Articles

Businesses Have Legal Obligations to Identify, Report Unclaimed Property by Karen A. Lake, CPA


Posted on May 12, 2022 by Karen Lake

All 50 states and the District of Columbia have laws regulating the disposition of unclaimed property, whose title must transfer to the state after a set period through the legal process of escheatment. Over the past year, however, several states have changed their laws, stepped-up enforcement efforts and initiated litigation to help ensure businesses and other holders of unclaimed assets report and remit them to the appropriate state. In fact, the issue of which state has a right to priority ownership of abandoned assets is now before the U.S. Supreme Court in the matter of Delaware vs. Pennsylvania.

What is Unclaimed Property?

Unclaimed property includes tangible and intangible assets and financial accounts that have been held by someone other than the rightful owner for a period of one year or more. Examples include abandoned or inactive bank and brokerage accounts, forgotten checks, money orders, safety deposit boxes, security deposits, insurance policies, gift cards and misplaced collectibles. Unclaimed property can also be in the form of wages or commissions a company paid to a former employee who passed away or changed addresses, or they may be payments a business made to vendors that subsequently ceased operations.

State laws dictate the period over which property in the possession of persons and entities other than the rightful owners becomes unclaimed. This is referred to as the dormancy period, which, for most states, is between three to five years.

In Florida, intangible property that a rightful owner does not claim for more than five years after it becomes payable or distributable is presumed to be unclaimed (although the time period may be more or less based on the actual type of property held.) At that point, custody of the property should be transferred to the Florida Department of Financial Services, which will attempt to notify rightful owners through a variety of measures, including a website residents can use to search for unclaimed property to which they may be entitled. Until the rightful owner comes forward, the state holds those assets in trust and deposits them into its school fund to help support public education. Other states have similar reporting rules and compliance methods to help unite unclaimed property to their rightful owners.

For example, California’s Franchise Board now requires businesses in the state to report on their annual income/franchise tax returns whether they previously filed an unclaimed property report, the date of that filing and the amount remitted on the taxpayer’s last report.

What Must Businesses Do with Unclaimed Property?

Holders of unclaimed property have legal responsibilities to regularly 1) identify abandoned or dormant property in its records, 2) attempt to locate the rightful owners 3) annually report such property to the appropriate state(s) and 4) turn it over to those jurisdictions at the end of the dormancy period as specified by state statutes. Because reporting may be required in multiple states, holders must learn the laws in each jurisdiction and prepare to comply which each of their unique and potentially conflicting regulations.

The amount of time property goes unclaimed before escheatment can last anywhere from one to five years, depending on the jurisdiction and other factors, such as the rightful owner’s state of residency. Over time, however, states have expanded the types of property covered by this legislation, reduced the dormancy period and increased audit activities to identify abuses and impose penalties.

While some businesses may be unaware that they hold unclaimed property, or they assume the value is so insignificant it is not worth the time or money to track down the rightful owner or remit it to the state, failing to report can prove extremely costly. Penalties for non-compliance and interest accrual on unreported amounts can be significant.

If the state conducts an audit and reveals the underreporting of unclaimed property, they may go back as far as 30 years to uncover other examples of noncompliance. Alternatively, several states have voluntary disclosure agreement (VDA) programs that enable reticent holders of unclaimed property to correct their failure to report before the state initiates a formal audit. For example, Delaware law no longer allows unclaimed property audits to begin without the state first giving companies an opportunity to enter its voluntary disclosure program. As a result, the secretary of state has been issuing several rounds of “invitations” to businesses, offering them a 60-day grace period to enter a VDA and avoid a more intrusive audit.

In the current regulatory environment, it is critical businesses be proactive identifying unclaimed property on their books timely reporting and remitting that property to the appropriate jurisdictions. Your professional advisors and CPA can help you accomplish these tasks and help you identify whether a voluntary disclosure program exists to avoid the time and additional costs that can come with noncompliance.

About the Author: Karen A. Lake, CPA, is a state and local tax (SALT) specialist and a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.