California Business Returns Now Require Information on Unclaimed Property Reporting

Renewed efforts to enforce compliance with California’s unclaimed property law take effect with the filing of 2021 business tax returns. AB 466, which became law in July 2021, authorizes the state’s Franchise Tax Board (FTB) to gather and share information on taxpayer reporting of unclaimed property. The FTB’s recently enacted reporting requirements along with the additional information sharing could increase the likelihood that business taxpayers will face additional inquiries or an audit on unclaimed property from the State Controller’s Office (SCO).

New Questions and Information Sharing

California defines unclaimed property as any financial asset left inactive by its owner for three years. This includes such assets as bank accounts, stocks and bonds, and estates, but excludes real estate. Holders of unclaimed property (corporations, businesses, associations, financial institutions, and insurance companies) must report and deliver unclaimed property to the SCO each year. The state will then hold the assets until claimed by its owners.

With authorization from AB 466, the FTB now requires business taxpayers to report on their 2021 tax return whether their business previously filed an unclaimed property Holder Remit Report with the SCO, and if yes, when the last report was filed and the amount last remitted. The new questions will appear on franchise or income tax forms 100 (corporation franchise or income tax return), 100S (for s corporations), 100W (for water’s edge filers), 565 (for partnerships), and 568 (for limited liability companies) for 2021.

The law also authorized the FTB to share with the SCO the answers to these questions along with the address or other identification or location information from tax returns or other records that is necessary to locate owners of unclaimed property. The FTB can also share with the SCO the business filer’s principal business activity code, entity status, and revenue range. The SCO may then contact businesses based on the responses on their tax returns.

Focus on Compliance

The new reporting requirement and information sharing are in response to a lack of compliance with the unclaimed property requirements. The SCO estimates that only 2 percent of businesses comply with the law and estimates that businesses could be holding more than $17.6 billion in unclaimed property. The Senate analysis of AB 466 states that there has been a decline in the number of unclaimed property reports filed over the past 10 years.

Substantial Fines for Noncompliance

Unclaimed property audits in California generally look back 10 years in addition to the property’s three-year dormancy period. With the new information sharing between the FTB and SCO, there will likely be increased audit activity or additional SCO inquiries. Currently, California does not have a voluntary disclosure program for unclaimed property. However, AB 2280, which has been introduced in the current legislative session, would enact a voluntary compliance program.

In addition to possible fines for not reporting, the SCO can assess interest on the property of 12 percent per year for failure to report, pay, or deliver unclaimed property within the required timeframe. The interest is assessed on the property or value of the property from the date the property should have been reported, paid, or delivered. The interest charge can often times exceed the value of property remitted.

Because of the mandatory reporting of information, businesses should review their policies and procedures to determine if a California filing of unclaimed property is required and determine what liabilities may exists in the event of further inquiries by the SCO.

The information sharing between the FTB and SCO will create additional uncertainties to taxpayers doing business in California. AB 2280 may provide some relief to prior reporting liabilities. We will monitor the legislation and provide updates as needed.

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