Why Should You Be Concerned About Unclaimed Property Compliance?

Tax Professionals' Resource
April 30, 2014 — 2,628 views  
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What is ‘unclaimed property’? Any organization during its day-to-day operation creates certain unclaimed financial liabilities, and these are collectively referred to as unclaimed property.

It is the duty of the organization to file an annual report and remit these unclaimed properties to the state. States might view unclaimed properties as a revenue source. During state audits these might lead to fines and penalties.

Reports suggest that only 15-35 percent of companies completely comply with their respective state laws. Also, among these ‘technically’ compliant businesses, it is believed, most under-report. The main reason for this is incorrect interpretation of what the law states. A typical penalty is 12 percent of the under-reported or not reported liability, plus interest.

From the business’ perspective tracking and notification of such unclaimed properties at the earliest is important. Maintaining thorough records is another important aspect.

More about unclaimed property state laws

All states have their own set of unclaimed property laws. This allows them to claim abandoned property, but only after a specific period of time has elapsed. Don’t be fooled by the name, unclaimed property doesn’t have to be a house or building; it could well be a safety deposit box, bank account or even stocks/bonds. It is, basically, any financial obligation that the business owes to another entity – customer, supplier, investor or even an employee.

Where most businesses go wrong is in assuming that such unclaimed properties become the company’s property after the dormancy period. But that is never the case. It always remains the property of the entity owed, and post the dormancy period the business is required to report and remit it to the state the entity owed was last known to live in.

The state’s role in this

Uncashed checks, unclaimed payroll, insurance payoffs, escrow balances, etc are all considered unclaimed properties. Over the past few years states have become more aggressive in pursuing unclaimed properties and placing businesses not in compliance under audit. National Association of Unclaimed Property Administrators (NAUPA) data reveals that all states together hold over $33 billion worth unclaimed property.

It also a known fact that only 30 percent of unclaimed property is returned to the rightful owner. The remaining 70 percent goes into the coffers of the state. For a cash-strapped state this can be godsend, which in turn can be used to fund public interest projects. So, businesses can expect unclaimed property laws to become even more stringent in the days to come.

Reporting unclaimed property generally falls within the job description of the tax department. Since, unclaimed property is not actually a tax; this job should ideally be entrusted with the internal auditors. Every business needs to ensure that all unclaimed property is mentioned in the company’s financial statement. Failing to do so could have extremely adverse effect on the company’s fortunes.

Tax Professionals' Resource