Wipfli Alerts & Updates: Are You Complying With Unclaimed Property Reporting Requirements?
July 30, 2014
Have you been sending out letters to your unclaimed property customers? Nearly every business has a legal duty to notify customers that you are holding unclaimed property. In addition, nearly every business has a legal requirement to file an annual report and remit unclaimed funds to the state. If your business hasn’t been taking these steps, be aware—the cost of noncompliance is steep, and the risk of audit is dramatically increasing.
What is unclaimed property? Unclaimed property is basically property or money being held by a business that actually belongs to another business or individual. The reporting requirements apply to all businesses including not-for-profit organizations and governments. Even the IRS is required to report unclaimed property to states for uncashed tax refunds.
A typical example is uncashed payroll checks or a credit memorandum. The property is considered unclaimed after it is held for a period of time (dormancy period) while the holder of the property makes a good-faith attempt to contact the property owner. Providing no contact has been established, the property must be turned over to the state, where it is held in trust until the state contacts the rightful property owner and distributes the funds.
Yet unclaimed property is not limited to uncashed checks or credit balances. There are many new forms of unclaimed property being discovered every year, from prepaid cards and stored value cards to employee health savings accounts to overcharges on license fees by auto dealerships.
More States Increasing Enforcement and Audit Efforts
Why haven’t you heard about unclaimed property in the past? It’s always been the law, but only recently have the Midwest states taken affirmative steps to recover the property. While many states view the administration of unclaimed property as a consumer protection duty, other states clearly see unclaimed property as a revenue source. Through aggressive audit techniques and favorable court rulings, unclaimed property has become Delaware’s third largest revenue source, generating over $500 million in 2013 alone.
Many noncompliant businesses are simply unaware of unclaimed property laws. Yet as a result of states becoming more aggressive with their audit efforts, businesses need to pay greater attention to their unclaimed property liability and comply with state reporting requirements. Who prepares the unclaimed property report? Generally it is the responsibility of the business, but outsourcing is a common alternative. It is important to note that since unclaimed property is not a tax, many taxpayer protections are lost. For example:
The statute of limitations is generally wide open. Many audits go back 10-20 years, and Delaware is even looking back to 1981.
A business can be subject to a state’s unclaimed property laws without ever visiting the state. There are no nexus provisions as found with sales or income taxes.
Third-party auditors often handle the audits for multiple states at a time and collect a percentage of the findings. This often leads to very aggressive and expensive audits. Generally tax audits can be performed only by the government.
Other than going to court, there are normally no appeal rights. You pay the auditor or go to court.
Extrapolation is common. Because most audits go back 10-20 years or longer and many businesses keep records for only seven years, the auditor will extrapolate a liability for past years. Again, the property holder has the burden to prove these estimates are wrong. With no rebuttable records for early years like 1981, this becomes a very difficult and onerous task.
Penalties and interest can approach 50% of the unclaimed money.
Minimize Exposure and Ensure Compliance
Summer months are the time of year for businesses to send notices to property owners and begin taking the steps to meet the early fall filing deadlines.
Because of the significant exposure created by complex unclaimed property laws, definitions, and dormancy periods (that vary among states) and with the extensive look-back periods, a best practice is to seek out professional advice to minimize exposure and ensure proper documentation. Unclaimed property is not a tax, and not all accounting firms have the expertise to assist. At Wipfli, we have experience in helping businesses proactively develop an action plan to ensure compliance with unclaimed property laws and the applicable state reporting requirements.
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