Who Claims the Unclaimed Property?
Some states aggressively pursue unclaimed property. Are you in compliance?
January 29, 2009
Under most state laws, companies are required to report and remit to the state any property, left unclaimed, after attempts to contact the owners.
Unclaimed property generally includes payroll checks, customer deposits or overpayments, credit balances, inactive bank accounts, safe deposit boxes, stocks and dividends, life insurance policies, utility deposits, certificates of deposit and gift certificates. If these items are unclaimed for a period of time ranging from one to five years, states require an annual reporting to remit these funds to the state treasury.
In many cases, the first step in the process of remitting unclaimed property is the most difficult — determining which state has the right to claim the property. Generally, the last known state of the owner’s residence may lay claim to the property. If the owner’s residence is unknown, the property should be remitted to the state of domicile of the issuer. It should be noted that in the case of a business entity, domicile is considered to be the state of incorporation, which may not necessarily be the location of the business operations.
This general process may vary from state to state in the treatment of gift cards. To date, 32 states generally exempt gift cards from being treated as unclaimed property. If the state with priority as the owner’s residence does not claim the gift card, it is possible that the state of the business’ incorporation may step in as a substitute to protect the owner’s assets. In the instance where neither of those states claims the property, the state in which the purchase took place could assert a claim.
Gift cards present unique problems in that the ultimate gift recipient may not be known. Some vendors, like Starbucks, are offering incentives such as discounted drinks when gift cards are registered online. The registration process safeguards against lost or stolen cards but complicates the sourcing process when the card remains unused for the requisite period of time. This could introduce a fourth state into the mix, when trying to sort out who has a claim on the property.
An additional complication is presented with gift cards when the holder offers the recipient the option to add money to the balance of the card, as originally issued. Does this reloading of the card now restart the issue date, for purposes of determining the amount of time elapsed to constitute dormant, unclaimed property? Tracking this information becomes even more cumbersome.
The reporting process for remitting unclaimed property varies greatly among the states. Some states require extensive due diligence prior to remittance, some states require annual reports, regardless of activity, and reporting periods are far from uniform. A corporation operating in multiple states could be faced with a compliance nightmare.
Penalty for Noncompliance
The penalty for noncompliance can be quite steep. Delaware, one of the most aggressive states for unclaimed property, assesses a penalty for failure to timely file reports of up to 50 percent, a penalty for failure to timely remit property of up to 25 percent, as well as a possible fraud penalty of up to 75 percent! With some states conducting unclaimed property audits through third-parties or even through the state’s sales-tax auditors, the importance of detailed recordkeeping is apparent. Some states offer finders’ fees or contingency fees for the identification of unclaimed property subject to state claim.
An unclaimed property enforcement program can result in an audit of 20 years’ worth of records — bank statements, accounts payable credit balances, outstanding vendor checks and payroll checks. If records are insufficient, a deemed assessment could be the unfortunate result. If noncompliance is determined prior to contact by a state, a voluntary disclosure agreement with the state could limit the exposure to five years, or less, rather than the 20-year period reviewed during an audit.
The complicated area of unclaimed property should be properly investigated to ensure compliance with all applicable state laws. The cost of noncompliance can be extremely expensive.
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Mary F. Bernard, CPA, MST is a Tax Principal and Director of State and Local TaxServices at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.