While state unclaimed property laws have been in existence dating back to the early 1900s, there are companies of all sizes, in all industries, that have never reported unclaimed property. A typical business entity — or “holder,” for unclaimed property purposes — is obligated to report outstanding, uncashed, and inactive accounts to the state on an annual basis. Reporting unclaimed property is a multi-step process that requires the holder to:
- Determine property that has reached the end of its dormancy period, the statutory period of time without owner-initiated activity or contact
- Mail due diligence letters to owners of unclaimed property accounts
- Reissue or reactive the accounts of anyone who comes forward showing rightful or legal ownership of the property
- Report and remit unclaimed property to the state
- Retain records evidencing compliance
- If your business has never filed an unclaimed property report, you may be running the risk of an audit red flag. However, undertaking a risk assessment to determine potential unclaimed property exposure as well as the risk of interest and penalties is crucial for a company’s holder toolbox and should be executed before filing reports.
Types of unclaimed property include:
- Uncashed payroll checks or vendor checks
- Accounts receivable credit balance, refunds, and deposits
- Unused gift cards/gift certificates
- Utility deposits
- Insurance proceeds
- Rebates (not applicable to all states)
- Inactive bank accounts
- Inactive brokerage accounts
Why Be Concerned About Unclaimed Property Reporting?
Every company generates unclaimed property, which, in essence, is any intangible property owed by a company to another party unclaimed for a specific time by the rightful owner. Once a business has held the property for the dormancy period without receiving any communication from the owner, the property becomes subject to escheat, and the holder has an obligation to report the property to the appropriate state.
Not correctly reporting and remitting unclaimed property may result in a material misstatement of a company’s financial statements by improper classification of unclaimed property liabilities. It can lead to a multi-state unclaimed property audit, penalties, and/or interest assessments that go far beyond the value of the property, potential whistleblowers, and negative publicity for the company.
What First-Time Filers Should Consider
A first-time filer should start by understanding what areas of the business have the potential to generate unclaimed property. The next step is to determine what remains outstanding, uncashed, or inactive according to the company’s books and records. To make this determination, companies should review the following:
- Chart of all accounts
- Year-end trial balance reports
- Accounts receivable aging reports
- Benefit plans and workers’ compensation
- Small balance write-offs
- Unidentified wires and remittances
- Inactive and matured accounts
How Can a First-Time Filer Report Past-Due Unclaimed Property?
Before reporting past-due property, first-time filers are required to notify their customers they are holding unclaimed property that will be reported to the state if no action is taken. This notification process is referred to as due diligence. Additionally, companies should ascertain whether the state has an unclaimed property Voluntary Disclosure Agreement (VDA) program. While terms and conditions of VDAs vary from state to state, in general, a VDA is an agreement between the holder and the state that outlines the terms under which they agree to settle past-due liabilities. VDAs will generally waive penalties and interest on the past-due property.
Why First-Time Unclaimed Property Filers Should Turn to a Professional Advisor
An advisor can be instrumental in bringing your business into compliance. The specialists at Dunbar can assist in identifying potential sources of unclaimed property your business may be generating, as well as create or update applicable policies and procedures. These experienced consultants understand how overwhelming filing unclaimed property can be — especially for first-time filers, no less — and have the expertise to standardize your unclaimed property process, negotiate VDAs, and assess your audit risk.
If you’re a first-time filer and have questions about the unclaimed property process, don’t brave the storm alone; turn to the professionals at Dunbar who can help you adhere to reporting requirements with ease. For more information about first-time unclaimed property reporting or help with finding unclaimed property owners, turn to our team today.