An Offer You Might Not Want to Refuse
Delaware Secretary of State Issues VDA "Invitation" Notices
The Delaware Secretary of State's Office recently sent letters to over 100 companies identified as "likely" out of compliance with Delaware's unclaimed property laws. The letters "invite" those companies to enroll in Delaware's Voluntary Disclosure Agreement (VDA) program. Delaware's VDA is program pursuant to which a company performs a thorough self-review of its unclaimed property reporting history and remits any overdue unclaimed property to the state. That self-review is, in turn, thoroughly reviewed by unclaimed property professionals on behalf of the Secretary of State's office who may identify additional property, if any, to be reported and remitted. In exchange for performing this self-review, the VDA program provides companies with a waiver of all penalties and interest that the state might otherwise assess on late-reported unclaimed property. In addition, the company and the Secretary of State will generally agree in advance on a methodology for certain contested issues that come up during the review: How far back does the review go? What entities have to be reviewed? What is the process for dealing with periods for which the company does not have researchable records?
The waiver of penalties and interest is the VDA's "carrot;" now for the "stick": companies who do not accept the invitation to enroll in the VDA program may be selected for audit by the State. That audit is not a company-controlled, state-checked review, but is conducted by a private auditing firm retained by the state. Those audits tend to be much (much, much) lengthier than a VDA and carry the threat of interest and penalties. In addition, the auditors generally employ more aggressive and controversial audit methodologies, seeking to shift the burden upon the company to prove that items are not unclaimed property, rather than the auditors demonstrating that items are unclaimed property. Indeed, there have been several lawsuits filed in just the past few years challenging the practices used by Delaware's selected auditing firms. See Univar v. Geisenberger, Case No. 18-cv-01909 (U.S. District Court, D. Del.); AT&T Capital Services v. Geisenberger, Case No. 19-cv-2238 (U.S. District Court, D. Del.); Eaton Corp. v. Geisenberger, Case No. 19-cv-2269 (U.S. District Court, D. Del).
Given the potential audit risk, companies that are incorporated in Delaware should be on the lookout for these notices. Unfortunately, the letters often do not go to the individual responsible for reporting and remitting unclaimed property at the organization, but rather are generally addressed to a senior executive such as the Chief Financial Officer. Time to accept the invitation is limited; companies receiving the notice have 60 days from the date the request was made to enroll in the VDA program. After that, an audit notice may issue.