California adds unclaimed property to its income tax return

The California Franchise Tax Board (FTB) has added an unclaimed property reporting questionnaire to certain business tax returns. After the passing of Assembly Bill 466 on July 16, 2021, the FTB is allowed to share the filer’s answers to these questions with the state controller’s office, which will use this information to increase audits of potential holders of unclaimed property. Here, we share everything you need to know about this update.

Data sharing

Assembly Bill 466 will lead to heightened reporting compliance for unclaimed property by amending California’s income tax disclosure provision under section 19554, which permits the FTB to provide information to the state controller’s office. Starting with 2021 returns, the FTB may now share the following information with the controller:

• The taxpayer’s entity status and the date that the FTB last updated the taxpayer’s entity status
• The taxpayer’s revenue range
• Whether the taxpayer previously filed an unclaimed property report with the controller, and if applicable, both of the following:

1. The date filed of the taxpayer’s last report
2. The amount remitted on the taxpayer’s last report

After the enactment of Assembly Bill 466, the FTB worked with the controller’s office to compile a list of questions to include on business tax returns of corporations, partnerships and LLCs that could increase awareness of, and compliance with, the unclaimed property reporting requirements. The questions include the following:

1. Has the business entity previously filed an unclaimed property Holder Remit Report with the State Controller’s Office? [Yes/No]
2. If “Yes,” when was the last report filed?
3. What was the amount last remitted?

The controller’s office will then use this information to increase unclaimed property audits of business entities, expand unclaimed property reporting compliance and raise revenue through penalties and interest.

Penalties

California has steep penalty and interest provisions for late unclaimed property reports. Non-compliant businesses face up to a $10,000 penalty per late report, $5,000 for failing to deliver escheatable property and 12% interest based on the amount of property subject to escheatment.  Additionally, the interest charge can surpass the actual reportable property in some cases.

No voluntary disclosure program

An unclaimed property audit by California is especially troublesome because the state does not offer a voluntary disclosure program. Many states have a formal or informal voluntary disclosure program that allows uncompliant businesses to come into compliance without facing penalties or interest. Under a voluntary disclosure program, the business will conduct some form of self-audit, attempt to contact the rightful owners of the unclaimed property and report the remaining unclaimed property to the state.

In February 2022, the California legislature considered a bill to establish the California Voluntary Compliance Program, which would allow businesses to come into compliance and avoid interest assessments in the process. While the program would increase compliance, it is still too soon to gauge the chances of this bill becoming law.

Expansion to other states

While California’s questionnaire approach has not been adopted by other states yet, every other state has similar annual reporting requirements where the failure to be in compliance can result in penalties and interest.

Typically, when a state proceeds with a compliance audit, it engages a third-party auditor, who is generally paid on a contingency basis. These auditors can significantly increase their compensation by expanding the scope of the audit and including additional states. By transforming a single state audit into a 20, 30 or 50-state audit, the third-party auditor can significantly increase its overall compensation, as well as the penalties and interest owed by the non-compliant business. Because of this, it’s important to note that even nonresident businesses should be aware of these changes so they can accurately answer the questionnaire.  

Learn more about unclaimed property audits

California taxpayers will most certainly receive more scrutiny from the state regarding their unclaimed property obligations in the coming years. Businesses filing California business income tax returns must be prepared to accurately respond to these unclaimed property questions to minimize audit exposure.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.