Unclaimed property results from the everyday functions of a company’s operations. As state budget deficits continue to grow, companies should expect unclaimed property compliance and related audits to continue and possibly increase. So, who is responsible for handling the process of Unclaimed Property management and escheatment to the state and keeping their company compliant?
Tax professionals may not want to think that the responsibility for unclaimed property compliance belongs to them, but that may not be the case. Even though unclaimed property laws are not tax laws, they are related. The unclaimed property laws look like a tax because there is an annual filing requirement governed by state law; and it feels like a tax because compliance requires ongoing monitoring of changes in laws and regulations. Because of these similarities, the tax department is often actively involved in, and ultimately responsible for, unclaimed property compliance.
Why could this responsibility fall to the tax department professional? The tax department commonly has a structured compliance calendar to ensure the timely completion of periodic tax filing deadlines, and this calendar is easily adapted to unclaimed property reporting deadlines. Also, because tax professionals are most familiar with the process of state and federal tax audits, they are often left with managing an unclaimed property audit if it occurs. Therefore, tax professionals need to be aware of state unclaimed property rules and regulations.
Auditors tell us that 80 percent of companies believe they are compliant in the world of Unclaimed Property … but they are not. Even companies that think they are “technically” in compliance may be under-reporting because, for example, they may:
- Be applying the wrong dormancy period
- Not be reporting all property types
- Failing to take into consideration property that may be outsourced to a third party (such as securities or payroll)
- Forgetting about merger and acquisition activity. Mergers and acquisitions can lead to potential exposure because of the acquired entity’s historical accounting practices and lack of compliance.
By recognizing where the risks exist, tax professionals can implement the necessary policies and procedures (or utilize existing processes) to make sure their company is compliant with all of the various states’ rules and regulations and establish the adequate cash reserves needed to protect their company from fines and fees should an audit occur.
Contact Sovos to learn more about unclaimed property solutions.