When most businesses think of unclaimed property, they likely consider outstanding checks issued from primary operating accounts, overlooking other sources that may hold potential exposure. Failure to recognize these exposures could result in significant interest and penalty assessments once discovered.
Some of the most overlooked sources of potential unclaimed property include the following:
Voided checks – Organizations typically will automatically void checks once they remain outstanding for 90 or 180 days. Checks that are voided, without resolving the underlying obligations with the payee, could remain due and payable even if the checks themselves were voided. Notification of a check being voided, with “after 180” written across the bottom of a check, does not relieve the unclaimed property obligation.
Accounts Receivable credit balances – Credit balances sitting in Accounts Receivable, resulting from duplicate payments, refunds, returns, or pre-payments could represent potential unclaimed property if they are not used by the customer within the prescribed dormancy period. It’s also important to note that credit balances due to one customer cannot be used to offset the debt owed by another.
Gift cards – While some states exempt unused gift card balances for cards that don’t expire, a significant number of states require unused balances to be reported once the card remains inactive for a period of three to five years. If addresses are not maintained, they’re considered to be unknown and due to the state of incorporation.
Rebates – If all conditions necessary to receive a rebate were satisfied and the rebate is distributable in cash, there’s a strong likelihood that undistributed balances could be considered escheatable.
Employee benefits – Uncashed checks related to employee benefit programs, that are not considered ERISA-exempt, represent potential unclaimed property exposure. It is especially important to be aware of balances returned from third-party administrators that are not sitting on company outstanding check lists but were used to reduce current obligations.
Non-primary cash accounts – Most organizations capture activity that originates from their primary operating accounts, but it’s not unusual for smaller check-issuing accounts to be overlooked. It’s important to review company trial balances periodically to ensure that all check-issuing cash accounts are captured in unclaimed property procedures.
Independent lines of business – It’s not uncommon for diversified companies with many lines of business to overlook one or two smaller entities in their annual review for unclaimed property. To help ensure that all sources of potential exposure are being captured, companies should review their organization charts annually to validate that all entities are monitoring, tracking and reporting unclaimed property exposure.
Property inherited through mergers and acquisitions – It’s important to be aware of unclaimed property that’s sitting on the books and records of companies that were acquired through a stock acquisition because there’s a very strong likelihood that they’re now your company’s responsibility. If there’s a significant population of out of compliance property, potential interest and penalties could be material and should be considered during the acquisition due diligence process.
The list above is by no means complete and there are many other areas that could hold additional exposures, especially when considering industry specific properties. To help ensure that your organization is in full compliance and capturing all sources of potential unclaimed property exposure, conduct periodic risk assessments to review current and closed bank accounts, new or expanded services or lines of business, promotional activity, internal clean-up efforts, and other activities that could generate new risks.
The Sovos Unclaimed Property Consulting team can help establish annual routines that will identify potential risks to ensure that your organization remains in full compliance and uncover your hidden unclaimed property exposures.
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