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10/29/20 8:20 AM

IRS Issues Guidance For Payments Made to State Unclaimed Property Funds

On October 16, 2020, the IRS issued new guidance applicable to payments made to state unclaimed property funds.

 

IRS Rev. Rul. 2020-24

The IRS provides that a payment from a qualified retirement plan to a state’s unclaimed property fund constitutes a designated distribution which is subject to federal income tax withholding and reporting requirements

In the example provided by the IRS, the employer is a plan administrator of a qualified retirement plan that does not include designated Roth accounts, employer securities, nondeductible employee contributions or accident or health plan benefits. The taxpayer is an individual with an accrued benefit in the plan with a value of $900 who did not make a withholding election.  In 2020, the taxpayer’s accrued benefit was paid to the state’s unclaimed property fund. 

Under the ruling, because none of the statutory exceptions from the treatment as a designated distribution apply (wages, a payment to a nonresident alien or corporation or dividends on employer securities), the payment and the amount withheld are a designated distribution and subject to federal income tax withholding. Additionally, because the amount is over the $10 reporting threshold, the distribution must be reported on Form 1099-R, with the distribution amount in Box 1 and the federal income tax withheld in Box 4.

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Topics: Reporting, Best Practices

10/6/20 7:42 AM

New York Sends Invitations to Participate in Unclaimed Property Voluntary Compliance Program

New York is increasing its focus on unclaimed property compliance. The New York State Comptroller’s Office of Unclaimed Funds (OUF) recently sent letters to companies regarding participation in the state’s Voluntary Compliance Program (VCP).

 

The correspondence states: 

We are contacting you because your company has conducted business in New York State, but has not filed reports with the New York State Comptroller’s Office of Unclaimed Funds (OUF) pursuant to the Abandoned Property Law (APL). The law can be found on the New York State Legislature’s website at http://public.leginfo.state.ny.us/lawssrch.cgi?NVLWO.

We encourage you to review your records for any unclaimed funds that may be subject to reporting. Unclaimed funds include uncashed checks issued to employees or vendors, outstanding accounts receivable credits and credit balances, and unredeemed gift cards/certificates, among others.

The first step of coming into compliance with the law is completing our Self-Audit Checklist. This online survey will help you to identify if your company is holding any unclaimed funds. Find it online at https://surveymonkey.rNYSVCU and use reference number XXXXXX. Complete the survey even if you find that you have nothing to report.

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Topics: Compliance, Audit, Best Practices, Voluntary Disclosure Agreements, New York

9/24/20 9:06 AM

The Role of Death and Dormancy for Unclaimed Property Holders

Organizations (holders) are not always made aware of the death of the people they do business with. While death plays an important role in the escheatment process, holders of banking and securities property types are not required to proactively search for and confirm death. Similarly, in the securities industry, SEC 17Ad-17 searches for lost shareowners are not required if the holder has received documentation that a shareowner is deceased

Death, however, is a factor in triggering escheatment. For example, death serves as the dormancy trigger for Roth IRA accounts in most states, as a possible trigger date for individual retirement accounts, and in states like Illinois and Maine, decreases the dormancy period for “other tax deferred” accounts.  In states that have adopted certain provisions of the 2016 Revised Uniform Unclaimed Property Act (RUUPA) as they relate to retirement accounts and securities, holders are not required to confirm death unless and until they receive a notice or indication of death (with death to be confirmed within 90 days).

Often, a holder becomes aware of the death of an owner when the next of kin contacts the holder. In other cases, notice of death comes from an SEC 17Ad-17 search of an account that is RPO (Returned by Post Office). There are no statutory requirements that force holders of banking or securities property to proactively determine if owners are deceased. Auditors, however, have been taking a more aggressive approach and assert that holders must proactively bump their records against the death master file (“DMF”) database. If an account owner is found to be deceased and there has been no contact with a beneficiary, the account is considered lost, which triggers escheatment and the property becomes fair game for the auditor. The National Change of Address (NCOA) database is similarly utilized by auditors as an attempt to locate accounts with updated addresses. According to auditors, these updates serve as proof that the holder does not know the location of the account owner, which triggers escheatment for some property types, including securities.

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Topics: Compliance, Reporting, Audit, Best Practices

9/16/20 8:34 AM

A Proactive Approach To Improve Unclaimed Property Due Diligence

The 2016 Revised Uniform Unclaimed Property Act (“RUUPA”) is a model act designed to assist states in updating their unclaimed property laws, which for the most part, are outdated, since they are based on either a 1981 or 1995 version of the act.   Certain provisions of RUUPA address modern technology and have been incorporated into the laws of states that have recently enacted RUUPA-like laws.

For example, RUUPA requires that holders reach out to owners of retirement, securities or custodial accounts that have consented to receive electronic communications from the holder via email no later than 2 years after the owner’s last indication of interest in the property. This pre-due diligence requirement must be followed up promptly with first class mail if the holder lacks an email address for the owner or believes an email to be invalid, if the email bounces back, or if the owner does not respond within 30 days.

RUUPA also requires that if an owner consented to electronic communications, the due diligence notice must be sent via first class mail and email. Both the pre-due diligence outreach and the electronic due diligence requirements have been adopted in Tennessee, Utah, Illinois, Kentucky, Maine, and Colorado (email optional), Vermont (effective 1/1/2021), and Nevada. RUUPA-like bills have been introduced in the District of Columbia, Minnesota, Washington, and Wisconsin, and we expect additional states to also follow suit.

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Topics: Due Diligence, Reporting, Best Practices

9/3/20 8:29 AM

Unclaimed Property Early Owner Outreach

Customer relationships are the foundation of a company’s success, but if customer assets are escheated to the states as unclaimed property, those relationships could be at risk.  Studies by Bain & Company show that acquiring a new customer can cost five times more than retaining an existing customer and increasing customer retention by 5% can significantly increase a company’s profits.

Millions of dollars are escheated annually. This results in angry customers and lost profits, especially when it is their retirement or savings account. It is therefore important to understand the steps a company can take to reduce the risk of escheatment and increase its’ customer retention rate.

Escheatment occurs when accounts are deemed dormant, which occurs when there has been no “owner-generated” activity on the account for a specified period of time (the dormancy period). If the account owner does not affirmatively act to remove the dormant status of an account, by law, the account must be escheated to the state of the owner’s address once the dormancy period for that type of property has expired. Generally speaking, dormancy periods range from 3 to 5 years.

A 3-year dormancy period may seem like sufficient time in which to reestablish contact with an account owner. However, the time-frame for action is actually shorter, as companies generally do not begin to initiate proactive communication with dormant account owners until the account has been inactive for at least 24 months. Leaving the account inactive until the performance of statutory due diligence (which occurs between 2 and 12 months before escheatment), generally results in up to 80% of those accounts being escheated.

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Topics: Due Diligence, Best Practices

9/2/20 10:35 AM

7 Steps For An Effective Unclaimed Property Compliance Program

Every 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.

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

5/28/20 10:02 AM

April 2020: Vermont Adopts The Revised Uniform Unclaimed Property Act

On April 29, 2020 Vermont joined the growing group of states that has adopted RUUPA, when the governor signed HB 550, an act relating to unclaimed property (“Act”) into law.  The Act is effective January 1, 2021.

The Act updates Vermont’s current unclaimed property law, and it is largely based on the revised model act produced by the Uniform Law Commission (ULC) in 2016. This act repeals Title 27, chapter 14 (Vermont’s current unclaimed property law) and replaces it with a new chapter 18.

The highlights of the new legislation include expanding record retention requirements, adjusting due diligence requirements, allowing use of extrapolation and statistical sampling for the failure to retain records and providing a transitional provision.

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Topics: Compliance, ULC, Reporting, Best Practices, Vermont

5/5/20 10:22 AM

Recovering Unclaimed Property During Covid-19

Each year in the United States, billions of dollars are escheated to state governments as unclaimed property.  The total value of escheated properties in state unclaimed property custody may well exceed $50 billion, with less than 50% likely ever to be reunited with the rightful owner. Even more unclaimed property sits dormant at other government agencies, counties, and municipalities.

There are many factors that can contribute to the possibility that amounts owed to your organization are lost. Examples include: a company may have moved locations, changed their process or contact point for payment receipt, have a history of mergers/acquisitions, name changes, extensive business-to-business dealings, or a check could have been 'lost' in the mail.

It is important to note that unclaimed property can be funds held by a state/jurisdiction resulting from statutory escheat requirements or they can be outstanding balances held by a government entity that will never be escheated.

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Topics: Best Practices, Corporate Asset Recovery

1/28/20 9:55 AM

Unclaimed Property Negative Reports

In any given year, it is not uncommon for a holder to have no unclaimed property to report to one or more states.  Does this mean you have no reporting obligation?  Not necessarily.  Some states still require that you file a “negative” report.  This negative report indicates to the state that the holder has no property to report for the given report year, while demonstrating ongoing compliance with the state’s unclaimed property requirements.

The states are split on the matter of negative reports, so it is important to check with the state(s) in question before filing.  Approximately half the states require negative reports to be submitted.  In these states, failing to submit even a negative report will cause the holder to be considered out of compliance.  Other states do not require negative reports but will accept them if they are filed., and a handful of states do not accept negative reports at all. 

A few examples can illustrate the variation in negative reporting requirements across the states:

  • Nevada requires negative reporting for three years after the submission of a positive report. After that, negative reports are not accepted.
  • In California, if a notice report is negative, a negative remittance report should not be filed. However, if the notice report is positive, a negative remittance report should be filed.
  • Connecticut requires a negative report only if the holder is domiciled in Connecticut.
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Topics: Compliance, Reporting, Best Practices

11/12/19 9:35 AM

Consolidated Unclaimed Property Reporting

As a holder advocate, one of the most frequent questions we receive is whether a company with multiple subsidiaries and entities under its corporate umbrella can file consolidated unclaimed property reports.  The unclaimed property compliance environment is complex, frustrating, and demanding for corporate America, and complex organizational structures don’t make it any easier to navigate.  Conducting unclaimed property filings on a consolidated basis can create efficiencies for many holders.  However, a number of factors should be considered when determining the right approach for your particular organization. 

Consolidated unclaimed property filings are similar to other consolidated financial filings such as income tax filings and financial statements.  Consolidated unclaimed property filings consist of one report sent to each state or filing jurisdiction, usually by a parent company, on behalf of multiple subsidiaries.  This single report contains all property that would have been reported if separate reports had been prepared for each individual entity.

 

Consolidated reporting simplifies and streamlines the reporting process and tends to be more cost effective regardless of whether the filing process is managed internally or outsourced.   It is particularly beneficial for companies with a substantial number of subsidiaries that would otherwise consistently file zero or negative reports due to limited or no unclaimed property activity.  It may also be the simplest approach for companies who already consolidate financials or are running a common paymaster across its various entities. 

While there are  benefits of a simplified process, there are several factors to consider before deciding to file consolidated unclaimed property reports.

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Topics: Compliance, Reporting, Best Practices