CA Escheat Letters to Founders: What to Do If You Get One

CA Escheat Letters to Founders

If you’re a startup founder or CFO in California, you might be surprised one day to receive a formal letter from the California State Controller’s Office. It might reference “unclaimed property” or use the word “escheat.”

At first glance, it may look like a phishing attempt. But in most cases, it’s a real legal notice under California’s Unclaimed Property Law and ignoring it can lead to serious penalties, audits, or even forced escheatment of your assets.

In this blog, we’ll break down what these letters mean, why startup founders are getting them more often , and what steps you need to take to stay compliant.

What Is Escheatment?

“Escheat” refers to the process where the state takes custody of unclaimed or abandoned property on behalf of its rightful owners.

Under California Code of Civil Procedure §§1500–1582, certain types of unclaimed property must be reported and transferred to the state if:

• There’s no activity or contact with the owner for a specified period (usually 3 years)
• The company is unable to locate the rightful owner
• The property has not been claimed or used by the rightful owner

Why Startups Are Receiving Escheat Letters

California has significantly increased enforcement under the Unclaimed Property Law, especially targeting:

• Delaware-incorporated startups with a physical or operational footprint in California
• Startups with dormant equity, old payroll liabilities, or unclaimed expense reimbursements
• Founders who failed to report historical unclaimed obligations, especially during acquisitions or shutdowns

These letters often request:

• Records of outstanding checks, SAFE payouts, stock options, reimbursements
• Audit history or details of unclaimed payments to vendors, employees, or investors
• Filing compliance under California Holder Notice Report

Example: A Founder’s Wake-Up Call

Scenario:
A San Francisco-based AI startup incorporated in Delaware gets acquired . During diligence, the buyer finds $32,000 in uncashed vendor payments from 2021–2022. Months later, the California Controller’s Office sends a notice stating that failure to report these as unclaimed property could result in penalties.

The startup never filed a Holder Notice Report and now faces:

• Possible audit
• Escheatment of funds to the state
• Penalty exposure under CCP §1576 (up to 12% interest annually on unreported property)

What Is a Holder Notice Report?

Before transferring unclaimed property, California requires businesses (including startups) to submit a Holder Notice Report. This report:

• Lists all items presumed abandoned
• Is submitted without remitting the funds initially
• Gives owners time to come forward and claim their property
• Is followed by a Remit Report after a dormancy period ends

Startups must file this annually if they meet the criteria.

Step-by-Step: What to Do If You Get a Letter

1. Don’t Ignore It
   These are legally enforceable letters. Ignoring them can lead to audits or assessments.
2. Review the Letter Carefully
   Confirm whether the letter is:
   • A compliance reminder
   • An audit initiation
   • A Holder Notice Request
3. Conduct a Self-Review
   Look for:
   • Uncashed vendor or employee checks
   • Old stock repurchases, RSU settlements
   • SAFE investments not converted
   • Expired reimbursements
   • Dormant account balances
4. File a Voluntary Compliance Program (VCP) Request
   If you’re non-compliant, consider filing through California’s Voluntary Compliance Program (covered in next blog). It can help you avoid penalties if done before the audit starts.
5. File the Holder Notice Report (Form UFS-1)
   • File online or by mail
   • Submit before October 31 each year for most businesses
   • Use FTB’s Safe Holder portal for filing

Key Forms and References

Conclusion: Escheat Notices Are Serious Act Early

California is not bluffing with these letters. If you’ve received one as a startup founder, it’s likely because the state identified a compliance gap in your past operations. Whether it’s unclaimed stock payouts, old debt, or expired obligations, failure to act can lead to steep fines especially during or after a liquidity event.

Don’t wait until an audit letter arrives. Review your records now and consider filing a voluntary disclosure if needed.

Need Expert Help?

Book a call with Anshul Goyal, CPA EA FCA, a U.S. licensed Certified Public Accountant, Enrolled Agent admitted before the IRS, and a cross-border tax strategist. Anshul helps startups, founders, and venture-backed companies navigate California’s growing compliance landscape including escheat notices, VCP filings, and acquisition due diligence.

Schedule your call today

Disclaimer

This blog is for educational purposes only and does not constitute legal or tax advice. Readers should consult a licensed CPA or legal advisor for advice related to their situation. Information is based on California laws applicable for the tax year and may change.

FAQs: California Escheat Letters

1. Is a Holder Notice Report mandatory for every startup?
   Not always. But if you have dormant liabilities, unclaimed checks, or old obligations, you likely need to file.
2. Can I ignore the escheat letter if I’ve closed the company?
   No. Former officers, directors, or successors can still be held responsible under California law.
3. What’s the deadline to file the Holder Notice Report?
   Usually by October 31 each year. Late or non-filers may face penalties.
4. How can I get out of penalties if I never filed before?
   You can apply to California’s Voluntary Compliance Program before an audit begins.
5. Does this apply to Delaware corporations operating in CA?
   Yes, if you have a California presence, the state can claim jurisdiction for unclaimed property purposes.

About Our CPA

Anshul Goyal, CPA EA FCA is a U.S. licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant with a deep focus on California compliance for startups. He helps clients avoid audit triggers, respond to FTB letters, and stay ahead of evolving tax enforcement policies.