Any holder who has been involved in an unclaimed property audit has experienced frustration when dealing with third party contingent fee auditors. Delaware’s increasing aggressiveness in collecting unclaimed property has been inextricably tied to the use of these auditors, who are known for taking liberties with unclaimed property laws, harassing holders and inflating the values of assessments. The state’s reputation as a friendly home to business has started to take a hit because of these practices. Hearing complaints about these auditors, some Delaware legislators have introduced a bill to end the practice. On May 8, Delaware Senate Bill 215 was introduced in the Senate and assigned to the Senate Banking Committee. S.B. 215 would prohibit third party auditors from being paid on a contingent fee basis and would require state contracts with auditors to not extend beyond three years.
Contingent fee audits are rarely used in state and local tax audits, and for good reason. Although taxes are imposed to raise revenue, the purpose of a tax audit is not to raise more revenue, but to make sure that the correct amount of tax is paid. In the unclaimed property world, where contingent fee audits are the norm, auditors are incentivized to assess as much liability as possible to inflate their own compensation. S.B. 215 would allow Delaware to continue to use third party auditors, but only if they are paid on a fixed scale.
S.B. 215 is particularly notable because Delaware is the most important and influential state with regard to unclaimed property. Because unclaimed property lacking owner address information escheats to the holder’s domicile (see Texas v. New Jersey, 379 U.S. 674 (1965)), Delaware (the most popular state of incorporation) receives an unclaimed property windfall each year representing about a third of the state’s budget. S.B. 215 signals that at least some in the Delaware legislature are growing concerned that companies will begin incorporating in other states, causing major problems for the state both politically and economically. We applaud the sponsors of S.B. 215.
There is one more part of S.B. 215 that needs to be mentioned. In a very rare, and very strange, move, the bill not only eliminates contingent fee audits, but also states that it “may be necessary to point out certain existing restrictions” in the Delaware Code. The bill then recites Section 5805 of Title 29:
No person who has served as a state employee, state officer or honorary state official shall represent or otherwise assist any private enterprise on any matter involving the State, for a period of 2 years after termination of employment or appointed status with the State, if the person gave an opinion, conducted an investigation or otherwise was directly and materially responsible for such matter in the course of official duties as a state employee, officer or official. Nor shall any former state employee, state officer or honorary state official disclose confidential information gained by reason of public position nor shall the person otherwise use such information for personal gain or benefit.
This recitation of the statute is clearly directed at Delaware’s former State Escheator, Mark Udinski, and probably also directed at his predecessor Patrick Hurley. Both Mr. Udinski and Mr. Hurley, who were responsible for hiring and supervising third party auditors, joined Kelmar Associates when they left their positions as Escheators. Kelmar just happens to be Delaware’s principal third-party (contingent fee) auditor. Mr. Udinski’s move certainly raised a lot of eyebrows.
It will be very interesting to see what happens to this bill. Holders have been voicing complaints for some time about Delaware’s audits, and it is encouraging that some in the state capitol have heard those complaints.
