States Increase Enforcement of Unclaimed Property Laws

Editor: Alan Wong, CPA

Miscellaneous

Unclaimed property laws have existed for decades. Until relatively recently, however, states were either unable or unwilling to devote significant resources to enforcing these laws. Many states have now taken a variety of measures to promote compliance with unclaimed property laws, including increasing the number of audits, engaging third-party auditors, and offering voluntary disclosure programs (VDPs).

While unclaimed property laws are not a tax, per se, in many ways they are similar to a tax. States looking for revenue are enforcing unclaimed property laws, just as they are looking for more tax revenue, and holders of unclaimed property that fail to comply with reporting requirements may be subject to a variety of harsh penalties. As such, now is the time for businesses with unclaimed property to take proactive measures to comply with state filing requirements.

Unclaimed Property: An Overview

Unclaimed property is property held by a person for the account of, and deliverable or payable to, its apparent owner, where payment or delivery has remained outstanding for a specified period and the property is presumed abandoned. The property would then escheat to the state, which assumes custody of the property. Unclaimed property includes financial assets that have no activity generated by, or contact by the holder with the owner for a fixed period, generally between one and five years. Some common forms of unclaimed property are refunds, checks, stocks, savings and checking accounts, insurance payments, life insurance benefits, unredeemed money orders, uncashed dividend checks, certificates of deposit, customer overpayments, security deposits, and contents of safety deposit boxes.

States require holders of unclaimed property to conduct due diligence to contact the property’s owners. Holders must generally send a letter to the owner, listing information sufficient to identify the unclaimed property and notifying the owner of its property rights. Holders must also file annual unclaimed property reports and escheat property to the state if they cannot contact the owner.

Most holders are required to file unclaimed property reports in states outside where they hold the property, in part because of the priority of escheat laws established in Texas v. New Jersey, 379 U.S. 674 (1965). In that case, the U.S. Supreme Court established that the state of the owner’s last known address (the primary state) has primary authority over the owner’s unclaimed property. If the owner’s address is not known or if the primary state does not have unclaimed property laws, then the state of the holder’s incorporation (the secondary state) obtains authority over the unclaimed property.

Penalty Exposure and Increased Enforcement

While a wide variety of businesses are required to file unclaimed property reports, a surprisingly large number of those businesses have not heard of unclaimed property or escheat laws. States impose penalties and interest on holders that fail to file unclaimed property reports and remit unclaimed property to the state. The amount of these penalties varies widely. For instance, the Illinois state treasurer may impose a penalty of $500 per day (765 Ill. Comp. Stat. 1025/25(a)). The Wisconsin state treasurer imposes annual interest equal to 18% of the unclaimed property’s value plus a penalty of $100 per day, up to a total of $5,000 (Wis. Stat. §177.34). The Delaware Department of Finance may impose a penalty of up to 50% of the unclaimed property’s value (Del. Code. tit. 12, §1159(a)). Other states have similar penalty regimes.

Moreover, most states have statutes authorizing the use of estimation techniques if a holder does not have sufficient records to quantify the amount of unclaimed property for a given year (Uniform Unclaimed Property Act, §20(f)). Thus, upon audit, a 10-year holder with a five-year record retention policy could be forced to estimate unclaimed property liabilities for its first five years. It is unlikely that these estimates will work in the holder’s favor.

Many states have recently increased the number of companies selected for unclaimed property audits. Increased audits are arguably an effort to generate revenues as states continue to experience budget deficits. It was estimated that Minnesota returned to owners only $19 million out of the $61 million of unclaimed property revenue it collected from holders in 2012 (Hammerand, “Abandoned Cash—Or Is It?” Minneapolis/St. Paul Business Journal (July 5, 2013)). Some states have engaged third-party auditors to conduct unclaimed property audits. For instance, Delaware engaged Drinker Biddle & Reath LLP, a law firm, to administer its VDP. States often pay these administrators on a contingency basis, which provides incentive to collect as much revenue as possible.

Voluntary Disclosure Programs

Holders that were previously unaware of unclaimed property laws do have options. Most states offer VDPs for holders that have not previously been contacted by the state regarding unclaimed property reports. VDPs generally provide favorable terms for holders to come into compliance, such as automatic penalty and interest waivers and shortened lookback periods.

Once holders enter such programs, VDPs give them time to complete due-diligence procedures. In other words, holders are given time to notify owners. If holders are uncertain whether a liability is accurate, they should contact the potential owner to inquire whether a liability exists. If the potential owner agrees that no liability is owed and confirms this in writing, the property is not escheatable. Holders should send due-diligence letters to owners that cannot be otherwise contacted or that do not provide written confirmations.

States that do not offer formal VDPs often enter reasonable agreements with holders to bring them into compliance, provided the holder contacts the state prior to any communication from the state. In most instances, holders can avoid penalties and reduce lookback periods as part of these informal negotiations. Even if they have already contacted a holder, many states will abate penalties if a holder can show reasonable cause for its failure to file.

The law surrounding unclaimed property is complex, and states, through third-party auditors, are aggressively pursuing unclaimed property. Holders should consider engaging qualified professionals to represent them in filing delinquent unclaimed property reports. Qualified professionals can evaluate all options and generate revenue for the holder through the accounts payable review that is part of every unclaimed property project. Furthermore, their negotiation experience with state governments yields maximum benefits for holders.

EditorNotes

Alan Wong is a senior manager–tax with Baker Tilly Virchow Krause LLP, in New York City.

For additional information about these items, contact Mr. Wong at 212-792-4986, ext. 986, or awong@bakertilly.com.

Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.