Illinois Enacts Unclaimed Property Overhaul With Retroactive Provisions

| 7/27/2017

On July 6, for the first time since 2015, the state of Illinois passed a budget with a series of bills, including Senate Bill 9 (SB 9). In addition to increasing the income tax rate and a number of other changes to Illinois income tax laws, SB 9 includes a significant revision to Illinois’ unclaimed property law.

While unclaimed property reporting and remittance are similar to traditional state and local taxes, unclaimed property generally is not considered to be a tax. The unclaimed property “taxpayer” is referred to as the “holder” and is required to report and/or remit the property to the state after a certain dormancy period. Different property types have varying dormancy periods. Holders also are under certain statutory obligations to identify the true owner of the property prior to remitting it to the state. Unclaimed property reports in Illinois are due annually before May 1 of each year for businesses, utilities, and life insurance companies, and they include property that became abandoned during the preceding calendar year.

Prior Illinois law included a number of business-friendly provisions, such as an expansive exemption for most types of potential unclaimed property transactions as long as property was generated in a transaction between businesses, known as a “business-to-business exemption.” Illinois also provided relatively generous dormancy periods so that businesses had ample opportunity to determine the true owner of unclaimed property and to remediate the situation. The revisions to the unclaimed property law, which generally are effective Jan. 1, 2018, eliminate these business-friendly provisions, and they do so on a retroactive basis.

Retroactive Application

According to SB 9, a holder’s report due on May 1, 2018, “must include all items of property that would have been presumed abandoned during the 5-year period preceding the effective date of this Act as if this Act had been in effect during that period.” This means that holders are required to apply the new unclaimed property law retroactively for a period of five years.

Elimination of the Business-to-Business Exemption

Under the prior law, businesses were not required to report transactions owed from one business association to another business association, such as old accounts payable checks and aged accounts receivable credits. The new law repeals the business-to-business exemption. Because of the retroactive nature of the law, the business-to-business exemption effectively is repealed for transactions entered into on or after Jan. 1, 2010. Holders that relied upon this exemption in the past to determine their unclaimed property reporting obligation will need to revisit their prior analyses.

Reduced Dormancy Periods

Illinois’ prior unclaimed property law required holders to report most property after a five-year dormancy period. This time period must lapse before property is considered abandoned and reportable to the state. SB 9 shortens the dormancy period from five years to three years for many property types. The change will require holders to file a “catch-up” report on May 1, 2018, to incorporate the change in dormancy periods. The catch-up report should include property that is dormant for three, four, and five years. Unclaimed wages will retain a one-year dormancy period.

Clarification of Record Retention Requirements

Holders must retain records for 10 years following the later of the date an unclaimed property report was filed or the last date a timely report was due to be filed. Holders ultimately are required to maintain records for 10 years (plus dormancy) to ensure all transaction periods are researchable in the event of an audit.

Additional Contingent-Fee-Based Audits

Many states currently conduct unclaimed property audits through the use of third-party audit firms, which often are paid contingent fees based on the amount of unclaimed property collected. Under prior Illinois law, the state was prohibited from contracting with a third-party auditor to examine holders within Illinois on a contingent-fee basis. SB 9 eliminates this barrier and allows the state administrator to contract with contingent-fee auditors.

Liabilities That Result From Estimation Are Considered a Penalty

Under prior law, Illinois was allowed to use estimation to conduct an unclaimed property examination when records were deemed insufficient. Similarly, SB 9 permits the reasonable use of estimation if adequate records are not available. The new law stipulates, however, that amounts paid based on estimation do not relieve a holder’s obligation to remit unclaimed property to another state, as estimation is “a penalty for failure to maintain the records required.”

Penalties for Noncompliance

Due to the changes under SB 9, on the report due by May 1, 2018, and thereafter, companies are required to report transactions between businesses, report certain properties that previously were exempt, and include three years of dormant property to comply with the reduced dormancy period. Illinois may assess interest of 1 percent per month; in addition, a maximum penalty of $5,000 may be imposed for late reporting.

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