KeepUP™ Blog

2/5/15 2:21 PM

3 Ways Unclaimed Property Compliance Is Different from Tax Compliance

by Greg VerMulm

Understanding the difference between unclaimed property compliance and tax compliance helps avoid some of the most serious pitfalls of this important business function.


A company’s tax department is often where unclaimed property functions reside. In some ways, this makes sense. Although unclaimed property is not a tax, it functions in many ways like a tax. Personnel responsible for unclaimed property must adhere to reporting schedules, keep track of changing laws, calculate and document the company’s reporting responsibility, generate the report, then remit payment. All of those steps are very similar to tax responsibilities.

In spite of the similarities, abandoned and unclaimed property involves unique considerations that can lead to misunderstanding of the requirements and increase liabilities to which a company is exposed. When large amounts of unclaimed property are involved, misunderstanding compliance can impact both the financial health and reputation of an organization.

Awareness of unique unclaimed property compliance issues can prevent misreporting

The good news is that tax, finance, compliance, treasury and accounting departments are equipped with the basic understanding and resources to handle these reporting differences. Simply make sure key personnel are aware of the differences, so policies and processes can be put in place to manage them.

1 It’s often unclear how unclaimed property is being generated.

Although tax law can be complex, most organizations are very aware of the transactions and financial functions that generate statutory tax responsibilities.

By contrast, unclaimed property responsibilities might have been overlooked and can be new concerns for many companies. Personnel are lacking experience and education to help them identify all sources of unclaimed property. Some sources are not obvious. For example, unclaimed gift card balances or accounts receivable credit memos are types of unclaimed property. Accounting mistakes can generate transactions that initially might appear to be unclaimed property and if ignored might be included on an unclaimed property report.

2 With no nexus requirement, companies may report to states within which they do not do business.

Tax, treasury, accounting and other personnel are used to defining tax responsibility according to the states within which they have a business connection. When it comes to unclaimed property, by legal precedent, companies must report unclaimed property to states where property owners are last known to reside, which sometimes falls outside of states within which they do business. This means personnel in charge of unclaimed property must learn the statutes and requirements of states not otherwise on their radar.

At the very least, these additional responsibilities add to staff time (unless the company engages a professional unclaimed property services provider). In addition, the added complexity of reporting in unfamiliar jurisdictions can lead to confusion of requirements, with potential resulting penalties.

3 Minimal or nonexistent statutes of limitations lead to substantial unclaimed property liabilities.

Whereas tax regulations include statutes of limitations to minimize excessive retroactive tax responsibilities, historically there have been few limitations on how far back a state can go to identify unclaimed property. In states where there is not a specific statute of limitations for unclaimed property and when a holder’s unclaimed property records are not available, auditors are allowed to use recent years’ reporting levels to extrapolate responsibility for past years. In states with no statute of limitations, assessments can be shockingly high. Even companies with unbroken reporting histories can find themselves saddled with high assessments if they missed property types, miscalculated dormancy periods, or made accounting errors in past years.

The IRS normally requires seven years of document and data retention. For unclaimed property, some states require 10 years, but a company must also consider dormancy periods. With a five-year dormancy period, records must be retained for 15 years to comply with the 10-year document retention requirement. Because some states have no statute of limitations, companies often keep unclaimed property data indefinitely.

The best defenses against these potential slips in unclaimed property management are proper policies, procedures, organization and documentation. This provides a framework for management of abandoned and unclaimed property and demonstrates your organization’s willingness to comply, which can help avoid penalties and legal consequences.

Your next step might be to conduct an internal assessment of your potential abandoned and unclaimed property liabilities under current conditions. Once you know where you stand, you and your staff can then take action to improve your unclaimed property management plan and avoid these common pitfalls.


Topics: Compliance