This blog was last updated on September 25, 2024
Unclaimed property compliance is often overlooked by small businesses, with many mistakenly thinking it only applies to large corporations. But this misconception can lead to serious financial and legal trouble. All businesses, no matter their size, must follow the same state regulations when it comes to unclaimed property.
This comprehensive guide to unclaimed property was created to help small businesses navigate these complex requirements and avoid costly penalties. Whether you’re new to unclaimed property reporting or looking to refine your current approach, this guide will provide the essential steps to protect your business and ensure you meet all state-mandated obligations.
What is unclaimed property?
Unclaimed property (UP) refers to any financial asset that a business holds, issues, or owes to someone else—like a customer or employee—that has remained unclaimed for a certain period of time. This can include a variety of assets for businesses of all sizes, including uncashed payroll checks, unused gift cards, store credits, or customer credit balances.
The types of unclaimed property may seem minor to small businesses. Still, they come with strict state-mandated reporting obligations that can’t be ignored. Each state has its own rules about what qualifies as unclaimed property and when to report it. Staying on top of these requirements is crucial for avoiding penalties and ensuring compliance.
How do I report unclaimed property for my business?
After a specified dormancy period, if the rightful owner hasn’t claimed the property, the business is required by state law to report and remit it to the state. Complying with unclaimed property (UP) regulations can get confusing due to the differing state-by-state jurisdictions and reporting requirements.
However, the process of reporting unclaimed property as a business generally follows the same steps: record maintenance and review, due diligence, reporting and remittance.
Step 1: Maintain and Review Records
Regularly checking records for potential unclaimed property is essential to not only staying informed internally, but also knowing where the company’s obligations may land under different state jurisdictions. For example, dormancy periods may vary based on the jurisdiction or property type. Therefore, keeping detailed books and records of any properties the business may be holding is an integral part of the reporting process.
Step 2: Due Diligence Requirements
Due diligence is a critical step in unclaimed property management. Once unclaimed property has been identified, businesses must make every effort to locate the rightful owner. This typically involves sending due diligence letters to the owner’s last known address, informing them of the unclaimed property and offering an opportunity to claim it.
In some states, businesses can also notify owners via email, making the process more efficient. By fulfilling this obligation, businesses not only comply with state laws but also strengthen trust with customers by demonstrating responsibility in returning their assets.
Step 3: Report & Remit
Once the business has identified and reported its properties and successfully performed its due diligence obligations, the next step is to report and remit to the appropriate tax authority. Most states will have fall reporting deadline that lands on either October 31 or November 1.
How to report unclaimed property will vary based on the state’s requirements but are usually accepted through an online portal or paper form. It is during this step that businesses may need to remit funds via ACH or other state-approved payment methods to each state.
Staying organized and proactive in each step of the process is key to maintaining compliance with unclaimed property laws across different jurisdictions. By regularly reviewing records, conducting due diligence, and properly reporting and remitting them to the appropriate authorities, businesses can ensure they meet their obligations and avoid potential penalties.
Why Unclaimed Property Compliance Matters
As states face budget constraints, unclaimed property has emerged as a significant source of revenue, resulting in heightened enforcement efforts and increased audits. What was once a distant concern for many businesses is now a looming reality—making compliance with unclaimed property laws an essential aspect of running any business. The question is no longer “if” your business will be audited but “when.” Therefore, businesses must understand the long-term implications of non-compliance.
Unclaimed property audits can be both time-consuming and costly, often stretching over multiple years. For small businesses, the impact of these audits can be particularly severe, as they may not have the resources to dedicate to lengthy investigations. Audits can last up to seven years, pulling business owners away from their core operations and leading to extensive financial strain.
Worse, if unclaimed property is mishandled or not reported properly, businesses can face steep penalties, which vary by state. Most commonly, states impose interest charges on the value of the unclaimed property, and additional fines for non-compliance can add up quickly, creating an even larger financial burden.
Beyond financial penalties, mishandling unclaimed property impacts a business’s reputation. These regulations exist to ensure that property is returned to its rightful owners. When a business fails to take its unclaimed property policies seriously, it not only risks fines and audits but also damages trust with customers and stakeholders.
Reputation is critical, particularly for small businesses that rely on customer loyalty and community goodwill. A failure to address unclaimed property obligations can create the perception of negligence or indifference, which could result in lost business or legal disputes.
The Role of Automation in UP Compliance
With the increase in state enforcement efforts and more stringent audit processes, small businesses must take proactive measures to stay compliant. However, for many small businesses, staying on top of compliance can feel like a constant juggling act.
Limited resources, small teams, and complex requirements make it easy for things to slip through the cracks. Manually reviewing records, sending out due diligence letters, and filing reports are time-consuming tasks that can drain valuable time and energy—especially when compliance is just one of many responsibilities.
But what if staying compliant didn’t have to be so complicated? That’s exactly where automation steps in. Solutions like the Sovos Unclaimed Property Standard was specifically designed to take the headache out of UP management, helping SMBs navigate this complex landscape.
Automation ensures due diligence efforts are handled promptly, reports are filed accurately, and payments are remitted on time—without the usual chaos. It doesn’t just save time; it also dramatically reduces the chance of mistakes that could lead to costly penalties. Plus, it provides small businesses with the peace of mind to shift their focus from managing compliance to what really matters: growing their business.
In the end, the right tools not only protect the bottom line—they preserve reputation and ensure future growth. With an automated compliance solution, small businesses can stay one step ahead of regulations, avoid costly missteps, and build trust with both regulators and customers.
Want to learn more? Take a guided tour of UP Standard here.
