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:

Even though it seems like a long way away, Fall unclaimed property reports will be due before you know it.  With Fall states reports generally having deadlines of November 1, now is the time to create a checklist to ensure you meet the deadlines.  The following, while not in-depth, contains the most important tasks for you to perform.

1. Understand State Requirements

Before starting the process, 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. Unclaimed property law is a dynamic environment. Over the last few years, some states have made minor changes to their unclaimed property laws and administrative rules while other states have significantly overhauled their unclaimed property laws.  With all of these changes and more changes likely on the horizon, it is more vital than ever to keep current with the statutory environment.

Companies are generally familiar with the unclaimed property that they generate and the process for reporting and remitting that property to the various states.  Having good policies and procedures that help you identify, evaluate, mitigate and ultimately report unclaimed property housed on your books and records allow for companies to comply with state statutes.

But what happens when any unresolved liabilities are not recorded on your books and records?

This situation occurs when a company uses the services of a third-party administrator (TPA).  Companies use TPA’s for a variety of property types, including stocks and bonds, payroll, rebates, gift cards and benefit programs.

In these cases, the TPA’s maintain the records and the company may have limited to no visibility about any unresolved liabilities.  Why is this a problem?  Unless the contract between a company and a TPA includes specific language transferring the escheat responsibility to the TPA, states will consider the company the holder of any related unclaimed property and expect the company to report that unclaimed property.  Obviously, this is a problem if the TPA has all the relevant books and records. 

What should a company that employs TPA’s do to ensure it remains compliant with the unclaimed property statutes?

Managing unclaimed property compliance involves multiple pieces of the puzzle to come together. Firstly, the statutory requirements vary across jurisdictions and change regularly. Secondly, it likely requires coordination across a variety of departments, divisions or entities, many of which may not regularly interact. These complexities can increase exponentially for organizations with complex organizational structures, decentralized accounting functions or a complicated merger and acquisition history. So what should you concentrate on if you want to ensure your organization maintains compliance?

Key Areas of Focus:

• Ownership: Assign the responsibility to a specific group
• Understanding: Analyze your organization and develop a good understanding of where unclaimed property is created and how you can minimize risk and exposure
• Education: Ensure all areas of the business are educated on the basic requirements of unclaimed property and how their areas are impacted
• Documentation: Document and enforce adherence to policies and procedures

Every company’s situation is different, but nearly every organization must identify potential unclaimed property risks and liabilities to avoid damage to finances, resources and reputations. It can be difficult to conduct an assessment of your processes after every reporting cycle. However, if you’re not sure when the last review was performed, or if you know it’s been more than a year or two, holders should carve out time to complete an exposure assessment.

Exposure Risks

Having an inefficient process, neglecting to keep up with, or overlooking, changing legislation and personnel that are not experts with escheat responsibilities are just a few areas where a company can open themselves up to the risks of unclaimed property exposure which can lead to:

• Lost opportunities to find and reunite owners with their property
• Increased likelihood of audit
• Increased penalties/interest when escheat requirements are not being followed
• Excessive expenditures of time and money to resolve issues
• Negative public assessments

To avoid these issues and effectively manage data and legislative requirements, organizations must establish and execute smart policies and processes. There are a number of universal action steps that holders can take to decrease their exposure and achieve an efficient process.

Record retention refers to how long important information must remain accessible for future use or reference. Most financial and accounting processes have standards that need to be met because agencies such as the Internal Revenue Service, the Federal Deposit and Insurance Corporation, and the Public Company Accounting Oversight Board all have requirements. You may be familiar with the obligations for these well-known agencies. Do you know what is required for escheat compliance? 

Companies generally maintain a schedule or policy for their escheat records that help define what will need to be kept and for how long. This is a worthwhile practice to meet requirements and have supporting documents available if requested or needed in the event of an audit. 

Creating and maintaining a schedule for unclaimed property record retention isn’t always easy. Unclaimed property retention requirements vary by state and jurisdiction and cause holders confusion about what and how long they need to archive records. Some holders might decide not to retain unclaimed property records and take their chances during an unclaimed property audit. We don’t want you to fall into this danger zone and have some practical advice that can simplify your escheat record retention policy. 

A Few Facts:

• Most States’ unclaimed property laws require record retention periods longer than standard tax statutes
• The 1981, 1995 & 2016 Uniform Acts require a record retention period of 10 years plus the dormancy period of the type of property
• Statutes are often silent on which records to keep

Accounts receivables (A/R) is an important component to most companies and often overlooked when it comes to unclaimed property compliance. This is unfortunate because A/R can create a substantial amount of unclaimed property and be a key focus in unclaimed property audits. Consequently, any effective escheat program should include policies and procedures for reviewing and including accounts receivables in the reporting process.

How Does A/R Become Unclaimed Property?

Accounts receivables become an unclaimed property issue when credit balances occur that go unresolved and age beyond the respective dormancy period (typically 3 to 5 years). These unclaimed credit balances typically can be found on a company’s books and records in three forms.

1. On Account Customer Credit Balances
2. Unidentified Receipts
3. Write-offs

On Account Customer Credit Balances

On account customer credit balances can become unclaimed property when activity with the customer ceases and the credit balance ages beyond the statutory dormancy period which can vary across jurisdictions.  Customer credit balances can result from a variety of reasons including but not limited to returned product, overpayments and invoice adjustments.  It’s important that an organization understand their specific causes for credit balances, and has standard procedures in place to regularly review and resolve them before they age and become unclaimed property.

With any unclaimed property type, including A/R, it’s vital to maintain documentation sufficient to substantiate the resolution of any credit balance. Procedures should include standardized documentation requirements for resolved credit balances to ensure the outcome can be proven under the scrutiny of an unclaimed property audit.

On January 27, 2017, the Delaware House of Representatives passed Delaware Senate Bill 13 (“S.B. 13”), finalizing Delaware’s legislative body’s fast-track effort to overhaul the state’s unclaimed property laws.  The bill will now be sent to Governor John Carney, who has indicated he will sign it. The legislature’s approval of S.B. 13 is a much anticipated development in the unclaimed property world, as Delaware attempts to address the scrutiny it has endured over the last few years, which culminated in July 2016 with the critical decision in the Temple-Inland case.  Although S.B. 13 addresses many of the areas on which corporations and unclaimed property practitioners have been seeking guidance, a few key issues in the current Delaware act have yet to be addressed.  Following are some of the key changes for those areas the Senate Bill has definitively addressed.

Look-Back Periods, Statute of Limitations, and Record Retention

One of the main areas of contention with Delaware’s escheat act has been its audit look-book period and statute of limitation provisions.  As Delaware’s act is currently written, a holder may be subject to a reach-back period of 20+ years, which is especially problematic because such a lengthy audit reach-back period typically far exceeds generally accepted corporate document and data retention policies.  In recognition of this clear misalignment, S.B. 13 stipulates a 10 year look-back period for ongoing and future audits.  The look-back period is based on the calendar year in which the Delaware audit notice was mailed to the holder.  Accordingly, the look-book period for holders already subject to a Delaware audit will vary depending on the age of the specific audit.  To ensure consistency, the look-back for the Voluntary Disclosure Agreement (“VDA”) program will also be amended to 10 years.  We note that this change for VDA’s merely represents a codification of what occurred administratively this past summer following the Temple-Inland decision.

Under S.B. 13, the statute of limitations increases to 10 years from 3 years (or 6 years in cases where a report contained an omission of unclaimed property that was more than 25% of the value disclosed in the report).  This 10-year statute is tolled if a holder is placed under audit or if the Delaware State Escheator determines that the report contained a fraudulent or willful misrepresentation.

In addition to the massive numbers of transactions that end up in the unclaimed property bucket for large healthcare providers, the nature of provider transactions also causes unique issues in this industry. Escheatment for healthcare providers and insurers can be very complex, especially if an organization has not yet come into compliance. However, MarketSphere has identified several high-level unclaimed property focus areas providers can target to get well on their way to proper escheatment.

When you’re looking ahead to a new unclaimed property reporting cycle, it’s important to identify some of the aspects of reporting that haven’t gone so well in past cycles. Due diligence often falls into this area, because it can be challenging to sort through varying requirements of multiple states and ensure all steps of the due diligence process are carried out accurately.

With little concentrated effort, you and your team can probably come up with solutions to streamline due diligence processes—and even avoid triggering future issues. Paying attention to the process now may take a little time and require a meeting or two, but the preemptive effort now will pay off later in less stress, better accuracy, better records in the event your company is audited, and potentially lower liabilities.

Due diligence for fall reporting in particular can be more demanding than for summer or spring reporting cycles. For most corporations and banks, fall reporting contains a majority of the states, so process requirements are much more demanding. Unclaimed property personnel must manage greater printing, mailing, email and phone calls — both inquiries and responses. Although there is a longer break between summer and fall reporting deadlines than between fall and spring deadlines, many staff members are on vacation before the fall cycle, which can make report processing more challenging.

Challenges of Unclaimed Property Due Diligence

Some of the most challenging due-diligence-related reporting issues fall into these categories:

• Keeping up with varying state time thresholds triggering due diligence
• Getting the timing of mailing, responding and reporting correct
• Meeting specific wording requirements of different jurisdictions
• Preventing and dealing with fraudulent responses
• Owners can misunderstand efforts to reunite them with their property