Unclaimed property management can fall under a variety of responsibilities ranging from CFO to accounting—but typically resides within the accounting or financial reporting departments. Every company generates potential unclaimed property through regular business functions such as payroll. With over 80% of companies considered non-compliant with unclaimed property laws and regulations and the number of audits increasing, it’s imperative that a company’s accounting department ensures unclaimed property reporting and remittance is in full compliance.
What is unclaimed property?
Unclaimed property is defined as tangible (safe deposit box contents) or intangible (general ledger property) personal property that has gone unclaimed by the rightful owner with no activity from the owner regarding the property after a specified period of time (dormancy period). At its most basic level, unclaimed property laws are intended to be consumer protection statutes to help reunite lost owners with their property. Once property goes unclaimed for a specified period of time, the company or holder must attempt to locate the owner through the due diligence process. If there is no response to the due diligence efforts then the property gets reported and remitted (escheated) to the state. Most states hold unclaimed property funds in a perpetual trust fund that provides for the return of property to the rightful owner upon satisfactory proof of ownership. If property cannot be returned to the owner, it becomes an additional source of revenue for the states.
Unclaimed property is not a tax but it is the law, governed and enforced at the state level. State laws vary across the 55 reporting jurisdictions. Foreign countries, including some Canadian provinces have unclaimed property laws as well. State requirements change regularly and there are many different property types for unclaimed property reporting and remittance. These property types include checking accounts, stocks, refunds, overpayments, and more. Different property types have different dormancy periods and due diligence requirements, on top of the different state laws. To help, Sovos unclaimed property experts have compiled important unclaimed property information by state.
Risks of non-compliant reporting
As mentioned above, unclaimed property compliance is the law so it’s mandatory. States also have laws providing the assessment of interest and penalties for non-compliance, such as late filing or incorrect filing. Interest and penalty laws vary by state and range from zero to 18%. On top of the potential penalties and interest, unclaimed property non-compliance can trigger an audit, and diminish reputation by being associated with improper handling of unclaimed property. Companies rely on customers and employees; the easiest way to frustrate both is to miss-handle their funds.
Consider the following questions to help determine your potential unclaimed property reporting liabilities:
- Are you currently filing unclaimed property reports? This may seem straightforward but many companies simply do not file and escheat unclaimed property, causing non-compliance and significant audit risk.
- Do you have formal and documented unclaimed property policies and procedures? You should. States require unclaimed property policies and procedures and require that they be updated regularly based upon changes to the law.
- Are you filing reports to all jurisdictions? Many companies mistakenly only file unclaimed property reports to their state of incorporation. Per the rules of jurisdiction the state of the owner’s last known address has first claim to unclaimed property.
- How long are you maintaining copies of your unclaimed property reports? Each state has its own regulations surrounding how long you must retain records and typically this requirement is longer than the tax record retention requirement. Don’t forget to maintain records for the state’s legally required time PLUS the state’s dormancy period, which can be 15 or more years.
- How do you keep up to date on unclaimed property compliance laws? States change and enact new unclaimed property legislation on a regular basis. If you’re using a software or other tool that requires manual updating this puts your company at significant risk for non-compliance.
- Has your company experienced a merger or acquisition in the past two years? As companies merge or are acquired there is a lot to account for and many times unclaimed property goes unnoticed. The unclaimed property liability does not go away with a merger or acquisition, the liability remains on the books and merely transfers to the other company.
- Does your company have centralized unclaimed property operations? Decentralized unclaimed property operations can cause additional liabilities as different departments, regions or sectors perform unclaimed property functions in inconsistent ways or perhaps not at all.
Worried about your company’s compliance with unclaimed property and how to stay updated on the constantly changing rules and regulations? Talk to an expert today.