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Most state legislators are in recess this month, so we thought we’d spend some time talking about a topic that often gets overlooked – unclaimed property reporting. What is it, why do you care, and what happens if you ignore it? Let’s dive in . . .
What is unclaimed property?
Have you ever had an employee who quit and just never came back for their final paycheck? Or a vendor whose uncashed payment keeps showing up on your bank reconciliation month after month? That’s unclaimed property – money that still resides in your bank account that doesn’t really belong to you. It can also include merchandise credits, gift cards, and even insurance policies.
Ok, I have those items hanging around on my bank reconciliations. How do I get rid of them?
The good news is that you can report and remit those items to your state’s treasury department and let them worry about it. The bad news is that you’re required to do so – each year. If you just don’t get around to it, missed reports can cost you substantial time and money.
When is property considered “unclaimed”?
Each kind of property has a period of inactivity, called a “dormancy period.” Each state establishes the dormancy period for different categories of property, ranging from 6 months to 15 years. For instance, in most states, the dormancy period for wages is one year.
How do I report unclaimed property?
You’re generally required to submit an unclaimed property report each year. Many states have a November 1 deadline to report unclaimed property held by June 30 of the current year. Some states require filing a report even if you’re not currently holding any unclaimed property. Reporting for most states is done electronically and includes delivering the unclaimed property along with the report.
Some states have a minimum threshold below which reporting is not required.
Is there anything else my company is required to do with unclaimed property?
Yes. The holder of unclaimed property is responsible for exercising due diligence in finding the owner(s) of that property, and for keeping records of those attempts. Typically, this means you need to send written notice to the owner of the property at their last known address within a certain number of days prior to filing your annual report.
What happens if I miss submitting an unclaimed property report?
If you’re required to file a report but fail to do so, your state may impose a penalty for each day your report is late. You read that right – a daily penalty accrual.
How long do I need to maintain unclaimed property records?
Again, it depends on your state’s rules, but some states require that unclaimed property records be maintained for 10 years after the unclaimed property report was due. During this time, your state has the authority to audit your records and/or hire third parties to conduct audits on their behalf. So good recordkeeping and timely reporting are critical.
What would an audit look like?
Your organization would be contacted if the taxing authority believes you may hold unclaimed property. They would conduct interviews, request documents, and review prior reporting. The auditor would then compile their findings and present them along with any applicable assessments. Your organization could then either agree with the findings or protest the assessments based on the process established by your state.
Is there anything that makes our organization more likely to be a target for an audit?
States look closely at companies that don’t file an annual unclaimed property report or file with minimal information.
What if we know we’re out of compliance with unclaimed property reporting – is there any relief for our organization?
Maybe. States occasionally offer voluntary disclosure and amnesty programs (VDA) that would allow organizations to get back into compliance. These programs are usually available to organizations that have not previously reported unclaimed property or participated in an amnesty program and require that you agree to remain current with your reporting requirements in the future. If you’re currently under audit, your organization is generally not eligible for a VDA.
In exchange for voluntarily coming forward and reporting your unclaimed property, applicable penalties and interest may be reduced or even waived. Sometimes these programs also decrease the lookback period over which you would need to report, so you might not have to go back indefinitely.
If your state offers a voluntary disclosure and amnesty program, there’s often a short timeframe in which to gather records and file reports.
And be aware that if you receive an “invitation” to participate in a VDA, it’s wise to pay attention, as it could be the warning shot that your organization is being considered for an audit. So it’s worth your while to gather accurate records and catch up your filings in order to avoid an audit and future penalties.
What are my state’s rules for unclaimed property?
You’ve probably noticed throughout this article that we’ve used words like “typically” and “generally”. That’s because every state has different rules and requirements regarding unclaimed property reporting and compliance. For an overview of different state requirements, you can visit the website of the National Association of Unclaimed Property Administrators at https://unclaimed.org/state-reporting/.
This all sounds very complicated and a bit scary. Help!
Here at Mize CPAs, we’re happy to assist you with your unclaimed property reporting and questions.
If you know you’re out of compliance, it’s better to come clean and fix the problem rather than hope for a future VDA. Contact Brandon Mills, CPA, our State and Local Tax Manager, at bmills@mizecpas.com.
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