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9/2/20 10:35 AM

7 Steps For An Effective Unclaimed Property Compliance Program

by Jen Duran

sevenEvery business is required to report unclaimed property annually. If you are unsure if your company is reporting unclaimed property (“escheating”), start by asking your finance or accounting team members. A few examples of unclaimed property are unpaid or unreconciled liabilities such as payments to vendors, refunds or credits owed to customers, unpaid wages and/or commissions, unpaid insurance claims and lost/abandoned bank accounts or investment accounts.

Unclaimed property compliance is not an option; it is a requirement. The risks of non-compliance could result in fines and/or penalties being imposed. Additionally, a company could be subjected to an exhaustive escheat audit where the disruptions to time, resources and greater amounts of monies owed are at risk.

Organizations should conduct regular reviews to ensure their compliance. The following, while not exhaustive, contains the most important tasks for you to perform and consider establishing policy and procedures to create an efficient unclaimed property program.

1. Understand State Requirements. As unclaimed property law is a dynamic environment, it is imperative that holders understand existing state statutes and regulations and determine whether there have been any changes from the previous year that may impact the current year’s filings. If you use software, you should ensure that you are using the most current update provided by the software vendor. In 2020, we have already seen a few states change the dormancy periods for certain properties and other states have changed how unclaimed property reports are submitted and /or funds must be remitted.

2. Determine Whether Any Mergers or Acquisitions Have Happened. If you have been involved with any merger or acquisition activity since your last filings, you will need to determine whether these transactions may have included potential unclaimed property which would now be your responsibility to report. A review of the purchase agreement should be performed to determine what your unclaimed property responsibilities are.

3. Identify, Gather and Validate. Ensure you are collecting data from all potential sources of unclaimed property. This will include internal sources such as accounting, tax, payroll, accounts payable, treasury and accounts receivable departments. It will also include external sources, such as third-party administrators, who do not report unclaimed property on your behalf.

Once data has been gathered, you will need to verify all appropriate data elements are complete, e.g., does each obligation indicate a name, address, amount, date, identification number and type of property.   In addition, ensure the data fields are accurately parsed, business names are appropriately shown, individual’s names are formatted correctly, and where available, federal tax identification numbers are included. In recent years, states have started to reject reports if owner names are not formatted correctly or if tax identification numbers are not provided for various property types or properties valued over a certain amount.

4. Analyze and Remediate. Your next task is to perform various data analyses. The first analysis is to ensure the amounts are actually owed. If they are owed, you should next determine whether an exemption or exclusion applies to the items. Finally, you should perform a dormancy analysis to identify those transactions that are due to the states for this reporting period.

Be aware of the risks which exist should your company decide to manually calculate dormancy. This can increase a holder’s risk of reporting properties late thus opening up your company for potential penalties, interest assessments or audit notices. If you have manually calculated dormancy in the past, remember step 1 and make sure you are up to date on all state requirements.

5. Due Diligence. Once you have identified those transactions that are truly unclaimed property and are due to the states for this reporting period, you must perform statutory due diligence. It is important to follow state requirements, that may include first class mailings, certified mailings and, for some states, the sending of emails (where email addresses are available, and the owner has consented to electronic communication).

States have different periods during which they require due diligence be performed, along with verbiage and font requirements which must be incorporated into the communication. An understanding of all applicable due diligence requirements is vital to ensure you follow the statutory requirements.

Unless your company is using a form of optical character recognition (OCR) technology and accepting responses electronically like MarketSphere, the process of physical letters being mailed and returned during the current COVID-19 pandemic will require a great deal of planning and forethought to ensure your staff remains safe and healthy.

6. Report and Remit. In the wake of the COVID-19 pandemic, this step has been significantly affected, so it is important you are aware of changes your organization needs to make in order report and remit unclaimed funds on time. You should also know which states have changed their own processes for accepting reports and remittances as a result of COVID-19 precautions.

After due diligence responses have been received, you will now know what transactions need to be reported to the states. Most states require reports to be filed electronically and uploaded directly to state websites. Some states still accept electronic reports on CD, as long as they are filed in a format which is readable by the state. 

Remittance protocols also vary by state, some require electronic remittances (e.g., ACH or wire transfer), others accept checks. Again, a thorough knowledge of the most recent state requirements and protocols will ensure a successful report and remittance process.

7. Record Retention. Today, we are seeing an increase in unclaimed property audits. One of the best ways to lessen the impact of an audit is to be able to show a consistent reporting history, which means maintaining your annual reports. This should consist of each report filed (whether by you or on your behalf by a third-party administrator), whether positive or negative, details for all individual transactions included on the report, copy remittance, and also copies of due diligence responses to support the resolution of items not escheated. In addition, if you have excluded items due to a state exemption, you may wish to keep a copy of the relevant state statute, holder handbook or other documentation to support the exclude amount.

The above task list, while not exhaustive, can provide you guidance as to the steps you need to take to ensure your filings are as accurate and complete as possible and will be accepted by the states.

Free resources covering a variety of unclaimed property topics are available in our Knowledge Vault. For more information about unclaimed property reporting or for guidance creating a compliance program for your company, contact MarketSphere for a free consultation. 

Topics: Compliance, Due Diligence, Reporting, Recordkeeping, Best Practices