7. December 2016 09:17
States have “discovered” unclaimed property revenue can be an alternative to a tax increase, and consequently it is an increasingly important source of operating funds among all 50 states. As a result of this increased attention, unclaimed property laws, and states’ administration and enforcement practices, are regularly changing. Businesses need to keep pace to protect their interests.
Under unclaimed property laws, a “holder” of unclaimed property is required to report and remit unclaimed property to a state after the property has remained unclaimed by its owner for a specified period of time (usually three or five years, depending on state law).
States have the statutory authority to audit any business for compliance. They may do so with their own internal resources, or they may hire third party audit firms that have a contingent financial interest in the property that they turn over to the state. Interest and penalties can be assessed for over 100% of the underlying liabilities, going as far back as 1981.
Given this environment, if your business has not actively been pursuing unclaimed property compliance, it may be time to take a closer look. Following are some considerations to help you evaluate the applicability to your business relative to annual reporting, compliance and risk management:
- Annual unclaimed property reporting is required in every state
- Reporting can be complex, as all state laws are different
- Non-compliance with annual reporting requirements can be costly, with States possessing growing statutory authority to issues fines, penalties and to conduct audits of business records
- The average penalty imposed by the state is 12% of the individual account value, with the interest beginning on the date the property should have been reported
- In some circumstances, the fine far exceeds the value of the property
- In select states, unclaimed property revenue serves as a non-tax form of revenue to fill budget gaps
- Most unclaimed property audits involve multiple states, lasting 3-5 years, and are conducted by outside audit firms that work on a contingency basis
- Recent jurisdictional disputes among the states have reached the level of the Supreme Court
- States are becoming more aggressive in changing laws to lower dormancy periods (the amount of time a company is required to hold an account or credit on their books before it qualifies as unclaimed property) to generate more unclaimed property required to be reported to the state
- For example, Pennsylvania recently lowered its dormancy period from five to three years and also redefined the requirements for when Individual Retirement Accounts become reportable, which can be long before the date of mandatory distribution
- Unclaimed property compliance should be part of your merger and acquisition review
- Acquisition of a large unclaimed property liability places your company at risk, and liabilities that have been written off into income can overstate the value of a company
Given these considerations, unclaimed property compliance is not something that can be ignored in any organization. Having an active, robust program, that is part of your company's risk management and compliance programs, can help you maintain positive customer relationships and be good corporate citizens at the same time.