Many companies treat unclaimed property as a narrow accounting issue with limited effect on day-to-day business operations. However, unclaimed property compliance obligations can be broad and create real financial consequences.
Recently, states have become more aggressive in enforcing unclaimed property laws, which has further amplified the need for businesses to establish a process to ensure continued compliance in order to avoid costly assessments and penalties.
Unclaimed property generally arises when a business holds money or other property owed to customers, vendors, employees, or other parties and loses contact with the owner for a state-defined dormancy period (typically 1 to 5 years depending on the property type). Once the dormancy period runs, the property is presumed abandoned and must usually be reported and remitted to the state, which then holds it until claimed by the rightful owner.
Understanding Unclaimed Property: On-Demand Webinar
Most businesses that generate an annual profit have some form of annual unclaimed property reporting obligation, even when leadership initially believes the company has none. Companies often take a superficial look at certain accounts or transactions, such as stale-dated checks, and underestimate the potential issue without taking a deep dive into their general ledger.
Common sources of unclaimed property include uncashed accounts payable checks, payroll checks, wages, commissions, aged accounts receivable credits, deposits, rebates, gift cards, royalty payments, and customer loyalty programs. A deep dive into these accounts may uncover previously unidentified exposure.
Read More: Restaurant Unclaimed Property Compliance
The compliance process is an ongoing review and requires businesses to take a proactive approach throughout the year. Traditional tax nexus laws are inapplicable to unclaimed property administration, meaning that businesses may have a reporting requirement in any state where the last known address of the property owner is located.
Before reporting unclaimed property, businesses must complete their due diligence by making a final written effort to contact the owner. The letters must follow a state-specific format and typically need to identify the owner, the amount due, the type of property, relevant dates, a response deadline, and contact information for claiming the funds.
Once the diligence process is complete, final returns and payment must be remitted to each state. Deadlines for the completion of the unclaimed property process vary by state, so it is important to understand each state’s rules to avoid costly interest and penalties associated with noncompliance.
Businesses that have not previously filed unclaimed property returns should begin with a self-assessment to determine the magnitude of exposure. This process should involve management, accounting, and compliance personnel to review unresolved payments, check voiding practices, customer and vendor credits, payroll processes, and any other areas where abandoned property might accumulate. Writing off stale balances and poor historical documentation are often leading causes of unclaimed property exposure.
If exposure is discovered, the next step is to determine materiality, identify the states involved, and select a compliance strategy. Options may include reporting the property through regular filings, participation in voluntary disclosure programs to seek waiver of interest and penalties, or evaluating other corrective approaches. Most of the time, businesses that discover an unclaimed property exposure utilize a combination of all three approaches to catch up and get into compliance.
Once the initial clean-up has been completed, businesses should focus on establishing a structured compliance program built on internal controls, assigned responsibilities, centralized recordkeeping, and periodic reconciliation. Creating an internal unclaimed property playbook that covers due diligence, filing deadlines, ownership of tasks, accounting treatment, document retention, and internal coordination is paramount to continued compliance going forward.
Unclaimed property compliance is not a one-time exercise. Rather, it is an ongoing governance issue, because even companies with modest balances can face significant exposure when weak processes, missing records, and multiyear noncompliance are allowed to build. Understanding that unclaimed property extends beyond uncashed checks is the first step in creating a process that will keep businesses compliant and avoid costly exposure down the road.
If you think your business has potential exposure or questions, contact Jeff Monsman or your GBQ team.