KeepUP™ Blog

State enforcement of unclaimed property compliance continues to rise.  States are auditing more companies than ever in order to validate that unclaimed property is being reported accurately and completely.  To prevent an audit, many holders over-report property, escheating items that are not actually unclaimed property, or may not be reportable to the states. However, this practice could cause red flags.

The two most common transaction types that are not considered to be unclaimed property are accounting errors and exclusions/exemptions.

Accounting Errors

Accounting errors are not unclaimed property.  Unfortunately, errors in accounting systems do occur that cause items to appear to be outstanding or unresolved, when in fact they are not. This leads to the potential for over-reporting.  Examples of accounting errors include:

• duplicate payments
• voids that were never processed
• misapplied payments.

Prior to reporting, research should be performed to identify and correct accounting errors and avoid over-reporting.   

Exclusions/Exemptions

Many state statutes include provisions that exclude certain transactions from the definition of unclaimed property, or specifically exempt the property from reporting.  An example of a state exclusion appears in the Kansas unclaimed property law, whereby:

On March 19, 2018, the California Assembly introduced a bill, AB 2773, that proposed the creation of a voluntary disclosure program through the introduction of a new section, 1577.6, into California’s Code of Civil Procedures. 

 Under existing law, property held by a person that belongs to another and that is unclaimed for more than specified periods escheats to the state. Existing law requires persons holding unclaimed property to report and deliver it to the Controller within a prescribed time-period, and imposes interest payments, at a 12% statutory rate, and penalties, for a failure to do so.

AB 2773 would require the Controller to create a program for the voluntary disclosure of unclaimed property consistent with specified requirements. The bill would require the Controller to waive interest and penalty charges for holders who are accepted into the program, complete the voluntary disclosures in good faith, and act consistent with program requirements. The program would be open to all holders who aren’t currently under audit, whether they have previously filed or not, and the look-back period would cover 10 prior report years.

Every year, California mails out penalty and interest assessments to holders across the nation.  These assessments relate to violations of California’s unclaimed property laws that were evident on the assessed companies’ unclaimed property filings. 

California is one of the most stringent states in the country when it comes to enforcing the penalties and interest sections of its unclaimed property laws.   Once received, it is very difficult for holders to get California to waive or recalculate an assessment.  In addition, California does not offer a voluntary compliance program that allows companies the ability to avoid penalties and interest through a VDA. 

Here are three reasons a company would receive a penalty and interest assessment and ways to avoid those issues in the future.

1. Reporting Property Late on the Notice Report. This is the most common cause of an interest assessment from California. California assesses 12% interest for every year the property is late. 

• California assesses interest for late reported properties based on the properties reported on the Notice Report (filed in the fall) not the Final Report (filed in the summer). Therefore, if a reported item is resolved between the Notice Report and Final Report (i.e. by response to California’s due diligence outreach), interest will still be assessed on that item because it was reported on the Notice Report.  

Constitutional due process is one of the most potentially contentious issues being bandied about in the unclaimed property world. It’s a question of fairness and also a question of appropriate government power. Due process implies the government does have the right to seize property when there’s a question of ownership or when property has been abandoned, but it most clearly reflects the idea that government can’t swoop in and take property without making a reasonable effort to find owners and give them a chance to retrieve what they own.

This makes me think of the Sheriff of Nottingham in the story of Robin Hood. The sheriff was an unscrupulous character who swooped in and took property he wanted without any due process whatsoever—never mind that there were no ownership questions or periods of dormancy to justify his actions.

In today’s world (at least in developed nations), we have few real Sheriff Nottinghams, and it’s easy to imagine most legislators and state unclaimed property administrators truly do have owners’ best interests in mind. However, with recent developments in unclaimed property law, namely drastically reduced dormancy periods and gratuitous due diligence, it may seem to some we are leaning Nottingham-way.

The state of California’s dual reporting requirement is different from every other state. Also called “bifurcated reporting,” this state rule exists in part due to past lawsuits directed toward the state, claiming the abandoned and unclaimed property program was being operated unconstitutionally. In response to the court actions, the state’s controller made the decision to return to the two-step process many states had required in past years.

The two-step reporting process requires extra due diligence—both by the holder and by the state administrator. Once the steps are understood, it’s not as difficult as it might at first seem. This white paper lays out the steps of California due diligence and reporting to clarify the holder’s responsibility. Use the document as a reference to help your unclaimed property team integrate California reporting into your organization’s abandoned and unclaimed property routine. It also may be useful when training new personnel. MarketSphere can perform any of these steps for you—or you can assign them internally, if you have the resources.

Step-by-Step Bifurcated Unclaimed Property Reporting in California

In many regards, California reporting is not that much different from general reporting requirements in other states. The difference lies within two aspects of the California law: 1) there are two reports required (a Holder Notice Report and a Holder Remit Report); and 2) in addition to the holder conducting their due diligence, the state of California conducts its own due diligence process.

Step 1: Document Dormant Abandoned and Unclaimed Property

Examine all departments, divisions and affiliates of your organization to identify dormant property of all types. Don’t forget to remove and rule out accounting errors. When possible, contact owners early to keep property from becoming dormant and reportable.

Filers of abandoned and unclaimed property in the state of California have to manage an extra influx of responses from owners as a result of due diligence efforts of both holder companies and the State of California. This task is thought to be a bit more robust and demanding in California than in other states, because California is the only state that still has a dual or bifurcated reporting process—and double due diligence.

As late as the 1980s, many states required this type of double reporting of abandoned and unclaimed property. Holders had to report their unclaimed property, then complete due diligence. Any properties returned to their rightful owners were deducted from the unclaimed property report and a final report was filed, along with appropriate remittances.

Most states moved away from the dual reporting process due to the administrative burden it put on unclaimed property holders. However, after class action lawsuits claimed the California unclaimed property program was being operated unconstitutionally, the state controller put new procedures in place, returning to the bifurcated reporting of previous years.

Abandoned and unclaimed property holders with reporting responsibilities in California submitted preliminary reports to that state by October 31st of last year, with the exception of life insurance companies, which submitted their preliminary reports on April 30^th of last year. A singular California requirement to publish those owner names and property descriptions could open your company to fraud.