This blog was last updated on October 21, 2024
Unclaimed property compliance is one of those legal obligations that often flies under the radar for many businesses, especially smaller ones. However, failing to stay compliant can quickly turn minor oversights into major liabilities. In many cases, the penalties far exceed the value of the property itself, making it essential for every business—big or small—to get it right.
In this blog, we’ll uncover the common pitfalls that trip up business owners when it comes to unclaimed property. From not knowing they’re liable in the first place to overlooking state-specific regulations, let’s explore some of the most common questions businesses have about unclaimed property management.
- Which businesses are liable?
- What are examples of unclaimed property?
- What is the reporting deadline?
The Responsibility of Unclaimed Property Reporting
The most common mistake business owners make when it comes to unclaimed property management is simply not knowing they are liable in the first place. Many business owners, especially small and medium-sized enterprises, assume unclaimed property regulations only apply to the big players. But here’s the catch: no matter how big or small your business is, you’re on the hook for the same reporting obligations.
Unlike other regulatory areas where size or revenue may dictate a company’s obligations, there are no revenue thresholds or state exemptions that exclude businesses from compliance. So, whether a business generates thousands or billions in annual revenue, unclaimed property reporting obligations remain the same.
Know How to Identify Unclaimed Property
Understanding these universal obligations is just the first step; it’s equally important to recognize the specific types of unclaimed property your business may be holding and how to properly manage them to avoid potential penalties.
- Unredeemed Gift Cards and Certificates: While they may be valuable tools for attracting customers and boosting revenue, gift cards and certificates can pose compliance challenges due to the diversity of state laws governing them. Conducting regular audits of gift card balances is crucial to avoid legal pitfalls.
- Uncashed Payroll and Vendor Checks: Common in businesses with high employee turnover, these unclaimed funds put small businesses at compliance risk. It is essential to keep accurate and up-to-date contact records for current and former employees and vendors and to address any outstanding checks in a timely manner.
- Aged Credit Balances: These typically arise from invoice adjustments, returns, or overpayments and require careful management to prevent them from turning into unclaimed liabilities. Many states prohibit the write-off of these balances, making strict record-keeping practices essential.
- Contents of Safe Deposit Boxes: Safe deposit box contents may be subject to the same laws once they’re abandoned or unclaimed. Financial institutions are responsible for reporting these contents after efforts to contact the owner have failed.
- Insurance Proceeds: Unclaimed insurance proceeds, especially from life insurance policies, must be reported if beneficiaries do not claim them within the designated dormancy period. This ensures that rightful recipients can eventually claim their due benefits.
- Customer Deposits and Refunds: These funds can become unclaimed property if customers do not claim them within a certain period. Businesses must track these deposits and refunds carefully and make concerted attempts to locate and return them to their rightful owners to comply with state laws.
Dormancy Periods: State reporting deadlines
Another mistake to avoid is not taking the time to recognize the state-by-state unclaimed property laws. Each state operates its own unclaimed property program, with regulations that dictate the dormancy period after which unclaimed property must be reported and turned over to the state. This dormancy period—the time during which property remains unclaimed by the rightful property owner—varies significantly depending on the state and the type of property involved.
Failure to comply with laws can lead to unclaimed property audits that date as far back as 10 years. The penalties for noncompliance can include hefty fines, interest charges, and, in extreme cases, legal action. So, regardless of the number of resources, it’s essential for all businesses to treat unclaimed property compliance with the same level of diligence.
Navigating the complex and often confusing world of unclaimed property laws, with varying requirements across different states, can be overwhelming for businesses of all sizes. This is where specialized software solutions come in, streamlining processes, reducing the risk of costly errors, and ensuring that businesses stay compliant. Sovos offers a range of unclaimed property reporting solutions and consulting for organizations of all sizes, including:
- Sovos UP Standard, a budget-friendly and easy-to-use platform specifically designed for small to medium-sized businesses. This software simplifies the core tasks of unclaimed property compliance, such as record management, due diligence tracking, and state reporting.
- Sovos UP Enterprise, for businesses with more complex needs—such as those operating in multiple states, handling larger volumes of records, or managing more intricate types of unclaimed property. This solution provides enhanced configurability, more advanced support, and services that allow for greater flexibility in managing complex compliance requirements.
- Sovos Managed Services, for organizations seeking to centralize and outsource the handling of reporting, escheatment, and due diligence. With Sovos Managed Services, businesses benefit from expert oversight, ensuring that their unclaimed property obligations are met while freeing up internal resources for other priorities.
Taking a proactive approach to unclaimed property compliance can help businesses of all sizes avoid legal and financial pitfalls. With the right tools and understanding in place, your business can stay compliant, minimize risks, and ensure long-term success. Don’t let unclaimed property become an unexpected liability—act now to protect your business.
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