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Delaware Finally Finalizes Its Final Regulations

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On October 1st, the Delaware Department of Finance issued final regulations as it pertains to the state’s auditing procedures. These regulations became officially effective on October 11, 2017. Which means if you were previously undergoing a Delaware unclaimed property audit, you are now officially ‘on the clock’. But what does this mean?

It means that if your company has been under audit by the state of Delaware since before July 2015, you must elect 1 of the following 3 options, and that election must be made by December 8, 2017. Well technically, December 10, 2017, but the 8th falls on a Friday and we recommend getting your ducks in a row by then. Here is a brief description of the 3 options, provided by statute:

1. Remain in the regular audit: this option requires no real election, as it is the default position for all holders who choose to do nothing, or would like to continue their audit as before under the new statutes and regulations. The benefit associated with this option is that there is no pressure to finish the audit in a specific period of time – it will take as long as it needs to take (these exams often last 5 years or more), however a holder in a regular audit will be subject to a now mandatory interest assessment on the audit findings, and possibly new penalties that are a part of Delaware’s new unclaimed property statute. Based on the language of the new law, the interest that would likely be assessed can amount to at least 25% of the amount found to be due under the audit. That is likely to be no small sum. Of course a holder in this position will also retain its rights to challenge any audit findings in accordance with its statutory and/or constitutional rights.

2. Move to the expedited audit program: this option will require a formal election, which must be made on this form. The benefits associated with choosing this option is that the state will agree to waive interest and penalties on any audit findings. The obvious downside here is that your audit is now ‘expedited’ which means it must be completed within 2 years from the date your company submits its intent form. If you do not complete the audit in 2 years, the exam will revert to a ‘regular audit’ and become subject to the mandatory interest noted above. A holder electing an expedited audit will also retain its rights to challenge any audit findings in accordance with its statutory and/or constitutional rights.

3. Convert your audit to a voluntary disclosure: this option will also require a formal election, made pursuant to the rules, forms and administrative policies found here. Making this election will move your company out of the purview of the State Escheator and the Department of Finance, and into Delaware’s Voluntary Disclosure Program which is administered by the Delaware Secretary of State. Under this option, a company conducts a self-audit (you will no longer have to deal with Delaware’s contract auditors) to determine liabilities owed, and makes a submission to the VDA Administrator who will adjudicate her findings and determine final acceptance. Even though removing the auditors from the equation may sound enticing, 2 major concerns with this option remain: a) like the expedited audit option, the VDA submission must be made 2 years from the date your company submits its intent to convert form; and, b) the results cannot be challenged. The anticipated practical effect of the new Regulations means that not being able to challenge the state’s positions on a VDA filing could result in your company having to extrapolate/estimate liabilities in a manner consistent with Delaware’s old methodology, a methodology that was found to “shock the conscience” in the heralded pro-holder, Temple-Inland case.

Keep in mind that no matter which option is selected, if the audit firm conducting your company’s audit is representing multiple states, you will remain under audit in those states, and by that same audit firm. Retaining the ability to challenge may be a very important factor in the decision-making process, as Delaware is seemingly litigation-weary and many of these audits have been on hold for quite a while.

Choosing any of these options should be done with careful consideration of your company’s specific facts and the circumstances of your existing audit. JMS is recommending that all holders in this situation seek counsel from experienced advocates, before making a decision to make sure that your rights and interests are fully protected, and any decision-related disadvantage is minimized. Finally, keep the deadline in mind, but do not to make any formal election immediately, as any 2-year periods that will run pursuant to the expedited audit or VDA options begins as of the date of execution of those election forms. Contact us now and we can surely assist you.

Tagged: delaware vda, delaware unclaimed property, delaware audit, delaware regualtions, delaware escheat