Nearly twenty years ago, while consulting with several clients about state and local tax issues, I discovered a problematic theme—noncompliance in the unclaimed property (UP) area. Oftentimes, when I mentioned unclaimed property, client responses fell into two categories: the client denying that they had unclaimed property or the client admitting that they arbitrarily took certain items of unclaimed property into income over the years. Back then, few states actively enforced compliance in the unclaimed property area, leaving companies to overlook remitting unclaimed property to the state and claim property as they wished. Times have certainly changed.
Today’s increased state involvement in UP means that if your company is historically noncompliant, it may cost you significant penalties. Here are four important unclaimed property details to help your business better navigate the changed landscape, get the protection you need, and break an unintended history of noncompliance.
1. What is Unclaimed Property?
Unclaimed property (“UP”) is tangible or intangible property that has been abandoned or lost by its rightful owner for an extended period of time. Common forms of UP include: stocks, uncashed payroll and dividend checks, unredeemed money orders, uncashed traveler’s checks, insurance payments or refunds, unredeemed credit balances, uncashed vendor checks, savings or checking accounts and gift certificates (in certain states).
2. How do State-specific Escheat Laws Impact UP?
Each state has enacted its own escheat laws, under which items of UP are required to be turned over to the appropriate jurisdiction upon expiration of a statutorily defined time period. Pursuant to decisions of the United States Supreme Court, the state that has first priority over items of UP is the state in which the true owner resides or is located (last known address of the payee). If the last address of the true owner is unknown, then the UP should be remitted to the state in which the holding entity is organized. States holding unclaimed property hold it in trust for its rightful owners.
3. What about UP Audits?
Recently, many states have recognized UP as a potential untapped and politically correct source of revenue, since a very high percentage of it is not reclaimed by its true owners. Accordingly, they have become more aggressive in the UP audit area. Unlike an increase in taxes, the general public is not overly concerned with the states’ efforts to raise revenue by focusing their attention on the UP audit area.
Under many of the states’ statutes, there is no statute of limitations regarding UP. Thus, companies undergoing a UP audit can be asked to produce records from periods extending back 20 years or more. Oftentimes, companies are unable to produce records dating that far back. In such cases, state auditors often apply an error factor to the older open periods. This factor is based on the amount of UP they have identified with respect to the more recent periods for which records exist. States in which many entities are typically organized (e.g., Delaware) raise significant revenue from the application of these error factors to periods without records. This result is a consequence of the Supreme Court’s conclusion that UP for which the last known address of the payee cannot be identified escheats to the state of the holder’s organization.
4. What Can Companies Do to Protect Themselves?
If your company has a history of noncompliance in the UP area, it is imperative that you consider applying to the applicable states’ Voluntary Disclosure Programs. The state programs often offer generous terms as an incentive to bring companies into compliance. New York, for instance, waives not only penalties, but also interest to participants in its program.
If you have any questions concerning UP compliance, please contact Tom Corrie at (212) 842-7019 or via e-mail at email@example.com.