"Basic" could be a misnomer when it comes to unclaimed property reporting. It can be challenging to keep up with complex laws in all states, decipher those laws and organize your work to meet requirements without wasting time or money.
This blog sheds light on common mistakes holders make in basic reporting. The ideas below were inspired by the 2015 UPPO presentation, "Reporting Basics & the Oops Factor," delivered by Heather Steffans of MarketSphere and Marilyn Henry of UnitedHealth Group.
UP Oops #1: Assuming you don't have to report unclaimed property, or writing it off to income
In past years, when audits were not done as often, some companies didn’t know about the law, neglected reporting or incorrectly wrote off unclaimed property to income. However, audits have increased and there has been enough publicity in recent years that ignorance is no longer an excuse. Voluntary Disclosure Agreements (VDAs) in some states are ending because it is assumed every company should now be aware of its responsibility to include unclaimed property in compliance processes.
UP Oops #2: Inaccurately calculating dormancy periods
There are 54 U.S. unclaimed property reporting jurisdictions: 50 states, plus Puerto Rico, Virgin Islands, Washington D.C. and Guam. Each jurisdiction enacts its own unclaimed property laws, and definitions of stale dated property vary by state. Carefully review and apply dormancy rules for each state to make sure you are reporting correctly.
UP Oops #3: Reporting to the wrong states
The law places property where it is believed owners will most easily be able to retrieve it when they realize it's there. To make this clear, priority state reporting rules were established through a landmark Supreme Court case in 1965. As a first priority, you must report to the state of the owner’s last known address (even if it’s a bad address). The second priority rule comes into play if you don’t have the owner’s address or a jurisdiction is without unclaimed property law, then you are required to report to the your company's state of incorporation. The nexus rule used for taxes doesn't apply. You might have to report unclaimed property in states where you don't do business.
UP Oops #4: Overlooking property types or using incorrect property codes
Companies holding unclaimed property are required to report all property unclaimed by owners. Some property is difficult to identify as unclaimed, because it is the result of passive or automatic transfers of value or other situations. Once property is identified, you must carefully determine the specific property codes each state requires, because an inaccurate property code could result in penalties or fines if the dormancy periods are different. There are more than 100 different property types states have classified for companies to report on. Some types are very specific based on the industry your company represents. For example, an insurance company would report an unclaimed claim benefit, a bank would report a dormant savings account, and a utility company would report an unclaimed security deposit. Most companies typically report anywhere from three to 15 different types of property.
Oops #5: Missing report deadlines and due diligence dates
Reporting deadlines and required due diligence actions vary among the states. In general, there is a fall reporting period of either October 31 or November 1 for property that has become dormant in the period between July 1 of the prior year and June 30 of the current year. There are exceptions based on industry classifications, and some states have heavier spring reporting schedules. California requires bifurcated reporting, with a preliminary report (except life insurance) due on November 1, due diligence performed after November 1, and final reports submitted between June 1 and June 15 of the following year. To ensure compliance, many companies create compliance calendars.
More potential mistakes
In general, careful study of the laws and updating of processes will keep your company in compliance. However, it can be confusing and time consuming, and take your staff away from more important tasks. A professional advisor can help, implementing due diligence and reporting services cost-effectively, because it's all they do. Best practices learned from many different clients can be a valuable advantage. For more information, call MarketSphere.