Unclaimed property - beware of patient credit balances

Continuously looking for new sources of revenue, states have increased their enforcement of unclaimed property laws. Due to the potential for significant patient credit balances, organizations in the healthcare field may become targeted for unclaimed property audits.

What is unclaimed property?

Unclaimed property, in general terms, is property the business has in its possession that has not been claimed by the true owner. Examples of unclaimed property include patient credit balances, uncashed payroll checks, uncashed vendor checks, unidentified remittances, self-insurance payments, uncashed stock or dividend checks, and uncashed debt/interest checks.

When these items sit on companies' books for a long period of time as old credit balances or outstanding checks on bank reconciliations, occasionally companies simply "clean up" their financials and reverse these items into income. This practice is illegal. State law requires all businesses to report unclaimed or abandoned property and remit it to the state. The state government acts as a custodian and holds the property until it is delivered to the rightful owner.

Each type of unclaimed property has its own specified period of inactivity (referred to as a "dormancy period") before companies have a reporting requirement. Typical dormancy periods are one year for payroll items and three to five years for other outstanding checks or credit balances.

Example: Wisconsin dental practice

Credit balances on patient accounts are common, especially in the healthcare industry where the patient, insurance company, and sometimes government programs will all be making payments on one account. In this example, a patient agrees to accept services for which the dental practice will charge $550. The dental practice provides an estimate of insurance benefits to the patient indicating the insurance company will likely pay $350 of the total charges. The patient pays $200 at the time of service, and a claim is filed with the insurance company. The company subsequently issues a check to the dentist for $370, which results in a $20 credit balance due to the patient. If this credit balance is left unresolved for five years, the dental practice must include the credit balance in their annual unclaimed property report.

How do I comply with the reporting requirements?

Below is a basic outline of the steps in filing unclaimed property reports. As all fifty states have their own requirements and due dates, we advise you to contact your Baker Tilly representative for assistance if you have not previously filed an unclaimed property report.

1. Determine the liability.

A good place to start is reviewing outstanding check listings, accounts receivable aging reports, accounts payable aging reports, and journal entries of amounts previously written off.

2. Conduct internal due diligence.

The purpose of unclaimed property laws is to return property to the rightful owner. Therefore, holders of unclaimed property should make positive efforts to contact owners, e.g., payees of uncashed checks or owners of credit memos, prior to transferring funds to the state. If the owner confirms property is owed, the holder can pay the funds directly to the owner. If the owner confirms property is not owed, the holder can report the funds as income.

3. Determine where to report.

Once you have identified unclaimed property, you must determine in which state to report the unclaimed property. In a situation where you know the owner's last known address, the unclaimed property falls under that state's reporting requirements. If the owner's address is unknown, then you must follow the state in which your business is incorporated or domiciled.

4. Determine state-specific requirements.

Identify the dormancy period for each type of property and any potential exemptions or deductions for certain property. This varies by state.

5. Prepare the report.

States vary in the form of reporting required (electronic vs. paper), reporting period (calendar vs. fiscal year), and due diligence requirements. The compliance report consists of a holder verification or cover sheet and a National Association of Unclaimed Property Administration (NAUPA) file. Each state has its own holder verification/cover sheet. The NAUPA standard electronic file is a common form used by all jurisdictions, contains the detailed information regarding the unclaimed property, and supports the state holder verification/cover sheet.

Unclaimed property audits

State audits of unclaimed property compliance can create a large burden on the business as they can be time and resource intensive. If unclaimed property reports are never filed, the company is at risk for significant penalties and interest. There is no statute of limitations for delinquent filers, and some states are allowed to audit back to when the business was formed. Since many businesses do not retain records for the level of detail required for more than a seven-year time period, the state governments are allowed to use statistical sampling to extrapolate the liability in years under audit where records are no longer available.

Are you at risk?  Consider filing a voluntary disclosure agreement

If you have never filed an unclaimed property report with the state but had unclaimed property in the past, we strongly recommend that you consider filing a voluntary disclosure agreement (VDA). A VDA typically provides companies with several benefits, such as a limited period of prior-year returns to file, waiver of interest and/or penalties, and limitations on future audits. Baker Tilly can not only assist you with filing the VDA and unclaimed property reports, but also help you establish more effective processes and procedures to track and report unclaimed property.

For more information on this topic, or to learn how Baker Tilly dental specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Related sections

Next up

Trends in the affordable housing industry