Unclaimed property (UP), also referred to as “abandoned” property or “escheat,” was once a widely neglected area of corporate compliance, mostly due to a lack state enforcement and minimal educational opportunities on the subject provided under general business and accounting courses. Today, companies holding UP (holders) are well aware of UP, as the result of compelling lawsuits between states and holders, and the proliferation of costly state UP audits.
However, as UP is not a traditional area of tax, accounting or corporate financial reporting, many individuals encountering UP for the first time simply don’t know what they don’t know. Regardless of their specific industries, companies need to understand the basics of UP to understand their annual UP reporting responsibilities and to help identify areas within UP compliance that may need further research, development and strengthening to ensure they are in compliance with the UP laws of the 54 domestic jurisdictions (50 U.S. states, Guam, Puerto Rico, the U.S. Virgin Islands and Washington D.C.).
Laws and administrative rules
Case law: Three U.S. Supreme Court cases — Texas v. New Jersey in 1965, upheld by Pennsylvania v. New York in 1972, and Delaware v. New York in 1993 — specify which state gets the custodial right to collect UP funds under the First and Second Priority Rules. Under the First Priority Rule, property is reported to the state of payee’s last known address as shown on the holder’s books and records. If the owner’s address is unknown, the Second Priority Rule provides that the state of incorporation of the holder has the right to take possession of the funds. A narrow Third Priority also exists specific to money orders, travel checks and similar instruments under the Federal Disposition Act, which grants custody of the funds to the state where the transaction giving rise to the property occurred.
Jurisdictional statutes: In an effort to create uniformity among state statutes, the Uniform Law Commission has drafted various model UP acts over the years. As most states have adopted one of the model UP acts, state statutes are somewhat standardized. However, a lot of variation among jurisdictions remains dependent on which version of the model UP act a state adopts and how each state’s legislature posts revisions to the original language. There have been five model UP acts since 1954, the most recent being the 2016 Revised Uniform Unclaimed Property Act (RUUPA). Several states adopted RUUPA provisions soon after enactment, and more states are adopting RUUPA provisions into their statutes each year.
Administrative guidelines: In addition to case law and statutes, states also draft specific administrative guidelines, which can generally be found on the individual state websites. The guidelines are often drafted in the form of a reporting booklet, but some states opt to simply post directions on their webpages. Many states revise their guidelines frequently, so annual review is recommended to ensure all state specific reporting requirements are met.
Reportable property
The term property as it relates to unclaimed property is typically an intangible liability that has not been resolved with the owner or payee. The key to understanding potential reportable property is simply to know your organization’s aged liabilities, virtually all of them. Per state statutes, once a set time period has passed without the owner expressing an interest in the property (the dormancy period), the state has jurisdiction over the property, and the holder must deliver the liability to the state pursuant to the priority rules summarized above. Specific dormancy periods differ by state and transaction type. The most common dormancy periods are one year for payroll liabilities and three years or five years for other transaction types.
Common property liability types: Includes but not limited to aged accounts receivable net credit balances, stale dated accounts payable and payroll disbursements, and dormant saving and checking accounts.
Industry specific liability types: Industry specific properties can include, but are not limited to, mineral interests and royalty payments, equity positions, bank account balances, safe deposit box contents, life insurance policy proceeds, money orders and utility deposits. It is important that an organization reviews all of its transaction types to determine if they may have UP exposure related to industry specific aged liabilities.
Hidden liability types: As the term implies, hidden liabilities are not readily identifiable. They may include unreported liabilities acquired from a merger, liabilities from third-party administered plans for which the third party does not report UP on a holder’s behalf, or even marketing efforts that result in entitlements that have not been satisfied. Finding hidden liabilities should be part of an organization’s standard internal UP review process as they may come under scrutiny under a state UP audit or if the organization enters into a Voluntary Disclosure Agreement (VDA) with a state.
Tangible property types: Most commonly this includes, but is not limited to, abandoned safe deposit boxes.
The National Association of Unclaimed Property Administrators (NAUPA) is the leading authority on unclaimed property administration representing the National Association of State Treasurers. It provides a comprehensive list of NAUPA property type codes in their NAUPA file format resource, which can be found on the NAUPA website.
Reporting responsibilities
Review records: Businesses and other organizations are required to review their records to determine if they have aged liabilities that should be reported. Payroll, due to its one-year dormancy, should be reviewed at least twice a year. Other property types should be reviewed based on state specific dormancy periods. Prior to reporting property to any jurisdiction, adequate remediation efforts should be implemented to resolve the item with the presumed owner or payee.
Perform due diligence: Due diligence requires that holders mail letters to the last known address of the owner of the property to reunite the owner with their property before reporting it to the state as UP. Virtually all jurisdictions require a statutory due diligence notification effort to be completed generally no more than 120 days or no less than 30 days before the item is due to be reported, and often letters must include specific language and details regarding the dormant property. Recently, some states are beginning to allow for emailed due diligence notifications as part of the due diligence process.
Report and remit: Three primary “reporting periods” exist in an UP-report year, commonly referred to as spring, summer and fall reporting periods. The majority of jurisdictions have fall reporting due dates that are either before or on October 31 or November 1. Spring reporting jurisdictions due dates fall between March 1 and May 31. Only three states have summer reporting dates falling on either June 15 or July 1. While most states currently provide upload portals or allow emails for the submission of electronic reports, some states still require signed forms which must be mailed to the state. In terms of remittance options, most states offer ACH credit and debit payment options and, while checks are still an option in some circumstances, states are trending towards disallowance of check remittances. States also differ in their requirements for negative, or zero, reporting, with some states requiring negative reports and others treating them as optional. All reporting software applications provide information related state specific reporting details and, if reporting software is not being used, the information is readily available on individual state websites.
State enforcement
Monitoring and comparing: There has been a notable increase in state’s enforcement of UP laws over the last decade as most state administrators have turned to third-party UP audit firms (TPAF) to outsource specific functions of their unclaimed property compliance. The expanded and sophisticated technology resources TPAFs brings to the process makes it easier for states to track and monitor compliance, including timely filings, reporting of past due property, identifying reporting errors and identifying non-filing organizations by comparing UP reports to state tax filings. Compliance violations translate into penalty and interest (P&I) revenue for states as most jurisdictions can levy some level of interest for late reporting as well as a penalty assessment. A few examples of penalty criteria and interest assessed against late reporting include the following:
California: 2% penalty of amount due for failure to pay by EFT when required,12% interest
Nevada: $200/day penalty up to a maximum of $5,000, 18% interest for past due property
Texas: 5% penalty on amount due if remitted 31 days after due date, 10% interest
Washington: 2% penalty of amount due for failure to pay by EFT when required,12% interest
The good news is many states will abate penalty assessments if the organization requests it in writing, does not have a history of filing late property, and has shown good faith by voluntarily reporting the past due property.
Audits and other state reviews
State enforcement also emerges in the form of state audits, voluntary reporting programs, such as Delaware’s VDAs or California’s relatively new Voluntary Compliance Program (VCP), and compliance reviews. Audits have been the primary means of enforcement, but voluntary programs are gaining traction with organizations as they offer penalty and interest abatement incentives. Further, compliance reviews are less common and generally have a very limited scope and duration.
Audits are especially onerous for organizations whose state of incorporation participates in the audit due to the Second Priority Rule summarized in Section 1 above, which provides that the state of incorporation receives any property for which the owner or owner’s location is unknown. For some states, including Delaware, this also includes liabilities owed to foreign individuals or organizations. Given that most state’s lookback period under an audit is 15 years, and most organizations generally only maintain seven or so years of record retention, this results in an eight or more year gap of record availability. Generally, liabilities identified for periods when records are available will be used to extrapolate exposure for each of the eight “no records” years to determine a company’s estimated exposure. While extrapolations may still be required under voluntary programs, voluntary programs may offer some flexibility regarding scope. Audit durations can run from two to seven years or longer, depending on the complexity and resource availability.
Voluntary reviews are similar to audits, but offer P&I abatement, have a presumably shorter timeline for completion and provide companies with more control over the process. Nevertheless, voluntary reviews still require comprehensive self-auditing by standards developed from state audit practices. If a state is not satisfied with the representations made during a voluntary review, it can decline the organization’s further participation in the program and schedule the company for an audit.
Compliance reviews have a very limited scope and duration but can become more problematic if holders do not respond timely. The most recent example is Delaware’s Verified Report Notices (VR Notices). With the release of Senate Bill 281 in June 2022, the State Escheator was granted the authority to issue a compliance review for any reason and, if the state determines the holder did not meet the verified report requirements, it can initiate an audit without inviting the holder to participate in the states VDA program. Companies have 30 days from the date of the notice to confirm receipt and agree to complete the document submissions within 180 days. If holders do not respond, timely deliver documents or do not pay a determined deficiency, an audit can be triggered. Alternatively, if holders determine that they are unable to comply with the demands, they have the option of electing to participate in the state’s VDA program.
If companies find themselves in any of the above scenarios and do not have adequate internal experience and resources, it may be prudent to bring in subject matter experts. See “Service Providers” section below.
More in-depth information regarding audits, VDA’s, compliance reviews and applicable defense strategies can be found here.
Resources
State websites: State websites provide specific administrative guidelines for meeting state reporting requirements and provide a secure, efficient and convenient way for electronically submitting reports and related remittances. However, it can be a daunting task for most holders to monitor and track the vast amount of state specific information and annual changes for the 54 U.S. reporting jurisdictions.
Reporting software applications: Similar to tax software, UP reporting applications provide exceptional functionality for reporting unclaimed property. These applications are designed for annual compliance reporting and greatly facilitate the reporting process. They can determine dormancy periods for different property types, prepare due diligence letters, apply some allowable exemptions and prepare state reports in the required NAUPA standard file format. The downside is the learning curve to effectively use the application, cost, training and annual maintenance fees. A list of available reporting applications is provided on the Unclaimed Property Professional Organization’s (UPPO) website, under the Service Provider and Vendor Directory link.
Service providers: Many companies take advantage of the cost savings from outsourcing accounting functions, such as tax reporting to competent third-party service providers, as an alternative to creating a robust in-house function. Companies that outsource their UP function typically do so because of internal resource limitations, lack of subject matter expertise, training downtime and costs, and the cost savings associated with not having to purchase an annual license agreement for a reporting application. If an organization does not already have a robust internal unclaimed property reporting process in place, outsourcing to competent third-party UP service providers may be a good choice. The UPPO’s website provides an extensive list of UP Service providers.
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. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.
