Unclaimed property – another challenge to businesses from the states

States are becoming increasingly aggressive in looking for new sources of revenue. Historically, states have used nexus inquiries, expanded audits for sales/use and income taxes, and new types of business entity taxes to generate new revenue. Another threat, however, looms on the horizon: unclaimed property examinations.

Property on companies’ books and records owed to individuals or other businesses is classified as "abandoned or unclaimed" after a specified period of inactivity or where the company has had no contact with the owner after a specified period of time. Consequently, holders of unclaimed property are responsible for reporting and paying what’s owed under state escheatment laws.

Escheatment is the principle that unclaimed property reverts to a particular state if the owner does not claim it and no heir comes forward to assert a right to the property. To "escheat" means to surrender. State statutes, regulations, and court cases govern unclaimed property, defining when it must be surrendered to the state and how the owner of the property is notified to claim the property. The administering agency of escheatment laws might be the state treasurer’s office, the department of revenue, or another unit of state government.

The businesses, or "holders," most commonly in possession of unclaimed property are financial institutions, insurance companies, retailers, and companies with large numbers of employees. Unclaimed property is broadly defined and includes savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, credits, traveler’s checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds, life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes.

Reporting unclaimed property is not just for Fortune 500 companies. Unclaimed property law applies to businesses of all types and sizes, such as corporations, partnerships, limited liability companies, and other entities.

Every state, the District of Columbia, Puerto Rico, and the US Virgin Islands administer programs that require businesses to report and remit identified unclaimed property to the governing jurisdiction. In most states, special rules apply when the owner is unknown. Additional jurisdictions that have unclaimed property programs include Canadian provinces Quebec, British Columbia and Alberta.

Businesses are required to make efforts to contact the owners of unclaimed funds. This effort is called "due diligence." When efforts by businesses to locate the owner fail, the funds must be turned over to the administrator of the state program as required by the appropriate jurisdictional rules.

The state is then responsible for safeguarding the funds, attempting to locate the owners through publicizing the names of apparent owners who cannot be located by the holders, and returning the assets to the owners as they come forward. There is no statute of limitations for owners to file a claim.

Many companies are unaware of unclaimed property reporting requirements. It is important for businesses to review their accounts to determine if they are holding unclaimed funds and report this property to the state. Each class of property has its own period of inactivity, or "dormancy period," for determining when it is considered abandoned or unclaimed. Most state dormancy periods range from one to five years, depending on the type of property.

States like Michigan and Wisconsin have dialed up their efforts to enforce their escheat laws. Some have contracted with contingent fee firms to conduct unclaimed property audits. It should be noted that if a holder of unclaimed property has never filed reports, there is no statute of limitation on how far back an escheat audit can reach. Penalties and interest are punitive for nonfilers who are holding and not escheating property to the respective state.

Businesses looking for relief from the estimated assessments, penalties, and interest that states may impose should consider voluntarily coming forward through disclosure or amnesty programs. Many states have such programs. They typically offer a limited "lookback" period, and abate penalties and interest for unclaimed property reported through the program.

In 2012, Delaware—one of the more aggressive states—announced a voluntary disclosure program which provides favorable treatment with varying deadlines and lookback periods. This is of special interest to corporations or businesses organized under Delaware law since they are within the state’s reach for reporting unclaimed property if an owner’s state of location cannot be determined.

In summary, businesses should take the time to examine their unclaimed property reporting procedures. Start by finding out unclaimed property laws of the states in which you have reportable property. Set up policies and procedures to capture information on unclaimed property. Make personnel aware that unclaimed property does not belong to the company. States can and do audit for unclaimed property and can assess penalties and interest for noncompliance with escheatment laws. Noncompliance with unclaimed property reporting laws can also require companies reporting under generally accepted accounting principles (GAAP) to book a contingent liability for material amounts of unclaimed property that have not been remitted to state officials. Since there is no statute of limitations for audits and assessment of unclaimed property in most states, failure to deal with this issue properly can impair a company’s balance sheet, leading to other financial problems.

Businesses should also keep in mind that they themselves may have claims for unclaimed property, e.g., an account credit with a vendor or an undelivered check from a customer. Proper procedures will help identify and claim such property.

For further information on unclaimed property and state reporting requirements, contact us.

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