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Mary Schaeffer

Your Company’s Unclaimed Property Can Create Huge Liabilities

Seven common myths debunked.

September 6, 2007
by Mary Schaeffer

When it comes to unclaimed property, there’s a lot of misinformation making the rounds. This is unfortunate because companies that do not address the issue of unclaimed property can find themselves with a huge unexpected liability. This article looks at some common misconceptions that can cost your organization dearly.

Background

Unclaimed property (sometimes referred to as escheat) must be transferred to the appropriate state after it becomes dormant. Dormancy periods vary by state statutes for different categories of property and filing requirements. Under many circumstances, un-cashed checks, including payments made to suppliers and employees, are considered unclaimed property. Failing to report and remit these items often gets companies into trouble as does neglecting to find property holders for these items.

Common Myths

Here are seven of the most common misconceptions about unclaimed property, specifically un-cashed checks:

  1. MYTH: Un-cashed checks can be written off to miscellaneous income after six months or a year. This is just plain wrong. Any organization taking this approach is asking for trouble. Companies should follow up after six months and determine why the payee did not cash the check and where it is currently located.
  2. MYTH: Unclaimed property laws only pertain to banks, insurance companies and other financial institutions. While this may be where a good portion of the monies turned over to the states comes from, they are not the only parties subject to the escheat laws. Every company is.
  3. MYTH: The business to business (B2B) exclusion means no company must turn over unclaimed property. This is completely untrue. The B2B exclusion only covers a few cases. Because Delaware has rejected the B2B exemption, companies incorporated in Delaware will not be able to take advantage of any B2B exemptions that may be available in the "first priority" states where their business creditors reside.
  4. MYTH: Organizations can get in compliance at no cost by allowing companies that want their business to handle their accounts. There is no such thing as a free lunch. The companies that offer the free service typically work for the states and are paid by them on a contingency basis. Thus, they have no incentive to identify items that do not have to be remitted. Using such a service can cost you dearly.
  5. MYTH: If we have never reported, the states will not know we should be reporting and remitting. This is not true. States are continually looking for those not reporting, often relying on the third-party contingency auditors. They may find you.
  6. MYTH: The states don’t really need the money they collect as unclaimed property. This too, is incorrect. Many states use the funds to balance their budgets and in some states it is a large component of the state’s revenue. Some experts believe it is the third largest source of revenue for the state of Delaware.
  7. MYTH: The California Supreme Court ruling regarding unclaimed property means we won’t have to turn over funds to the state. As Corporate Finance Insider readers may know, the California Supreme Court has taken an active interest in this issue and recently ruled that companies have to report unclaimed property but not remit it to the state of California. The ruling is being closely watched by many of the other states. Do not take this as a signal that your unclaimed property responsibilities will diminish. Most experts are predicting it will mean more, rather than less, work for unclaimed property staff.

Closing Thoughts

Do not ignore your responsibilities when it comes to handling unclaimed property. If the states come in, they can go back for years looking for property you should have turned over. They can also fine you and charge you interest. There is no statute of limitations, so the fines and interest can really add up.

If you are not in compliance, it is far better to approach the state before the state finds you. Do not try and do it on your own. This is one area where hiring an expert is a really good idea. Attending a Webinar or seminar is a good way to find an expert and find out what you should be doing. It is also a good way for those currently reporting and remitting to find out if their procedures incorporate best practices and are covering all the bases.

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Mary S. Schaeffer is the author of a dozen business books including Controller and CFO’s Guide to Accounts Payable. She serves as the editorial director of Accounts Payable Now & Tomorrow, where she also plans Webinars and one-day seminars. She leads the organization’s accounts payable consulting endeavors, including services focusing on duplicate payments and master vendor files.