State unclaimed property audits are becoming more frequent. Is your company in compliance?

State unclaimed property audits are becoming more frequent as states look for ways to increase revenue. There is a growing chance that your company could become the subject of one. It’s important to get in front of an unclaimed property audit by understanding the organization’s unclaimed property obligations and taking steps to comply. Not doing so can result in penalties and an inability to take advantage of incentives for voluntarily coming into compliance.

Background

In the course of their operations, many businesses end up holding property that does not belong to them for property owners with whom they are no longer in contact. For instance, a company may hold funds belonging to a shareholder when a dividend check was returned because the shareholder’s address was no longer current.

States have long used unclaimed property laws to their advantage. They are significant sources of state revenue, and states are using audits to ensure compliance with their laws.

All 50 states, Puerto Rico, Washington, D.C., and the U.S. Virgin Islands have statutes requiring holders of unclaimed property to report and deliver it to the state. Two key premises of these laws are that states take custody but not ownership of unclaimed property and states may use property until it is claimed by the owner. For instance, in fiscal year 2021-2022, New York held $17.5 billion in unclaimed funds, collected $980 million in unclaimed property, returned $404 million to owners and transferred $560 million to the state’s general fund. In another example, Alabama held over $1 billion in unclaimed property in FY 2020 and returned over $36 million to owners or heirs.

States are turning to third parties to conduct audits of unclaimed property reporting and delivery compliance, often for contingent fees. Audits can last years and involve multiple states, and states may issue subpoenas and file audit enforcement actions. Further, audit look-back periods can be lengthy and cover multiple years.

Understanding Your Organization’s Unclaimed Property Obligations

Depending on the types of unclaimed property your company holds, it may need to file reports in multiple states because different rules apply to different types of property. Generally, unclaimed property can be broken down into three types:

• Tangible property, which is physical property such as real estate and goods.
• Intangible property, such as uncashed checks, insurance policy payouts, dormant bank accounts, and unused gift cards or vouchers.
• Money orders/traveler’s checks, where a banking or financial organization or a business association (the issuer) is directly liable. These instruments are governed by federal statute.

Once your organization determines the types of unclaimed property it holds, it can determine to which states it must report and deliver unclaimed property based on the priority rules established in the U.S. Supreme Court 1965 Texas v. New Jersey case and the 2023 Delaware v. Pennsylvania case. Additionally, Congress has provided rules for specific types of intangible property, particularly for money orders and traveler’s checks. Although state laws are similar, they are not the same. Your organization needs to be familiar with the laws of the states for which it is considered a holder of unclaimed property. Key aspects of those laws are dormancy periods; notice requirements; reporting requirements and deadlines, which can vary by state; and obligations for delivering unclaimed property.

Next, your organization will want to determine if it complies with these requirements. If not, it is prudent to determine what it will take to become compliant. It is then advisable to weigh the costs of compliance efforts against the potential fines and penalties it could incur for noncompliance. Many states provide incentives for voluntarily coming into compliance, including fine and penalty waivers, which should also be considered.

Ensuring Continued Ongoing Compliance

After your organization determines the status of its compliance and determines whether to voluntarily disclose, it is also prudent to do the following to ensure continued ongoing compliance:

• Identify areas of potential exposure.
• Adopt written policies and procedures for handling, reporting and delivering unclaimed property.
• Designate those who are responsible for ensuring compliance with unclaimed property laws.
• Evaluate document retention policies to make sure relevant documents are being retained for appropriate periods.

With state unclaimed property audits increasing, and more on the horizon, you should understand your company’s legal obligations and current best practices. By following the steps above, and by further consulting with accounting and legal professionals, your company can save time and money and protect itself from penalties for failure to comply with unclaimed property laws.

This article was originally published by Business Alabama on November 15, 2024 and is republished here with permission from the publication.