Beginning for tax year 2021, California will require businesses that file certain California tax returns to report their California unclaimed property filing history.  Specifically, most 2021 California business tax returns filed with the Franchise Tax Board (e.g., Forms 100, 565, and 568) have been updated to ask whether the entity has previously filed an unclaimed property Holder Remit Report with the State Controller’s Office, and if so, the date of the last report and the amount remitted.  The FTB is then authorized to share the responses with the State Controller’s Office, which oversees unclaimed property audits in California.

Broadly speaking, unclaimed property is property that is held by a company for a certain number of years without any contact or expressed interest from the property owner. Common examples include unredeemed gift cards, undelivered securities, and uncashed checks that have reached dormancy.  California requires business entities to review their records each year to determine if they hold any property, whether tangible or intangible, that has reached dormancy and is reportable to California (see previous discussion on priority rules).  Once the property has reached dormancy in California, it becomes reportable.  Failure to report the property may result in penalties and interest at 12% per year.

By including an unclaimed property compliance question on the California tax returns, California is attempting to close a compliance gap. We expect unclaimed property audits for many taxpayers, depending on their responses to the return question.  Accordingly, California taxpayers should review their California unclaimed property compliance prior to completing their 2021 tax returns.  This is especially true if California enacts Assembly Bill 2280, which would create an unclaimed property voluntary compliance program; however, similar legislation has failed in the past.

In addition to California taxpayers needing to consider unclaimed property compliance prior to completing their 2021 returns, this change may have a chilling effect on businesses with an uncertain California tax filing obligation.  Historically, such taxpayers may have conservatively opted to file a California tax return; however, this development introduces a new compliance hurdle and may sway some businesses from filing California tax returns.  In short, all businesses filing, or considering filing, California tax returns must determine the impact of the new unclaimed property inquiry included with the returns.

Contact the Authors: Ted Bots, Mike Shaikh, Trevor Mauck