California Unclaimed Property Law Update

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Starting in 2022, companies in California with a financial asset left inactive by an owner will be required to report the unclaimed property. The recent change means businesses across several industries must track and report unclaimed property. In addition, the California Franchise Tax Board will also add questions to the state tax return forms for businesses likely to have unclaimed property. Failure to comply with the new rules may not only result in increased scrutiny from state regulators but can open the door to significant penalties and fines. To help prospects, clients, and others, JLK Rosenberger has provided a summary of the key details below.

What Is Unclaimed Property?

In California, unclaimed property is anything a business owes to stakeholders past the period of abandonment. Stakeholders include employees, vendors, customers, creditors, or shareholders. Types of property, also called abandoned property, are:

• Uncashed or voided payroll checks and/or accounts payable disbursements
• Gift certificates or gift cards that haven’t been redeemed or used
• Accounts receivable credits or deposits
• Refunds and rebates
• Unclaimed securities or equity
• Other types of intangible property that are owed to third parties

Royalties, virtual currencies, insurance benefits, safety deposit box contents, and bank or investment accounts can also qualify as unclaimed property. Notably, real estate does not qualify.

Unclaimed property is recorded on the balance sheet and may be written off in accounts receivable. If the business’s bookkeeping practices don’t accurately reflect what the entity does or does not owe, there could be a risk of material misstatement. It’s estimated that 1.3 million entities did not follow unclaimed property guidance in 2020, leading California to take steps to increase its revenue through better compliance efforts.

Rules for Unclaimed Property in California

Businesses, including corporations, associations, financial institutions, and insurance companies, that hold unclaimed property in California must follow certain procedures to notify owners and report the amounts. The rules apply to businesses with operations in the state and California-based entities and businesses with California customers, vendors, or employees.

Taxpayers must send notices to property owners when the property’s value is at least $50. This is usually done by mailing a notice to the last known address. Generally, the state considers property unclaimed if there hasn’t been any activity within three years.

If the property remains unclaimed, the business will report and deliver it to the State Controller’s Office.

Unclaimed property valued at less than $25 may be filed together. And though negative property or property without any value isn’t required to be reported, the state can still request an inventory of it in certain instances.

Failure to follow unclaimed property rules can result in penalties and/or fines up to $50,000 and an annual interest rate of 12 percent per year going back to the date the property should have been reported. If a business is the subject of an unclaimed property audit, the examination can go back up to ten years and involve other states. It’s a lengthy and costly process that can be avoided with better compliance.

Changes to California Unclaimed Property

Beginning on January 1, 2023, California’s Voluntary Disclosure Program (VDP) becomes available for eligible business taxpayers to comply without the burden of the 12 percent annual interest rate. This amnesty program is the first in more than 20 years for unclaimed property.

To qualify, businesses cannot be the subject of an unclaimed property examination or have previously received notice of unclaimed property, nor be involved in a current civil or criminal examination. Any interest on an unclaimed property must have been paid within the last five years. Additionally, if the Controller waived any unclaimed property interest in the last five years, then participation is prohibited.

If a business participates in the VDP, it must take the following actions:

• Participate in a training and education program on reporting unclaimed property.
• Review its own books and records for unclaimed property over the last ten years.
• Make good faith efforts to notify owners of unclaimed property.
• Submit a report within six months.

There is an option to request a 12-month filing extension. When the final report is filed, the business should be prepared to pay for the unclaimed property – though, as a reminder, the annual interest will be waived.

The VDP allows businesses more control over reporting and remediation without being subject to an audit or costly fees and penalties. It’s hoped that by offering amnesty, California will incentivize businesses to come under voluntary compliance.

Another change is on the tax return for the 2022 tax year. The tax return will specifically ask businesses, including corporations, partnerships, and LLCs if they previously filed an unclaimed property Holder Remit Report with the state controller office. If the answer is yes, businesses will further be required to provide the date of the last report and how much-unclaimed property was claimed.

From there, businesses could be flagged for an audit if the FTB determines they’re not in compliance.

Staying In Compliance with California Unclaimed Property Rules

California businesses need strong records retention and documentation policies to stay on top of unclaimed property. If a business isn’t tracking unclaimed property or attempting to notify owners, it can easily miss potential risk areas.

The first step is to establish which types of property fall under the rules, both in California and other states. Businesses must then identify prior unclaimed property returns and whether the entity has been subject to an audit or voluntary disclosure agreement. If written policies and procedures don’t exist, now is the time to create them. Rules should be consistent with the state’s requirements for tax and financial document retention.

Contact Us

The recently announced changes to California Unclaimed Property rules mean Los Angeles and Orange County businesses need to maintain compliance to avoid issues. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.