MEMBER NOTES
Avoid the Nightmares Of Unclaimed Property
By Kenneth Hofsommer , CPA , MST , CGMA , Partner Sax LLP
Many business owners are unaware of the hidden dangers and significance of potential penalties that they have lurking in the shadows . Looking to sell your business or acquire a business ? Continue reading because due diligence will ask or should ask about unclaimed property . State escheat laws are often unknown , misunderstood , or not discussed until an audit starts . As Thomas Jefferson stated , “ Ignorance of the law is no excuse in any country . If it were , the laws would lose their effect , because it can always be pretended .”
All 50 states have escheat laws ; often referred to as unclaimed property statutes . While the type of property subject to the laws may vary , the basics are similar . When a business , regardless of entity form , has property in its possession that belongs to another the law requires that they locate the owner and return the property . When the holder ( person or entity in possession of the property ) cannot locate the owner , the law requires that they remit ( escheat ) the property to the state .
The action of escheating the property is not required until the expiration of a statutorily defined period of time which may vary based on the type of property . This is often referred to as the dormancy period and varies state to state . Often , the dormancy period is one to five years . Once property becomes escheatable , the holder must complete the required filings and remit the property to the state . Some examples of property that may be subject to the laws of escheating are :
◾ Security or Utility deposits
◾ Inactive savings accounts
◾ Unredeemed gift cards
◾ Accounts receivable credit balances
◾ Uncashed dividend checks
◾ Uncashed payroll or commission checks
◾ Uncashed vendor , refund , or royalty checks
◾ Uncashed employee expense reimbursement checks
◾ Uncashed pension checks In addition to often being unaware of their obligations under the state escheat laws where
they operate and / or are organized , the business may have other filing obligations . Generally , the filing is with the state of residence of the owner of the property . If the holder has no records indicating the owner ’ s address , then reporting may revert to the state of the business entity ’ s domicile . The majority of states have no statutes of limitations regarding the business obligation to report unclaimed property . As businesses expand and have employees living in other states as well as vendors and customers out of state ; the need to file multiple unclaimed property reports becomes a requirement .
States conduct audits regarding unclaimed property , and penalties can be imposed for failure to comply with reporting requirements . Audits can take years to complete and record requests can be voluminous . It is common for states to hire third parties who often are paid a percentage of what they collect . Some third party auditors are switching to an hourly fee but this may prolong the audit time . Many states are actively pursuing enforcement to gain revenue . Therefore , compliance efforts of all businesses should be looked at , reviewed , and consequently improved .
Noncompliance can get expensive . Most states have the ability to assert penalties and interest that can be in excess of 50 percent of the value of the property involved . Since there can be no statute of limitations , a business should consider looking into a VDA “ Voluntary Disclosure Agreement ” which can limit the look-back period and get a company into compliance . The state may agree to waive penalties and interest as part of the VDA . Upon entering VDPs “ Voluntary Disclosure Programs ”, states may give them time to complete their due diligence procedures . States that do not offer formal VDPs often enter reasonable agreements with holders to bring them into compliance . This is , of course , if the holder contacts the state before the state contacts them . Should a holder be contacted , they may be able to lessen or avoid penalties and lookback period if they can show reasonable cause for not filing .
Record retention is key in the arena of escheat or unclaimed property . Many states have created laws that allow the use of estimates if records do not exist , thus upon audit a holder may be required to pay a liability that is estimated and will never be returned to any actual person .
Recently states are becoming more aggressive in their pursuit of unclaimed property . For instance , Delaware mailed out letters in 2021 to businesses inviting them to participate in the SOS “ Secretary of State ’ s Office ” VDA program .
Participation in the program was strongly encouraged and recipients were advised that if they do not enroll in the program they will be referred to the Delaware Department of Finance for an unclaimed property audit . Most businesses would be wise to avoid an audit . Since the average Delaware audit may span five years or more and third party audit firms may adjoin additional states into the examination ; resulting in a multi-state examination . While the typical Delaware VDA spans only two years .
California passed a bill which became effective January 1 , 2022 allowing the Franchise Tax Board “ FTB ” to share information with the State Controller ’ s Office “ SCO ”. The FTB will add the following questions to certain business entity tax returns : a ) Has the business previously filed an unclaimed property report ? b ) If yes , when was last report filed ? c ) How much was remitted ? It is important to note that California assesses interest at a rate of 12 percent simple interest on the value of the property from the date that it should have been reported .
In summary it is suggested that you meet with your CPA and Business attorney to develop a process to handle unclaimed property if you do not have one , before the state ( s ) come knocking at your door . When a business has questions on conflicting statutes or other questions regarding the laws , it should consult with their legal counsel . Businesses should consult with their auditors to see if there is a liability to record on their financial statements .
Due diligence and accurate accounting are vital to navigate the red tape of unclaimed property nightmares .
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January 2023 COMMERCE 15