Managing unclaimed property is an important regulatory responsibility. Yet without intentional focus, it can be easily overlooked, especially since some businesses might hold unclaimed property without realizing it. This can result in significant financial penalties, accumulating interest payments, and unplanned fees.

States around the country are increasing their programs to audit and collect unclaimed property. As a result, it makes sense for businesses to confirm their compliance with annual reporting requirements.

Recognizing the Risk

The term “unclaimed property” refers to tangible or intangible assets being held by a company because the rightful owner either lost, abandoned, or otherwise failed to claim them. Dormant bank accounts and unclaimed insurance benefits are the best-known examples, but companies of all types can be holding unclaimed property in the form of uncashed payroll, dividend, royalty, and vendor checks; unclaimed supplier credits; dormant accounts receivable credit balances; or unclaimed customer deposits, rebates, and gift cards.

If such assets remain unclaimed by their rightful owners for a specified period, known as the dormancy period, companies are required to report and remit them to the appropriate state government, a process known as escheatment. In most cases, the assets are escheated to the state of the owner’s last known address. If that address cannot be determined, the property escheats to the state in which the company is domiciled or incorporated.

This means that, in addition to its home state, a company could owe unclaimed property reports and remittances to numerous states where former employees, shareholders, suppliers, customers, or other interested parties were last located.

To further complicate matters, the dormancy periods differ from state to state and for various types of assets. Although the Revised Uniform Unclaimed Property Act serves as a national model, each state has enacted its own version of the law with specific reporting, audit, remittance, and collection procedures. As a result, companies can face a complex administrative burden trying to comply with all relevant state reporting requirements.

Recent Trends and Developments

After escheatment, states must undertake their own efforts to locate the rightful owners of unclaimed property. They generally locate fewer than half, however, so state governments have come to rely on unclaimed property remittances as a valuable source of added revenue. In Delaware, for example, where the majority of US publicly traded companies are incorporated, unclaimed property collections typically amount to 10–15 percent of the state’s annual operating budget.

Like Delaware, many states have begun aggressively enforcing unclaimed property laws during the past few years. New York, California, Texas, and Illinois are among the most prominent, but many other states now actively seek out businesses that have failed to comply with their unclaimed property laws, usually engaging third-party private audit firms that are paid on a contingency fee basis.

Many states lack a defined statute of limitations for reporting unclaimed property, so the audit look-back periods often span many years—sometimes several decades. Because most companies do not retain transaction records that long, auditors will choose a more recent sampling period for which records do exist, and then estimate the company’s obligations for prior years based on that sample.

The combination of contingency fee audit contracts and aggressive estimation techniques has led to much higher claims and penalties in recent years. In addition, auditors have expanded their scope of interest, looking beyond the large banks and insurance companies that for many years were the most frequent targets for involuntary audits. Today, with new technologies that help auditors identify likely asset holders more easily, businesses of all sizes in a wide range of industries can find they’ve been selected for unclaimed property audits—with the risk of large assessments, penalties, and interest.

Managing the Risk

One recent study estimated that about three-quarters of US companies were unaware of their unclaimed property obligations. With state audit and collection efforts intensifying, prudent managers will take steps to ensure compliance with all relevant annual reporting and remittance requirements.

The first step is to review accounts payable, receivables, payroll records, and other accounts to identify potential unclaimed property and determine the relevant states to which reports might be due. It is also important to look at the procedures for processing stale dated checks and void checks since these also can qualify as unclaimed property. The specific reporting processes, forms, annual filing deadlines, and dormancy periods vary from state to state.

Most states require that companies first try to locate the rightful owner of unclaimed property in order to return it before escheatment. Some states require that letters be mailed to the last known address, and some even spell out specific language that must be used. All such efforts, including phone logs, correspondence, and returned letters should be saved as proof of due diligence.

If a company discovers that it failed to properly report and remit an unclaimed property liability when it was required, many states offer voluntary disclosure agreements that can limit exposure or allow for a “catch-up” filing. Once a company starts filing in a state, some states require continued annual filings in subsequent years, even if there is no new property to report. Failing to file a mandatory negative report could open the company to audit risk.

To mitigate future risk, management should make sure the company has instituted prompt, consistent, and well-documented follow-up procedures for handling uncashed checks, unclaimed credits, and inactive accounts. All employees involved should understand the required procedures.

Lastly, the company should review its accounting software to make sure it offers appropriate account reconciliation processes, including documentation of voided checks and dormant accounts. Doing so will reduce possible liability and provide documentation for potential audits.

Dembo Jones works with clients on reporting compliance and effective management of unclaimed property. Get in touch today to see how we can help.