Organizations can follow these steps to avoid financial and reputational risks involved with noncompliance.
Whether they’ve heard about it in a news headline, from an audit notice, or after receiving a letter from one of the many states that have made it a priority in recent months, most organizations by now are familiar with unclaimed property. An unresolved obligation or liability on an organization’s books for which contact with the owner has been lost, unclaimed property continues to be an ongoing risk area for businesses. Yet many organizations still are not compliant with unclaimed property laws.
All states require businesses to report unclaimed property. Noncompliance with statutory unclaimed property reporting requirements can expose organizations to financial risks (penalties and interest), reputational risks, and the potential for costly, multistate audits. Meeting compliance requirements, therefore, is critical. Following are three steps for organizations to follow to come into compliance with unclaimed property laws.
Step 1: Collect and analyze data
An organization can’t report what it doesn’t know, so a key first step toward unclaimed property compliance is understanding what types of unclaimed property the organization holds. Finance teams should review the organization’s balance sheet and business lines to identify liabilities the organization could be holding that it has not been able to return to the owner. Common types of unclaimed property include:
- Accounts payable
- Payroll disbursements
- Refunds
- Accounts receivable credit balances
- Unposted cash
- Gift cards
- Financial assets
- Securities and equity
- Tangible property (i.e., safe deposit box contents)
- Layaway accounts
In addition to identifying the types of unclaimed property, an organization must determine its reporting requirements. Unclaimed property rules are determined by the state in which the payee is located, not the state in which the business (holder) is located. A large health system, for example, that serves patients in multiple states would therefore be required to comply with the unclaimed property laws of several states. An organization conducting business with vendors based in numerous states also would need to report unclaimed property to those respective states.
States lack uniformity when it comes to unclaimed property reporting rules (for example, different dormancy periods and reporting deadlines). It’s essential, therefore, that an organization identify the states to which it has reporting responsibilities and the rules governing unclaimed property in those states. Many state websites include information about unclaimed property reporting requirements. An organization also can purchase external software or work with third-party vendors to help identify requirements.
In addition to researching information about initial compliance and reporting rules, an organization, especially one with gaps in its unclaimed property reporting history, should determine state-specific options for addressing a reporting backlog. For example, most states offer a voluntary disclosure option. Voluntary disclosure programs give organizations the opportunity to step forward and declare their intention to come into compliance, enter a formal process with a state to identify unclaimed properties, perform due diligence on those properties, and, finally, file and remit the properties to the state. Just as reporting rules vary, each state has different voluntary disclosure policies. Many, however, will waive related penalties and interest for organizations participating in these programs.
Step 2: Perform due diligence and collect responses
Once an organization has determined reporting requirements and identified any available voluntary disclosure programs, its next step should be performing due diligence. As with other aspects of unclaimed property, requirements for due diligence also vary by state, so organizations will need to be aware of the rules for each state in which they do business. All states, for example, require companies to send a mailing to property owners prior to the unclaimed dollars being escheated to the state as unclaimed property. The language and formatting requirements for those letters and the timing for when notifications need to be sent to payees alerting them to unclaimed property to which they are entitled also vary according to state.
After responses to the mailing are collected, the organization will need to 1) issue refund checks to those owners who provided a positive response and 2) prepare state filings for the remaining unresolved liabilities.
Step 3: Submit unclaimed property filings and issue remittances
Once it completes the preceding steps, an organization will need to prepare its unclaimed property reports and send payments to states where it is required to file reports (not just the business’s state of incorporation). An organization should plan to file unclaimed property reports annually, regardless of whether it has unclaimed property to report. Having consistent due diligence and filing processes in place goes a long way toward achieving compliance and lowering the organization’s audit risk.
