California taxpayers must report unclaimed property compliance: PwC

California taxpayers now must report their unclaimed property compliance

February 2022

In brief

The California Franchise Tax Board (FTB) is requiring certain business taxpayers to report their unclaimed property reporting compliance when filing their 2021 business tax returns. These returns include the corporation franchise/income tax return, partnership return, and LLC return.

Be aware: The legislation enabling the FTB’s inquiry authorizes it to share the information gained with the State Controller’s Office (SCO) to aid in its enforcement of unclaimed property laws. Based on responses on their business tax returns, taxpayers may be contacted by the SCO and potentially be subject to California and/or multistate unclaimed property audits. California historically has not offered a voluntary disclosure program and levies interest at a 12% rate. Because the lookback period for California unclaimed property audits generally is 10 years, the interest assessed can eclipse the actual unclaimed property owed.

Next steps: Companies that have not filed unclaimed property reports historically or have gaps in filing history may wish to undertake an internal review of unclaimed property compliance and potential liability. Being proactive can help companies effectively advocate during the California unclaimed property audit process as well as take advantage of voluntary disclosure opportunities on a multistate basis.

In detail

California A.B. 466 (enacted on July 16, 2021) amends the state’s income tax disclosure provisions to allow the FTB to provide the SCO with certain business taxpayer information. Following this authorization, the FTB announced that it would add the following questions to its corporate, partnership, and LLC tax returns:

Has this business entity previously filed an unclaimed property Holder Remit Report with the State Controller’s Office? [Yes/No]

If “Yes,” when was the last report filed?

Amount last remitted?

According to the bill analysis, “Due to low reporting under the unclaimed property law, the SCO estimates that businesses could be holding more than $17.6 billion in unclaimed property.” The SCO believes that compliance with the state’s unclaimed property reporting laws is potentially as low as 2% of all businesses.

Observation: Even though an entity may not have unclaimed property to report to California for a variety of reasons, or may only have reported in certain years or a limited amount of property, responses to the new tax return questions may trigger an inquiry and potentially a California audit. Further, audits of out-of-state companies may be undertaken by third-party auditors (potentially leading to a multistate audit).