Businesses are required to report unclaimed property on an annual basis. States differ as to when particular property types are subject to escheat, the type and timing of the due diligence notices that holders must send to property owners before escheating the property, and how and when the property should be reported to the states. The risks of non-compliance can result in penalty and interest assessments and can subject a company to a lengthy unclaimed property audit. Businesses should conduct regular reviews of their unclaimed property processes to ensure compliance with all state unclaimed property laws.
A holder’s obligations during a typical unclaimed property reporting cycle can be summarized as follows, with each step discussed further below:
▪️ Identify dormant property; collect data and review records
▪️ Analyze and apply applicable state laws;
▪️ Perform state-mandated due diligence;
▪️ Report and remit unclaimed property to the states; and
▪️ Retain supporting documentation.
1. Identify, Collect and Validate Data. A systematic process should be created to ensure data is collected from all potential sources of unclaimed property, which can include data from internal sources (e.g., accounting, tax, payroll, accounts payable, treasury and accounts receivable departments) as well as external sources that do not report unclaimed property on the holder’s behalf (third-party administrators). As part of this process, all areas/departments that may generate unclaimed property should be queried to ensure complete data capture. Holders should also verify that all appropriate data elements are obtained and complete, including the full name of the owner, complete mailing address, email address, amount of property owed, transaction date, unique transaction identification number and type of property. In addition, data fields should be accurately parsed and company and individual names correctly formatted. If data is being extracted from various systems, the extracts should be tested to ensure the output is valid and accurate. Next, the data should be analyzed to determine whether amounts are actually owed, and if so, whether any exemptions or exclusions might apply (which also vary by state). The final step is a dormancy analysis that identifies the transactions that are due during the current reporting cycle.
2. Apply State Requirements. As the unclaimed property laws are dynamic, legislation and litigation must be monitored. Holders must understand and follow legislative changes from the previous year that might impact the current year’s filings. If a holder uses software, the most current updates provided by your software vendor should be confirmed and utilized.
3. Perform Due Diligence. Once the transactions due during the current report cycle are identified, holders must comply with each state’s statutory due diligence provisions. State-specific requirements must be followed as they relate to the type of mail to be sent (e.g., first class, certified, or in some states, first class mail plus email [if the holder has a valid email and the owner has consented to receive electronic communications]). States also differ as to the timing of the notice, the verbiage required, and even the font size used in the notice. In some states, the failure to perform due diligence can lead to the imposition of penalties. When performing due diligence, a number of factors should be considered. Does the organization have enough resources (e.g., supplies, staff) to ensure an effective process? Has the organization budgeted for this task? Is the organization ready to handle the various types of responses (e.g., mail, telephone, email) and any related tasks (e.g., check reissuances)? Has the organization considered utilizing technology (e.g., websites, interactive voice response (IVR) technology) to make the process more efficient?
4. Report and Remit. The organization should have processes in place that ensure that unclaimed property is reported and remitted to the states in a timely manner. It is also important to stay up to date with the states’ reporting instructions, which can change from one cycle to the next. Many states now require holders to file reports electronically via online upload to the states’ websites. Some states will still accept electronic reports on a CD, but only if they are in a format that is accepted by that state. Remittance protocols also vary by state, as well as the delivery of securities property.
5. Record Retention. To defend against an unclaimed property audit, a company must be able to show a consistent filing history, which includes maintaining copies of: annual reports (including negative or zero reports), the details for each transaction identified on the report, the remittance, and due diligence responses to support the resolution of items that were not escheated. Record retention periods for unclaimed property vary state to state and are often longer than a company’s standard record retention period.
Unclaimed property compliance is a daunting task, one that can quickly exhaust internal resources. If you are reporting unclaimed property in-house, be sure that coordination exists across departments and that policies and resources are established around the data gathering, due diligence and reporting processes, to help keep your company in compliance with the unclaimed property laws. In the alternative, consider outsourcing your unclaimed property reporting obligations.
Outsourcing can be a cost-effective way to streamline the use of your organization’s valuable internal resources while maintaining compliance with the unclaimed property laws. Subject matter experts track and monitor legislative and regulatory changes and are up to date with litigation that impacts holders of unclaimed property. Dedicated teams and resources ensure that all state requirements are followed and that the appropriate records are retained. Further, outsourcing can efficiently maintain outbound and inbound communications with owners, allowing an organization to take advantage of the latest technology, such as optical character recognition (OCR) technology to capture and maintain due diligence responses electronically.
If you would like additional assistance, there are several resources that cover a variety of unclaimed property topics available in our Knowledge Vault. For more information about unclaimed property reporting, outsourcing, or for guidance in creating a compliance program for your company, contact MarketSphere for a free consultation.
*Content contained in this article is considered accurate as of the publish date.