Unclaimed property (also known as abandoned or escheat property) is tangible or intangible personal property that’s in the custody of a person or business (“holder”), but is owned by another party. The purpose of unclaimed property laws are to ensure the protection and the pursuit of finding the rightful owner to the abandoned property. A few examples of types of unclaimed property are: uncashed payroll checks, uncashed vendor checks, gift certificates/cards, customer merchandise credits, safe-deposit boxes, matured time deposits, 401(k) and retirement accounts, and escrow accounts.
It’s important to note that unclaimed property is not considered a tax on a company or individual. State filing deadlines, year-ends, statute of limitations, exemptions, and dormancy periods all vary state to state. The term “dormancy period” is defined as a set period of time, which may begin from the date of the last transaction on record with the property or the date of when the property was issued (e.g. check issuance date), and ends at a prescribed number of years (varies based on property type but typically 1-5 years). Once this period of time has elapsed, the property is deemed to have become abandoned.
If you are a holder of unclaimed property, it’s essential to implement an organized plan for accounting and reporting the property. Below is a general step by step plan to identify, track, report, and remit abandoned property.
The initial step for a holder is to identify their abandoned property. Reviewing outstanding checks, customer accounts, unused gift certificate are a few common areas to analyze each year. Once unclaimed property has been identified, the company should maintain a log to record a list of the unclaimed property type(s), monetary value, date issued, dormancy period, and the owner information. Once the dormancy time has passed, the holder must begin the state’s reporting process. The primary rule in determining that state to report abandoned property is based on where the owner’s last known address was located.
Due diligence by the holder is generally required by every state prior to filing and remitting the property. This is the process where the holder attempts to notify the owner via telephone or mail, but usually with a formal letter, to notify the owner that their property has become abandoned and by law is required to be transferred over to the state’s possession within a certain amount of days from the date of the letter.
Once the identified property that has reached the required dormancy period, it becomes unclaimed property and must be reported and remitted to the state by the due date of the state filing in. Some states enable holders to file the report and remittance (for cash payments) on the state’s unclaimed property website, or by mailing them in. For safe deposit box, securities, or other escheat property, it’s important to refer to the state’s holder reporting instructions for the proper remittance of the property.
Although it may seem as a nice gesture for states to take over the responsibility of abandoned property, it’s actually become a major revenue stream for them. Once a holder remits their unclaimed property to a state, the property is for the state to keep, unless the rightful owner eventually comes forward to claim it. According to various sources, states hold a combined total of approximately $42 Billion of unclaimed property!
As states have become more aggressive for additional revenue, they are constantly changing their unclaimed property laws in order to cast a wider net of reportable property. In addition, states are on the lookout for non-compliant holders and utilize third party contractor audit firms to conduct unclaimed property audits. If the exposure of an audit isn’t worrisome enough for a holder, be aware that many states do not actually have a statute of limitations for unclaimed property. That is, a state’s assessment on a holder potentially could go back to the holder’s date of inception if no report was ever previously filed.
And yes, states will include interest and penalties similar to income tax returns for failure to file, and paying timely. The good news is that many states do offer voluntary disclosure programs for unclaimed property and if you are admitted into the program, the state will generally waive all interest and penalties for the previous years of non-compliance.
Don’t put your business at risk! Third party audit firms working on behalf of states have the same incentives in order to maintain their contractual relationship: to find more property and non-compliance filers of holders. Freed Maxick can help. We’re tasked with finding compliance issues, working with the states directly through voluntary disclosures, filing your unclaimed property reports and tracking due dates, or helping you through an unclaimed property audit.
If you think you may have unclaimed property reporting exposure with your business and would like to discuss further with one of our State and Local Tax Experts, click here or call us at 716-847-2651.