Most businesses, whether they know it or not, have the potential to generate unclaimed property and the associated obligations that come with it.
Unclaimed property is a dormant or unclaimed financial item that your business owes to another business or individual. Examples include uncashed checks (including payroll), inactive savings accounts, life insurance proceeds, customer overpayments and even unused gift certificates. In short, these items must be given to the owner or turned over to the state. Unclaimed property can have some expensive consequences if not handled correctly, so it's important to understand how property can qualify as unclaimed, and what steps your business may need to take to deal with it.
How Does Property Become 'Unclaimed'?
There are a number of reasons property could become unclaimed. In some cases, the owner simply forgot about the property, passed away or left it behind. Unclaimed property can result from an employee termination, an owner changing their address without notification, or an owner moving from a location where a deposit was required.
Businesses holding these types of items may know they exist, but think the item is too small for them to take the time to deal with it. This may seem like a small oversight, but it could prove to be very expensive in the long run.
What Do You Do if Your Business Has Unclaimed Items?
There are three progressive steps that must be taken when unclaimed property is discovered:
- Identify any unclaimed property item (research)
- Notify, or return, the unclaimed property to the owner (due diligence)
- If the owner cannot be found, remit the unclaimed property item to the state (escheatment)
Since some of the above jargon may be confusing, here are a few definitions of common terms:
- Holder - The business in possession of an unclaimed property item.
- Dormancy Period - The amount of time an unclaimed property item can be held before it has to be reported to a state. (This varies by state.)
- Escheatment - The act of turning unclaimed property over to a state. Once you do this, they now have the responsibility for it.
- Due Diligence - The act of making one final attempt to locate the property owner.
Connecting identified unclaimed property with the rightful owner can be difficult and time consuming. Businesses need to make sure they are diligent in trying to locate the owner and documenting their efforts. Many businesses end up asking the following questions:
- What types of property do I have that may be subject to these rules?
- What is the value that should be reported?
- To what state should the property be reported to?
- How do I go about tracking down the property owner?
- How do I know whether or not an account is dormant?
- How long after the account is dormant do I have to report it?
There may be different answers to these questions depending on the state where an unclaimed property item is reported. Different states have different rules for reporting, and there are strict timelines to follow.
Importance of Compliance
States are increasing unclaimed property enforcement efforts, and there can be hefty consequences if your business is not in compliance. There's no statute of limitation on unclaimed property audits if you have failed to turn over all the unclaimed property, which means a state can come knocking at any time, and it can wind up being very costly. There's a case currently in litigation where a mere $147.30 of unclaimed property found by a state auditor has turned into an extrapolated assessment of nearly $2 million.
To learn more about unclaimed property, please contact Laura Robichaud at 602.264.8038 or firstname.lastname@example.org. Or contact your Eide Bailly representative.