What happens when an employee quits and you can’t find her to send a final paycheck? What if a customer has a credit balance on an account and you can’t locate him to return it? Or what happens when you own a rental property and a vacated tenant doesn’t leave a forwarding address for you to return the rental deposit?
These are all examples of unclaimed property which can be a risky area for business owners who aren’t aware of their obligation to account for it. As states become increasingly aggressive to look for new sources of revenue, unclaimed property examinations are also on the rise which could result in big penalties.
What is Unclaimed Property?
Unclaimed property laws were created to protect owners who are vulnerable to the loss of their ‘property’ which can be intangible (uncashed paychecks, stocks) or tangible (the contents in a safe deposit box). You may have also heard similar terms like “escheat” or “abandoned property.” Typically, the ‘owner’ of the property has had it for at least a year.
Examples of unclaimed property can include abandoned property, annuities, insurance payments, security deposits, gift cards or certificates, payroll checks, uncashed dividends, balances on a customer account, refunds, rebates – basically items of value. And there is no standard statute of limitations.
It’s your job to find it. And account for it.
As a business owner, it’s your job to capture and account for unclaimed property. The challenging part is identifying these assets so you are in compliance with state regulations that vary from state to state. Also, the definition of a “dormancy period” (i.e., how long the property has been unclaimed) can be different.
If you do find unclaimed property, you are obligated to identify it (known as ‘due diligence’), notify or return the unclaimed property to the owner and, if you cannot locate the owner, you have to remit the unclaimed property item to the state (also known as “escheatment”).
As you expand your business across multiple states, unclaimed property can be viewed as a liability. Growing your business requires transparency in accounting for liabilities and assets. Compliance with state rules can be confusing and often the definition of unclaimed property isn’t clear.
If you are non-compliant with correctly reporting unclaimed property, the penalties can be painful.
Case in point: A recent audit of a business owner with multiple locations resulted in a $3 million initial assessment including interest and penalties. Depending on the specific state, you can expect to pay significant interest approaching 20% per year and hefty penalties. If you are audited, some states will go back a decade or more looking for unclaimed property. If a business cannot provide records, estimates will be used which can greatly increase the assessment amount.
If you are not compliant there is still hope. Most states offer voluntary disclosure agreements which offer amnesty from interest and penalties if you come forward and bring your business up to date. However, these only apply if you enter into one before you get audited.
If you have questions about unclaimed property, please contact your Mize CPAs professional.