California Income Tax Reporting Change Will Enhance Unclaimed Property Compliance Efforts
The California State Controller’s Office’s (SCO’s) increased compliance efforts regarding unclaimed property will likely result in increased audit activity. CA Assembly Bill 466, which became effective on Jan. 1, 2022, authorizes the Franchise Tax Board (FTB) to share certain information with the SCO related to unclaimed property. Through this change, the state of California expects to increase awareness of and compliance with its Unclaimed Property Law.[i]
What's Changing?
Effective Jan. 1, 2022, the FTB will add the following questions to certain business entity tax returns:
- Has this business entity previously filed an unclaimed property Holder Remit Report with the State Controller’s Office? [Yes/No]
- If “Yes,” when was the last report filed?
- Amount last remitted?
The FTB will be able to share the answers to these questions, along with the taxpayer’s entity status and revenue range with the SCO.
Once the SCO obtains this information, it may use it to identify companies it feels may not be in unclaimed property compliance for audit.
Why Is California Doing This?
The FTB Bill Analysis states that the change is intended to help SCO increase awareness of and compliance with California’s reporting requirements. According to a California Legislative Analyst’s Office (LAO) report issued in March 2019, most California businesses are not reporting unclaimed property. The SCO estimates that the compliance rate may be as low as 2%. According to the LAO report, the reasons for such low compliance are willful noncompliance to avoid interest and penalties or ignorance of the reporting requirements.
What Is Unclaimed Property?
Unclaimed, or abandoned, property consists of tangible and intangible items that a business owes to its employees, customers, vendors, creditors or shareholders—everything from uncashed checks, voided checks and unused/unredeemed gift certificates to accounts receivable credits, deposits and refunds and rebates.
All 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands have laws that require companies to report and remit various property types that have been unclaimed or dormant for a period of time. Frequent legislative changes and the administrative burden make it difficult for many companies to successfully implement a compliance process and maintain ongoing compliance. States are enforcing unclaimed property laws more strictly, with audits that can go back 15 years or more now prevalent for all industries and businesses of all sizes.
California Unclaimed Property Specifics
The SCO can audit a holder if there is reason to believe the holder failed to report applicable property. California does not currently have a voluntary disclosure/amnesty program. Below is a summary of important aspects of California’s Unclaimed Property Law.
Interest and penalties
California assesses interest at a rate of 12% of the value of the property per year, from the date the property should have been reported.[ii] In addition, the state may assess penalties and/or fines up to $50,000.[iii]
Contingency fee auditors
The SCO conducts its own audits and also utilizes third-party contingent-fee auditors for audits.
Property types
California reviews companies for all types of unclaimed property; however, the property types most frequently reported are:
- Vendor/accounts payable payments
- Accounts receivable credits
- Payroll
Lookback period
A California review will generally cover a 13-year period: 10 years plus dormancy. (Note: The dormancy period is three years for most property types, but for payroll it is one year).[iv]
CA compliance filings requirements
California has a two-report process with the following requirements and due dates:[v]
- Holder Notice Report – No property is remitted with this report. The due dates for these reports are:
- November 1 – Business and organizations
- May 1 – Life insurance companies
- Holder Remit Report and Payment. The due dates for these reports are:
- June 1–15 – Businesses and organizations
- December 1-15 – Life insurance companies
Due diligence
California requires holders to send notices to owners of property with a value of $50 or more prior to reporting the accounts to the state.[vi]
Aggregate filings
California allows aggregate filing for property valued at less than $25.[vii]
Negative reporting
California does not require holders to file a negative report confirming that they have reviewed their accounting for unclaimed property but did not identify any for a given report year.
Please visit the SCO's Website for further information relating to unclaimed property in California.
[i] Cal. Civ. Proc. Code §§ 1500 et seq.
[ii] Id. at §1577.
[iii] Id. at §1576.
[iv] Id. at §1513.
[v] Id. at §1530(d).
[vi] See Cal. Civ. Proc. Code §§ 1513.5, 1514, 1516 and 1520.
[vii] Cal. Civ. Proc. Code §§ 1530(5).
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