Unclaimed Property: What Tax Professionals Need to Know
As someone who is responsible for handling sales tax, you may assume that unclaimed property doesn’t fall under your purview. This is a dangerous assumption, considering that your company may be expecting you to stay on top of unclaimed property reporting and compliance.
Unfortunately, you may not have received training on unclaimed property and don’t know where to start. These are a few of the basics that you should understand about unclaimed property – from what exactly it is, to potential risk areas and compliance issues.
Unclaimed property – what is It?
Unclaimed property is funds and/or property that are in the possession of a holder that are owned by or owed to someone else. Other names for unclaimed property are “escheat” or “abandoned property.”
Unclaimed property is not a tax. Since it is not a tax, there is no statute of limitations for unclaimed property unless a state enacts special legislation. What this means is that an unclaimed property audit could potentially go back 10-20 years. And the amount that might need to be remitted to the state isn’t a percentage of the unclaimed amount – it is 100% of the amount unclaimed!
What are risky items for unclaimed property?
So where should you be looking for potentially risky unclaimed property items in your company? You’ll want to review these areas to ensure that you are capturing all unclaimed property that is created by your business. This list is by no means comprehensive.
- Outstanding/unsupported transactions – this can include accounts payable, accounts receivable, payroll checks, uncashed dividends, voided transactions and many more.
- Customer credit balances and deposits – e.g. customer overpayments, contents of safe deposit boxes, refunds, rebates, etc.
- Gift cards and gift certificates
What makes compliance for unclaimed property tricky?
Now that you’re aware of what unclaimed property is and some high-risk areas where unclaimed property liabilities can arise, let’s discuss a few of the issues that make staying compliant so tricky.
Unclaimed property reporting requirements vary by state, and any holder of abandoned property is required to report it to the state. Over- or under-reporting can lead to audits. Each industry has typical unclaimed property types. Not reporting types of property that are typical to your industry can generate a red flag to state administrators.
Dormancy periods are another issue you need to be aware of. This is the amount of time that must elapse before property is considered “unclaimed” and must be reported to the state. Dormancy periods vary by state and property type and are generally 1-7 years. Note that dormancy periods can also change annually.
Due diligence processes are defined by the state and are required. What this means is as a holder of potentially unclaimed property, you are required to try to find the owner before you file and remit it to the state. Failure to follow these due diligence requirements can result in penalties.
Filing due dates – the dates in which unclaimed property reports are due to the state on an annual basis – also vary by state. Each state has its own specific filing due date for the type of unclaimed property. November and May are frequently used by states for reporting unclaimed property. You should check on a state-by-state basis for specific filing due dates.
What causes the risk of liability?
There are a number of issues that cause or trigger the risk of unclaimed property liability. Very frequently, unclaimed property risk is not taken seriously, so companies don’t bother to comply. There is often a lack of recognition – or an outright refusal to recognize – that a problem might exist.
Ignoring state inquiries can be another major red flag. The assumption that unclaimed property is a “tax” and therefore has statute of limitations or nexus protection can also lead to risk. In many companies, it is not even clear which department is responsible for unclaimed property reporting and compliance, which could mean that no one is taking care of it!