Businesses (also known as holders for unclaimed property purposes) are required by law to report and remit unclaimed property to the states on an annual basis. A typical holder reporting cycle involves the following, all of which are governed by state unclaimed property laws, and all of which can vary by holder type and/or property type.
• Identifying property that has reached the end of the dormancy period
• Mailing due diligence letters to the owners of those unclaimed funds
• Reporting and remitting the unclaimed property to the states; and
• Reconciling records and retaining records for the statutory retention periods
If your business has never filed an unclaimed report and you suddenly file one, if there is a gap in your reporting history, or if you are underreporting or excluding property types that are typically reported by other holders in your particular industry, you could be raising an audit red flag. Other red flags include filing unclaimed property solely to your business’s state of incorporation or if there are errors in the reports or the related remittances.
Undertaking a risk assessment to determine your business’s potential unclaimed property liability, and the risk of potential penalties and interest assessments, is a valuable tool in your holder toolbox – one that should be employed before filing reports, should you find yourself in any of the above situations.
A risk assessment allows the business to review the types of unclaimed property generated across all lines of business, including all related legal entities, such as subsidiaries. Your business’s unclaimed property processes should be reviewed from top to bottom, start to finish. This includes how unclaimed property is identified, the types of owner communication sent across the enterprise, including the due diligence process, and whether appropriate supporting documentation in retained.
One significant factor to consider is whether there are policies and procedures in place that document each step in the unclaimed property cycle. Accounting methods and processes should also be reviewed for errors, gaps, and potential areas of exposure. For example, whether unapplied funds are written off or taken back into income and if a standard process exists for voided checks or the reporting of stale credits.
Remember to review your company’s record retention policy and compare it to the states’ requirements – the unclaimed property laws typically require that holders retain unclaimed property records for much longer than a typical business’s document retention policy. If a holder does not have available, researchable records for the duration of the state’s retention period, the potential liability could far exceed what is truly owed, as states may use estimation and extrapolation techniques to estimate liability for years where records are not available.
Once the total liability, including any potential penalty and interest assessments is known, you are ready to take the next step to come into compliance. Options may include filing off cycle or catch-up reports or entering into a Voluntary Disclosure Agreement (VDA), where penalties and interest may be waived for those years covered by the VDA. Note, however, that not all states have such programs, requirements differ, and some programs are more formal than others.
A professional advisor can play a valuable role in bringing your business into compliance and staying in compliance at the time of a risk assessment, or at any point in the process. These experts assist in identifying all potential sources of unclaimed property that your business could be generating, create, or evaluate and update unclaimed property policies and procedures, and can support and guide you through the initial compliance process, including standardizing your unclaimed property processes, negotiating any VDAs, and assessing your audit risk. These experienced consultants can also assist in the creation of a go forward compliance plan, one that can take the form of periodic reviews of policies and procedures and in monitoring unclaimed property legislation for updates.