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Unclaimed Property Reporting Requirements- Are You in Compliance

Dec 19, 2014

Nearly every business has a legal duty to notify customers they are holding unclaimed property. In addition, they are required 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.

The Basics

What is unclaimed property? It is property or money being held by a business that actually belongs to another business or individual. Typical examples of unclaimed property include: uncashed payroll checks, credit memorandums, gift cards, and some employee benefit plans.

More States Increasing Enforcement and Audit Efforts

Only recently have Midwest states taken affirmative steps to recover the property. This is clearly a source of substantial revenue for states. Most states now use third-party auditors paid on a contingent fee. These audits average three to five years in length and go back 20 years or more. 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.

Why Delaware?

Under the unclaimed property sourcing rules established by the United States Supreme Court, property is first sourced to the property owner’s last known address and, if this is not determinable, the property reverts to the holder’s state of incorporation. Since many companies incorporate in Delaware, the sourcing rules under this court decision provide a windfall for the state.

Compliance Challenges

Using successor liability statutes, unclaimed property issues can arise in mergers and acquisitions or IPO transactions. Similar to sales or income taxes, many states will hold a successor company responsible for any unreported unclaimed property following a stock acquisition. In these cases, the exposure attributed to the loss of a target company’s historical information could be staggering.

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. It is important to note that since unclaimed property is not a tax, many taxpayer protections are lost.

Minimize Exposure and Ensure Compliance

Because of the significant exposure created by complex unclaimed property laws, it is a best practice to seek professional advice. Unclaimed property is not a tax, and not all accounting firms have the expertise to assist. Wipfli LLP has significant 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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Wipfli Editorial Team