application to participate (SOS DE-1).
  • Those holders that enter into the unclaimed property voluntary disclosure agreement on or before June 30, 2013, and make payment in full or enter into a payment plan on or before June 30, 2014, will be subject to a “look-back” period to 1996, as opposed to 1991.
  • Holders that enter into an unclaimed property voluntary disclosure agreement on or before June 30, 2014, and make payment in full or enter into a payment plan on or before June 30, 2015 will be subject to a “look-back” period to 1993.
  • After the SOS enters into a voluntary disclosure agreement with a holder, the State will not seek further payment of abandoned property covered by that agreement unless it can establish evidence of fraud or willful misconduct in the voluntary disclosure.
  • Holders currently participating in a VDA process with the State Escheator shall have the benefit of the shortened “look-back” periods but under the auspices of the State Escheator and not the SOS.
  • Holders currently under audit or who have received a notice of audit are not eligible for the reduced “look-back” periods set forth in SB 258.
  • The new law expires July 1, 2015.

It is important to note that SB 258 requires both the State Escheator and the SOS to waive any right to seek payment under 12 Del. C. §§ 1156 and 1158 of Delaware’s Escheatment Law after a VDA is accepted by the SOS, except in the case of fraud. This is a marked departure from current practices. Prior to the passage of this law, the State Escheator had the right to audit VDA deliverables up to three years following submission of a VDA.

Despite the apparent benefits, it’s still unclear how the new legislation will be administered. Recently, Drinker Biddle & Reath, LLC (“Drinker Biddle”), a large Philadelphia law firm with a presence in Delaware, was selected by the Delaware SOS through a request for proposal process to aid the Secretary of State in developing and administering the VDA program. Drinker Biddle’s responsibilities will include creating guidelines and regulations governing the program including all forms, agreements, and policies that will be utilized by the SOS. Drinker Biddle will also develop a forensic audit component, provide advice to holders, process submitted VDAs and communicate the SOS’s expectations to the holder community. Lastly, they will assist the Secretary of State in determining claims and resolving agreements pursuant to SB 258 for unclaimed property otherwise owing to the State Escheator.

Stay tuned for more news as Keane will stay at the front of the industry in reporting the latest developments.

Proposed Regulations to Benefit Holders Currently Under Audit

As stated earlier, SB 258 does not apply to holders currently under audit or who have received a notice of audit. Recognizing another opportunity to incentivize holders to come into compliance, the Delaware Department of Finance proposed new regulations that would similarly limit the look back period for those subject to audit. The regulations proposed on July 1, 2012, provide the following:

  • For holders currently under audit, or who become the subject of an audit before the effective date of the new regulation, auditors will review records dating back to January 1, 1986, provided that the examination is completed by June 30, 2015. This will reduce the effective cumulative look-back by five years.
  • For holders who become the subject of an audit on or after the effective date of this new regulation, and for all others whose examinations are not completed by the close of business on June 30, 2015, the State Escheator will continue the existing policy of examining records created on or after January 1, 1981 to determine compliance.

Comments to the proposed regulation were invited to be submitted to the Department of Finance by July 31, 2012. The comments that were submitted have not been made public by the State. However, the Council on State Taxation (COST) has made its comments publicly available. COST is concerned with the requirement that in order to take advantage of the proposed shortened look-back periods, an audit must be completed by June 30, 2015. COST aptly points out that the completion of an audit is largely beyond the holder’s control and that the State Escheator rarely declares an audit complete. It is then suggested that the State Escheator be required to set forth an audit plan describing steps for completion of the audit and similarly to provide a reasonable and accurate statement of the holder’s potential liability. Most significantly, COST suggests that the State Escheator be authorized to extend the deadline beyond June 30, 2015 in cases where the size and complexity of the audit justifies the extension.

The proposed regulations have not been finalized as of the writing of this article, but Keane continues to monitor developments and regularly post updates on our industry blog.

Anticipating the Window of Opportunity

Both SB 258 and the proposed regulations seek to encourage a swift resolution of unclaimed property compliance given the requirement to complete the process by a certain time. There has been great anticipation over the past few months waiting for the final bill to pass, and while several companies will likely take advantage of this new law, the process and information required for the bill has not yet been published. While there are many questions yet to be answered, there are significant benefits to using a seasoned unclaimed property specialist to help formulate a cohesive strategy and develop a comprehensive and credible VDA package for presentation to the state.

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