Whether tangible or intangible, unclaimed property is held by a company that has been abandoned or left unclaimed for a certain period, typically due to account inactivity or owner contact (known as a dormancy period). States are increasingly targeting unclaimed property as a way to gain sources of non-tax revenue to address budget shortfalls.
Unclaimed Property Audits: What You Need to Know
Companies must report and remit unclaimed property to the state where the owner resides, which subsequently acts as the custodian until the rightful owner or heir comes forward to make a claim and can prove entitlement to the property. All 50 states and the District of Columbia, Guam, Puerto Rico, and the Virgin Islands maintain unclaimed property laws that require state reporting and remittance.
Over time, the trend has been for the unclaimed property acts to increase the property types covered while reducing the dormancy period. States’ third-party auditors are compensated on a contingent fee basis, rendering incentives high to estimate corporate liability and enforce compliance and remittance. In light of this, companies are left with a complex burden to ensure they remain compliant with state requirements, as varying state laws can affect the way a given company handles unclaimed property.
Unclaimed property audits can leave a company with unexpected penalties and steep payments if caught off guard and not prepared. With states’ increased interest in unclaimed property, companies are advised to take several steps that mitigate the associated financial and operational risks.
Risk Areas
Assessing areas of risk is a priority. However, a company’s third-party accounting firm or finance department may not have the expertise in unclaimed property compliance to identify risk areas — which is what renders a partnership with our team so invaluable.
Policies and Procedures
Corporate protocol that methodically works to locate missing owners, assist in returning funds, and reconcile accounts can substantially reduce unclaimed property liability. Policies and procedures can provide audit defense documentation and bolster record retention, decreasing overall audit risk.
Policies and procedures should address every department/line of business and document the life cycle of uncashed, outstanding, or dormant accounts from when the item becomes stale dated or declared dormant/inactive to when it is reported to a state as unclaimed property.
Policies and procedures, including record retention measures, should be updated annually and detail the life cycle of the type of property from the point it becomes uncashed or dormant until it is reported as unclaimed property. These should be standardized and institutionalized, and process owners should be clearly defined.
Unclaimed property reports should be filed annually, and policies should be enforced as a component of a company’s ongoing compliance plan.
Ways to Mitigate Unclaimed Property Risks
Here are steps you can take to reduce risk of an unclaimed property audit:
- Maintain accurate records of voided and reissued checks.
- Ensure you are reporting the property types that are typical for your industry.
- Maintain a reporting history in the states. If a negative report is required, file a negative report if there is no property to report in a given year. Significant gaps in reporting history, as well as significant fluctuations in the amount reported, are red flags to the states.
- Stay up-to-date on state dormancy periods, law changes, and regulatory changes.
- Utilize an unclaimed property software package or outsource the function to a third party.
- Eliminate manual processes; automate as much as possible
- Staff assigned to managing the unclaimed property process need to be trained and receive continuing education in the field.
Dunbar: Ensuring Compliance for State Audits
Maintaining compliance with various states’ unclaimed property laws is no small feat. Dunbar can help companies come into as well as stay in compliance to avoid financial or reputational damage. For more information about unclaimed property compliance and reporting, reach out to us today.