Ten things to know about unclaimed property

Unless a company has been the subject of an unclaimed property audit, it is unlikely to be an area that gets much attention, and even the most seasoned tax professionals may not fully understand unclaimed property and how it may affect a business.

In the past few years unclaimed property audits have been on the increase as states and their third-party auditors look to increase compliance. For most companies that are unfamiliar with unclaimed property, these audits can be confusing and confounding. In addition, given the way the various state unclaimed property laws are structured, companies that do not have a strong unclaimed property compliance history may face the very real risk of a material potential exposure related to unreported unclaimed property.

For these reasons we have created a list of the key points that every company should know about unclaimed property:

1. Every company has unclaimed property.

All industries and companies generate items that can become unclaimed property if they remain unresolved for a period of time. The most common examples include uncashed payroll and accounts payable checks, accounts receivable credit balances, dividend payments and self-insured benefit plan claim payments. While companies used to write off these amounts to income once they became stale, they represent unclaimed property that may be due to a state. In an audit, prior transactions giving the appearance of unclaimed property may be scheduled as a potential liability.

2. Unclaimed property compliance is the law.

Companies have a statutory obligation to report and remit unclaimed property to all U.S. jurisdictions (50 states, the District of Columbia, U.S. Virgin Islands, Puerto Rico and Guam), and statutes of limitations are much longer than for taxes, and in some cases may not apply, especially for noncompliant companies.

3. Unclaimed property is not a tax.

Due to its reporting requirements and the risk of state audits, the unclaimed property function in most companies is in the tax department. However, because it is not a tax, there are no nexus requirements with unclaimed property. Therefore, companies may have unclaimed property reporting responsibilities and potential audit risk with every jurisdiction.

4. To which state is unclaimed property reportable?

Property is reportable to the state of last known address of the owner as shown on the company’s books and records. Whenever detailed owner address information cannot be located, it may create an unclaimed property liability reportable to the company’s state of domicile/incorporation – Delaware for many companies.

5. In some cases, unclaimed property auditors can estimate a company’s unclaimed property liabilities.

Under an audit, the company’s state of domicile may have the right to perform a reasonable estimation of liabilities for periods where records are missing or are incomplete using the information from available records. Given the lengthy periods covered under most unclaimed property audits, these estimations can exceed the total value of the actual unclaimed property identified.

6. Even small amounts of unclaimed property can lead to significant assessments.

Companies often define a tolerance threshold, below which accounts receivable credits are automatically written off, or aging criteria after which checks are voided (e.g., void after 90 days). Unfortunately, state unclaimed property laws generally do not offer exemptions for small balances. Even a $1.00 credit or less can be considered reportable unclaimed property. When these seemingly immaterial amounts are used as the basis for estimation for earlier periods, the potential exposure can easily reach millions of dollars.

7. Unclaimed property audits can cover a decade or more.

Unclaimed property audits far exceed the lookback period for conventional tax audits. Today, the look back period for audits in Delaware and a number of other jurisdictions is now 10 report years (plus five-year dormancy period). For many audits that would mean that the audit would cover a period of 15 years (dormancy plus 10 report years) from the date the audit notice was received.

8. No matter the size, most companies are at risk for an unclaimed property audit.

Historically only large companies were targeted for unclaimed property audits, as most states and third-party audit firms did not have the resources or expertise to go after any but the largest companies. However, now even mid-sized to smaller companies are routinely receiving audit notices from multiple jurisdictions, either through a single third-party audit firm auditing on behalf of multiple states, occasionally from the individual states, or even from multiple audit firms at the same time.

9. Companies can acquire unclaimed property liabilities through acquisitions.

Unless the right questions are asked during the due diligence process, an acquiring company can unintentionally inherit unclaimed property liabilities from a company it acquires in both stock and asset purchases. Often unclaimed property is overlooked through a company’s due diligence process, or the potential unclaimed property liabilities are underestimated when the review team finds only insignificant amounts of unclaimed property and are unfamiliar with how to correctly estimate a potential exposure. While even a significant unclaimed property liability may be deemed immaterial given the scope of a major acquisition, correctly calculating these liabilities can allow for purchase price offsets or other guarantees that reduce the risk that the acquiring company will be liable for material amounts years after the deal closes.

10. Even significant unclaimed property issues can be resolved.

Some jurisdictions, including Delaware, will allow companies with potential unclaimed property liabilities to enter into voluntary disclosure agreements, typically waiving interest and penalties. Subject to state review, these programs typically allow a company to calculate its own exposure and are usually less contentious, and costly, than defending an audit,

Need Help? Baker Tilly specialists provide updates and information on how unclaimed property impacts different industries and property types. To learn more about how we can work with you and your company to assist with unclaimed property audits, voluntary clean-up efforts and compliance, reach out to a member of our unclaimed property team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.