3 Ways to Reduce Risk of Unclaimed Property Penalty/Interest Assessment from California

Every year, California mails out penalty and interest assessments to holders across the nation.  These assessments relate to violations of California’s unclaimed property laws that were evident on the assessed companies’ unclaimed property filings.

California is one of the most stringent states in the country when it comes to enforcing the penalties and interest sections of its unclaimed property laws.   Once received, it is very difficult for holders to get California to waive or recalculate an assessment. In addition, California does not offer a voluntary compliance program that allows companies the ability to avoid penalties and interest through a VDA.

Here are three reasons a company would receive a penalty and interest assessment and ways to avoid those issues in the future.

1. Reporting Property Late on the Notice Report.

This is the most common cause of an interest assessment from California. California assesses 12% interest for every year the property is late.

• California assesses interest for late reported properties based on the properties reported on the Notice Report (filed in the fall) not the Final Report (filed in the summer). Therefore, if a reported item is resolved between the Notice Report and Final Report (i.e. by response to California’s due diligence outreach), interest will still be assessed on that item because it was reported on the Notice Report.
• Properties cannot be “added” to the Final Report that were not reported on the Notice Report. For example, someone finds a check that should have been reported to California this year but doesn’t find it until the day after the Notice Report was filed, the holder will not be able to report that item until next year’s Notice Report unless they decide to file a supplemental filing.

Holders need to pay close attention to what will be reported on the Notice Report prior to due diligence being sent and the Notice Report being filed.  If there are late properties on the list, there are a few steps a holder should take:

• The holder should investigate how this property became late in the first place. Was there a process or communication breakdown that needs to be corrected so this does not happen again?
• Holders should make additional effort to resolve these late items before they are ultimately reported. If the item is resolved before the Notice Report, it is no longer unclaimed property, will no longer be reportable, and the company can avoid the interest that would have been assessed had it been reported late.

One method to help resolve these items is to search for updated mailing addresses for the payee prior to sending the statutory due diligence letters.  Having an updated address when the holder sends out due diligence should increase the likelihood of a response from the payee which would allow the holder to resolve the item before being reported and being charged interest.  If the holder is using a third-party firm to administer its unclaimed property functions, these companies may have the ability to obtain updated addresses.  If the item is large enough in value, it may also be worth trying to reach out directly to the payee via a phone call to try to resolve the item.

2. Turning in a Report Late to California (Notice Report or Final Report).

If a company turns in its report late (Notice Report or Final Report) to the state of California, the entire reported amount becomes “past due” and will be assessed the 12% per annum interest for every day between the report due date and the date the report is actually filed. That’s approximately .03% interest a day which can turn into a large assessment.

Late California filings can occur more easily than you think. Consider the timing of the Final Report due date.  Unlike the Notice Report which is due October 31^st in the midst of fall reporting for the majority of the states, California’s Final Report is due June 15^th.  To further highlight this timing, California notes in its due diligence letters that the response window is open until the end of May.  As the response window is still open, it prevents holders from trying to get the California report finalized early along with the April and May report states.

3. Remitting the Reported Amount with the Incorrect Payment Method.

When remitting the Final Report amount to California, if the amount to be remitted is $20,000 or more, California requires that the amount be remitted via a wire. Any payment other than a wire will bring a 2% penalty of the amount of the payment.  That is a minimum $400 penalty.

Holders will need to make sure that they are cognizant of this threshold when the final reportable amount becomes evident.  Furthermore, the persons preparing the Final Report will need to determine ahead of time who to contact and what approvals are necessary within the company to facilitate the wire transfer.  Delays in this process could cause the report to be late.

For most companies, the persons in charge of unclaimed property reporting are not just in charge of unclaimed property but also have other primary job duties to contend with on a day to day basis.  These duties, along with distractions or personnel turnover, could cause the California Final Report deadline to slip away from a holder.

Though there is not much a holder can do once a California penalty/interest assessment has been received, there are measures that can be taken to prevent these assessments. Engaging with an unclaimed property professional or outsourcing with a service provider can assist holders identify and avoid the issues listed above to reduce the holder’s risk of being assessed penalty/interest from California as well as maintain compliance in all reporting jurisdictions.