What is unclaimed property? Companies that don’t know could be putting themselves at risk for costly audits and financial penalties. Danielle Herring, compliance manager for unclaimed property reporting at Sovos, explains what unclaimed property is and how companies should manage it.
Sovos: Unclaimed property seems like a misunderstood or maybe completely unfamiliar concept for a lot of companies. What is it?
Danielle Herring: The simplest example is if you skipped town and left your job today without leaving any forwarding information, and your company couldn’t find you to send you your last paycheck. Of course, this assumes you don’t have direct deposit, but it’s a relevant example for a lot of contractors and even for some full-time employees.
The company would wait a year, let’s say, depending on the state. If you didn’t come forward to claim your check, the company would have to turn it over to the state of your last known address, usually the state where the company is located. At that point, you can still come forward and claim your check at any time, for the rest of your life, actually. Your heirs could even claim it if they could prove their relationship to you. But in the meantime, the money goes into the state’s general fund in most states. The company cannot keep it by law.
That’s just one type of unclaimed property. There are many others. This practice actually started in medieval England, where there were fiefdoms, and if someone died without any heirs the person’s property would go the king. Now, instead of the money going to a king, the government holds it for someone until the person claims it.
Sovos: So, what happens if companies don’t comply with unclaimed property regulations? What if they fail to report unclaimed property after the required period of time?
Herring: Unclaimed property regulations vary state-by-state. That’s part of what makes them so complex. There are 50 jurisdictions, plus Washington, DC, and even Canadian provinces in some cases. Some of the states are lenient, but a lot of states will assess penalties and fines for mishandling of unclaimed property. In some states, employees who mishandle unclaimed property could even face jail time, although the state would have to prove willful refusal to comply in that case.
There are some states like California and North Carolina that automatically levy a fine if a company is out of compliance. Others are more lenient. The first time you report late, they give you a break. But others give no quarter and will issue a fine immediately. These are long-term records, too, for audit purposes. The average record retention recommendation is 10 years. Delaware, which has a large unclaimed property operation because so many companies are incorporated there, has been known to go back 20 years. If they get audited, companies have to pay someone to go back into their archives and find old checks and other records. That can get very expensive. The cost of a lack of compliance isn’t just the cost of fines and penalties. Audits are expensive, too.
Sovos: And yet unclaimed property is unfamiliar to many companies. Which ones are most vulnerable to audits and other complications?
Herring: Everyone has the potential for unclaimed property, but a lot of companies don’t know it’s a thing. They won’t know it’s a thing until they get a notice of an audit. States are going to target companies where they can recover quite a bit of money. States have already targeted big life insurance firms. Some of them were using the government’s death master file to stop annuity payments but were not using it to pay out death benefits for life insurance policies. Smaller life insurance companies and smaller health and property and casualty insurance companies are often in the cross-hairs now.
People who deal with vendor checks, usually accounts payable professionals, are most likely to have to deal with unclaimed property in most companies. In financial institutions, it’s often an issue for people who manage checking and savings accounts. Education is our biggest challenge. Most bigger companies are aware of unclaimed property. They probably have a tax department. A lot companies consider unclaimed property to be a type of tax. They feel as though they’re giving away money, although they money was never theirs to begin with. When a company reports unclaimed property to a state, the state provides indemnity from punitive action. You would think they would see that as a positive.
Sovos: How does Sovos enable companies to stay compliant in the area of unclaimed property?
Herring: For example, if 180 days go by after the date on a check and there’s no activity from the owner, the company would enter the check into our system. Our back end is full of different types of properties, how long they have to age and requirements for sending due diligence letters to owners informing them that they have unclaimed property. Customers load property records into our system, and our system provides state reporting forms. There’s a specific format the data has to be reported in. States can take those reports from our system and read it into their systems.
A lot of companies will send customer-service letters before they send due diligence letters. Customer-service letters aren’t required by the state, but it’s in the company’s best interest to send them in most cases.
With 50 state jurisdictions, plus Washington, DC, the Virgin Islands, Puerto Rico and some Canadian provinces, there are a lot of unclaimed property regulations to track. Some large financial institutions have internal auditors tracking compliance changes, but most medium and small companies don’t have anyone. We track those changes for them and build them into our system.
Get in touch with a Sovos unclaimed property expert to learn more about managing your unclaimed property compliance processes.