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"What's UP?" - The Basics of Unclaimed Property

by DMA Staff | Apr 07, 2017
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The concept of unclaimed property is the reunification of lost or abandoned property to its true and rightful owner. When that reunification does not occur, businesses may be obligated to report and remit the outstanding property to the appropriate governmental agency.  In this article, I will define key unclaimed property terms, identify several property types, demonstrate why businesses should be concerned with unclaimed property, and overview the compliance process.

What is unclaimed property?

Unclaimed property is outstanding personal property with a fixed or certain value that a business or legal entity (the holder) has on its balance sheet, which is owed to or belongs to another individual, business or legal entity (the owner). The holder has physical possession of said property but not title; and the owner has legal title to, but is not in possession of, said property. Many jurisdictions have enacted laws prescribing the processes leading to the custodial transfer of these outstanding properties from the holder to the jurisdiction’s designated authority [after a period of time (dormancy period)] in which communication between the holder and owner has ceased. 

Unclaimed property laws can be traced back to an heir’s right to land ownership in feudal England. Unclaimed property laws are enacted in every state, commonwealth, district, and protectorate in the United States and three Canadian provinces (Quebec, British Columbia and Alberta). In 1954, the Uniform Law Commission drafted the first unclaimed property act which was revised in 1981 as the Uniform Unclaimed Property Act (UUPA), updated in 1995, and recently revised again in 2016 as the Revised Uniform Unclaimed Property Act (RUUPA). Presently, 15 states have adopted the 1995 version of UUPA with RUUPA slated for upcoming state review and vote.  In order for a holder to be in compliance, it is imperative to understand how these laws apply to their business models, what types of personal property may need to be reported, requirements for reporting, and record retention policies.

Laws surrounding the reporting and remittance of unclaimed property may vary based on what type of industry sector a holder is classified in. There are state-specific and unique property and property reporting requirements for banking, life insurance, securities, utilities, mineral interests, retail, and general businesses. Some examples of properties include, but are not limited to:

  • Savings, checking, and certificate of deposit account balances
  • Safe deposit box contents
  • Traveler’s checks
  • Money orders
  • Insurance policy distributions
  • Stocks and bonds
  • Uncashed dividends
  • Utility deposits
  • Mineral royalty payments
  • Gift cards/certificates
  • Rebates
  • Payroll checks
  • Accounts payable checks and credit memos
  • Customer overpayments or refunds

Why should a business be concerned with unclaimed property?

The first and foremost reason any business should be concerned with unclaimed property compliance is that it is the law. Willfully not adhering to unclaimed property laws can subject businesses and its officers to civil and in some cases criminal penalties. Many states subsidize their budgets with the monies and assets they receive as unclaimed property. Many states have stringent and punitive audit processes and are often times assisted by contracted and contingent fee audit firms. Unclaimed property audits can become a considerable time and resource drain on a holder. Many audits are conducted on an alternative extrapolation or estimation basis as the holder is unable to produce actual records because its internal record retention policies may be significantly different from the state’s statute of limitations. For example $147.30 in unreported unclaimed property extrapolated into a $1 million audit assessment (Temple-Inland v. Cook). While estimation techniques may be considered a valid approach by a state, many statisticians argue that the results are statistically invalid. However, if a holder appeals the decision, additional costs, time and resources may be consumed in litigation. 

Outside of unclaimed property law, other factors business management should consider are inappropriately writing off or taking to income outstanding properties may violate Generally Accepted Accounting Principles (GAAP). Keeping aged properties outstanding on a business’ books and records requires reconciling and maintenance which can be an arduous and resource consuming process. Outstanding and aged liabilities can impact a business’ viability ratios such as the quick ratio or acid test.  Regular review and adherence to unclaimed property laws demonstrates corporate social responsibility and good business practices in attempting to reunite the property with its customers, vendors, and employees.

Initiating and maintaining compliance.

As a business begins compliance, it should:

  • Thoroughly review its books and records for any stale properties 
    • Perform formal and documented due diligence attempting to notify the owners of their outstanding property which should include instructions and deadlines on how the owners can establish a right to their property; and be communicated in the state prescribed format
  • After due diligence efforts have been completed, any properties that remain outstanding may need to be reported and remitted to the state with the highest priority
    • Priority rules were established in the Supreme Court’s 1965 decision of Texas v. New Jersey
    • The first priority rule establishes the first state with rights to the unclaimed property as the state of the owner’s last known address
    • The second priority rule establishes the second state with rights to the unclaimed property as the holder’s state of incorporation or domicile
  • Properties should be reported to their appropriate jurisdiction in the required format and by the prescribed deadline 
    • Many states require electronic and online reporting with a trend towards online payment
    • A majority of states prefer or even require a zero due (negative) report if the holder is domiciled or registered to do business in said state; or if the holder had previously reported property to said state
    • Few states have de minimis (minimum) reporting exemptions for unclaimed property
    • Several states offer exemptions or exclusions for business-to-business activities, gift cards, mailing and administrative allowance deductions; and aggregate property reporting options
      • While these exemptions, exclusions, and deductions are allowable and benefit the holder, it would be prudent for the holder, if not an unclaimed property expert, to seek advice on how to properly navigate these processes for maximum benefit with minimal audit exposure
  • Once properties have been reported to the appropriate state agencies, it is imperative that the holder maintain records, of not only the unclaimed property reports and due diligence attempts, but also essential accounting records such as bank reconciliations, A/P, A/R and payroll sub-ledgers for appropriate audit defense
    • Most states recommend a record retention period of at least 10 years plus the properties dormancy period. This could be a minimum 11 to 25 years depending on property types and many unclaimed property professionals recommend permanent record retention

Many states offer voluntary compliance programs. These programs assist holders in becoming compliant with unclaimed property laws. Depending on the dollar and physical amount of the outstanding properties, this could be as simple as informally calling the jurisdiction to seek its advice on how to proceed; and as complex as more formal approaches such voluntary disclosure agreements. These approaches with initial compliance efforts demonstrate a willingness to adhere to the state’s laws and often times result in penalty and interest reductions of the outstanding liabilities.

It’s important to remember that unclaimed property is not a tax, but a regulatory compliance function. Because the characteristics of reporting, record retention, and auditing are similar to other business taxes, unclaimed property is typically housed within a business’ tax department. However, a business with a strong internal process will have an established policy which includes cohorts from various business areas such as general accounting, human resources, and legal. Unclaimed property may impact all areas of the business and on-going compliance is key for a successful process and mitigated audit assessment risk!

Please do not hesitate to contact your local DMA office should you have specific questions or requests.