Georgeson ended 2018 by hosting unclaimed property forums in Philadelphia and New York in December.  Between the two events, guests heard from many knowledgeable guest speakers including: Valerie Jundt (VMJ Consulting), Freda Pepper (Counsel, Reed Smith LLP), Brian Munley (Director, Pennsylvania Treasury), Robert Tambini (Director of Audits, New York), and Brenda Mayrack (State Escheator, Delaware). Reed Smith LLP co-sponsored the forum in Philadelphia by hosting in their offices overlooking downtown Philadelphia.  

Both events began with a review of the Unclaimed Property Basics. Additionally, both events covered a review of IRS Revenue Ruling 2018-17, Audits/VDA updates, and a state panel update.  Freda Pepper of Reed Smith also provided a current litigation update in Philadelphia.

The IRS Revenue Ruling 2018-17 was released in May 2018 and clarified that the escheatment of an IRA account is a designated distribution, and therefore is subject to the 10% withholding tax and Form 1099-R reporting. Originally, the ruling had a transitional compliance date of January 1, 2019 however; the IRS has since issued Notice 2018-19 providing an extension to January 1, 2020.  There continue to be many implementation obstacles with the ruling that will be reviewed and discussed with IRS and the Treasury department in upcoming months.

Pam Wentz, National Practice Leader at Georgeson, gave an update on audits and Voluntary Disclosure Agreements (VDAs). She outlined the current audit landscape by explaining that audits are still on the rise by state conducted and third-party contingent fee auditors.  There continues to be an increase in the number of audit firms in the unclaimed property space; most taking aggressive positions that result in inflated audit findings. The risk of an audit continues to be a drain on a company’s time and resources, as most audits take multiple years to complete and remediation efforts can often be overwhelming.  In addition, an audit can present various financial risks to an organization such as the use of estimation where records no longer exist, penalties and interest, and possible litigation if an agreement cannot be reached.  Reputational risk is often the most sensitive risk to a company undergoing an unclaimed property audit.

VDA updates are of equal concern to organizations as they are an opportunity to avoid extensive, costly audits. Although not available in all states, most states have some sort of formal or informal process (California currently does not have any VDA program). VDAs are generally not an option once a company has been selected for audit so if an organization is contemplating joining into a state’s program, it is better to do so sooner rather than later.  However, before making that decision, all pros and cons should be carefully considered.  Some pros and cons of a VDA are listed below: 

​PROS:
CONS:
  • ​​Waiver of interest and/or penalities
  • ​​May have to give up legal arguments​
  • ​Holder controls the process
  • Must complete the due diligence and reporting within the timeline afforded by the VDA​
  • ​Generally resolved faster than an audit
  • Most states retain the right to audi​t
  • ​Limit the look back period
 ​
  • ​​Process can help establish effective unclaimed property reporting procedures
 ​

Pam also provided updates on the Delaware VDA program which is administered by the Secretary of State. Once an invitation to join into the VDA program is received, a holder has 60 days to enter. If the holder chooses to not respond, they will be eligible for an audit on the 61st day. Companies incorporated or formed in Delaware are at the greatest risk of being targeted for the VDA invitation and audit. There are two key takeaways to remember when considering the Delaware VDA program: 

  1. If a holder chooses to decline the VDA invitation, they WILL be audited. It is no longer a possibility; it is certainty.
  2. A holder does not have to wait for an invitation to join the VDA.  This gives the holder even more control over the timeline. 

In the wake of the IRS Revenue Ruling mentioned above, Brian Munley from the Pennsylvania Treasury took advantage of the opportunity to clarify reporting requirements of IRA accounts at the Philadelphia forum.  Section 1301.8 of the Pennsylvania Unclaimed Property law governs the escheatment of fiduciary and retirement accounts.  Under this section, IRAs are presumed abandoned three years after the holder has lost contact with the owner (as evidenced by returned first-class mail) unless the owner has:

  • Increased or decreased the principal in the account;
  • Commenced receiving distributions; or
  • Otherwise indicated an interest in the account or plan or in other property of the owner in the possession, custody, or control of the holder.  

Pennsylvania also has additional owner outreach requirements for owners that do not receive communications from the holder by U.S. mail (Section 1301.8).

In New York, Robert Tambini, Director of Audits, provided extensive detail on the state’s audit and voluntary compliance programs.  New York currently employs 45 full time auditors and also contracts with private audit firms to assist with out-of-state audits.  While it is known that many third party audits can take many years to complete, Robert reported that the shortest New York audit took 12 days to resolve!  As with many states, to be eligible for the New York Voluntary Compliance Program (VCP), the holder cannot have been contacted about an audit and must be reporting to New York for the first time.  Acceptance into the VCP is subject to approval.  Robert also shared that last year the state received $866 million in unclaimed funds and set a national record for the most claims paid of $460 million.  On average, the stat returns $1.5 million every day to owners.

Brenda Mayrack, Delaware State Escheator, presented at both the Philadelphia and New York forums.  Still relatively new in her role as State Escheator, Brenda shared the mission statement of the Office of Unclaimed Property:

  • ​To fairly, accurately, and efficiently collect and maintain exactly the unclaimed property due to the State of Delaware
  • To facilitate its prompt reunification with the rightful owners and;
  • To foster a fair business environment while augmenting funding critical for essential public services.  

Brenda also shared some of the comprehensive changes made to the Delaware Unclaimed Property Statute in 2017 (SB 13), which established the 10 year look back period, addressed the record retention requirement, established a formal due diligence requirement, and allowed the use of estimation only if the holder failed to comply with the law.  Regulations were also issued in 2017 with more clarification. 

Georgeson is appreciative to all the guest speakers, who addressed the many difficult questions directed their way. For more information regarding the Georgeson Unclaimed Property Forums, please contact Dana Terry at dterry@georgeson.com.