By: Jamie Baker, CPA
Key Takeaways:
- Unclaimed property includes money and assets left dormant in businesses for legally specified periods of time, which must eventually be transferred to state custody.
- Reasons for unclaimed property include uncashed refund checks, unused vendor credits, and contents of abandoned safe deposit boxes.
- Businesses must identify unclaimed property annually through financial records reviews, notify known owners, and transfer unreported items to the state.
- The state may audit a company’s unclaimed property process if not satisfied with self review results.
Failure to Report Can Result in a State Audit
Unclaimed property resides in the vaults and accounts of every state, transferred there after a legally specified period of time by businesses that have been unable to track down the rightful owners.
The question often arises: Why do businesses have property and money that belongs to their customers or vendors, and why do they turn it over to the state?
Businesses end up holding unclaimed funds and property through a variety of means. If a refund check is sent to a customer but never cashed or deposited, the funds remain in the business’s bank account. Or a medical practice may receive reimbursement from a health insurer after a patient has already paid for care; the practice may credit the patient’s account, but if the patient does not return for care, the credit amount is considered unclaimed.
Most unclaimed property is money, but states also hold personal property that often comes from safe deposit boxes that have lain dormant. If a bank customer dies without telling their family that a safe deposit box exists, the bank must, after a legally specified period of time, turn the contents over to the state. States have reported holding jewelry, old stock certificates and even wartime love letters and Purple Heart medals.
Every state has laws prescribing the length of time a business or financial institution must hold onto unclaimed property before “escheating” it to the state. “Escheat” is a legal term for reverting property to a state.
For instance, in Illinois a business must hold on to certain types of unclaimed property for three years before reporting it and turning it over to the state. During those three years, the business must attempt to contact the rightful owners to inform them how they can claim their property or funds. Once the property is turned over to the state, the business’s responsibility is ended. At that point, a rightful owner must file a claim with the state to recover their property or funds.
What is a Business’s Responsibility?
State laws vary, but generally businesses must identify where they have unclaimed property by going through transactions and accounts to determine if there are any outstanding items more than one year old. They must identify the amounts and the owners, and gather addresses as well as contact information, wherever possible.
The length of dormancy that triggers the requirement to report unclaimed property also varies by type of property. For instance, unclaimed wages typically must be reported after one year, but outstanding vendor checks must be reported after three to five years.
Since unclaimed property can take many forms – including wages, A/R credits and vendor credits – the process of tracking them typically involves a company’s finance and HR departments. The tax department would be in charge of compliance.
Once the unclaimed property is identified, the business is required to send due diligence letters to owners within a deadline set by the state. Companies must make a diligent effort to return the property to the rightful owner before escheating it to the state. If an owner does not respond within a specified period of time, the business must escheat the funds to the state with a report.
Given the varying deadlines involved, it is a best practice for businesses to perform an unclaimed property review of financial records at least once a year.
Unclaimed Property Rules in Illinois
Highlights of Illinois’ laws relating to unclaimed property reporting include:
- Dormancy period depends on the type of property subject to escheatment and can range from one year to 15 years.
- A business-to-business exemption is not available.
- Due Diligence notices are required to be sent for property with a value of at least $50. The notice period is not more than one year and not less than 60 days before filing the report.
- Unclaimed property with a value of less than $5 may be aggregated.
- Electronic filing is required in NAUPA (National Association of Unclaimed Property Administrators) format.
- If there is no unclaimed property to report, “negative reporting” is required.
- Reports are due:
- Before May 1 for the life insurance, utilities, manufacturing, trade, professional services, and communication industries.
- Before November 1 for governmental agencies, financial institutions and non-life insurance companies.
- Holders are required to retain records for 10 years after 1) the date the report was filed or 2) the last date a timely report was due, whichever is later.
- A Voluntary Disclosure Agreement (VDA) program is available for holders who have had compliance issues from prior periods which they would like to resolve.
- Gift cards are escheatable in some states, but not all. In Illinois, gift cards and loyalty cards are not considered unclaimed property; however, store-valued cards are and have a dormancy period of five years.
How to Report Unclaimed Property
Most states require a report describing the unclaimed property and the rightful owner’s name. Depending on the state, the report may be made to a state treasurer’s office, a state auditor’s office or a state controller’s office. Certain states require a two-step reporting process involving a notice report followed by an actual remittance report.
Reports and remittance are typically required to be submitted electronically but reports of 25 owners or fewer may still be filed on paper, depending on the state. Similarly, remittances of less than $25 per owner may be aggregated on a single submission, again depending on the state.
It is important to note that a company that has customers in different states must report and remit their unclaimed property to each customer’s state, in compliance with those states’ rules.
Consequences of Not Reporting
While the escheating of unclaimed property is not technically a tax, it has some of the earmarks of a tax. There are hard deadlines to meet, the unclaimed property must be escheated and failure to comply can result in penalties against a business.
Many states have stepped up enforcement of unclaimed property reporting in recent years. States employ a variety of tools to ensure compliance, including the opportunity for companies to perform a “self review” to ensure they are in compliance. While the term “self review” sounds non-threatening, bear in mind that these programs are conducted by the state or by the state with assistance from a third-party auditor.
If the state is not satisfied with the results of a self review, it may perform an audit of a company’s unclaimed property process. It is important to note that there is no statute of limitations on compliance with unclaimed property reporting requirements in most states, so these audits typically go back 10 years or more. So the importance of tracking unclaimed property in your financials at least once a year and reporting and remitting them to the state in a timely manner is self evident.
If you have questions about reporting unclaimed property, contact your KRD advisor.
