KeepUP™ Blog

Record retention refers to how long important information must be retained 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.

Unclaimed property reporting is a complex task with varying state requirements and protocols. One of the biggest fears and concerns for holders is running afoul of this complexity and creating the potential for a penalty and interest (P&I) assessment. States have the statutory authority to assess these fees and may impose them for:

• Reporting late property

• Filing late reports

• Filing inaccurate reports

• Submitting improper funding

• Reports filed in an improper or incorrect format 

Most jurisdictions have some mechanism to assess penalties or interest. Below are a few examples of several high-profile states.

In any given year, holders may find that they do not have any unclaimed property to report to one or more states.  Does this mean that the holder does not have a reporting obligation to the state(s)?  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, and demonstrates 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. Failure to submit a negative report if one is required by the state 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. 

The examples below help to illustrate the variation in negative reporting requirements across the states:

Fall unclaimed property reporting season is upon us, and most holders are gearing up to meet many of the states’ October 31/November 1 reporting deadline. It is essential that holders track and monitor state unclaimed property legislation to follow any new requirements, which often lead to changes to the states’ reporting instructions. State websites and holder manuals contain key information related to these changes, as well as the actual mechanics of reporting and remitting unclaimed property. Be sure to review these updates prior to each reporting cycle and refamiliarize yourself with state requirements as these vary from state to state. A high-level review of holders annual compliance reporting obligations are outlined below.

It can be difficult to smoothly add abandoned and unclaimed property management duties to primary business responsibilities. It’s not simply a matter of squeezing in extra work. Escheatment involves spikes of activity rather than steady work—often at inconvenient times of year when other responsibilities are also spiking (notably when tax returns are being prepared). It doesn’t help that personnel often do not have needed expertise. 

Some of the spikes in work can be managed by cross-training staff to pitch in when needed. Working with outside unclaimed property specialists can help, not only with the extra work of reporting cycles, but also by providing deeper expertise than it’s possible for in-house staff to acquire. This blog will define the challenges of merging unclaimed property work with other duties and provide advice for overcoming the challenges. 

Getting Perspective on Unclaimed Property Workflow Issues 

Year end, quarter end and month end are all peak times for accounting and finance staff in general. Most of the state’s unclaimed property reporting deadlines fall within the same timeframes. For tax professionals, half of the spring unclaimed property season falls exactly into peak tax season. 

On the other hand, unclaimed property management really has to be a year-round endeavor to ensure all supporting records are in place and a plan is followed for accurate reporting. You also need time to lay the groundwork for successfully meeting the challenges of unclaimed property audits. 

Here’s what often happens: Accounting or finance professionals find themselves busy with other duties, then unclaimed property hits their radar and they realize they haven’t completed due diligence requirements—maybe even haven’t done due diligence (pun intended) on what those requirements are! They have to scramble to meet the deadlines, often taking shortcuts resulting in under-reporting or over-reporting the unclaimed property they hold. 

The truth is, when peak reporting time rolls around for unclaimed property, it is an intense effort that leaves little time for other duties.

California AB 466 was enacted on July 16, 2021, and becomes effective on January 1, 2022. The bill allows the Franchise Tax Board (FTB) to share information from business entities’ tax filings, on an annual basis, with the State Controller’s Office (SCO), specifically:

♦The taxpayer's entity status and the date FTB last updated the status.

♦ The taxpayer’s revenue range.

♦ Whether the entity previously filed an unclaimed property report with the Controller, and if applicable, both of the following:

• The filing date of the taxpayer’s last report.
• The amount remitted on the taxpayer’s last report.

According to the FTB’s Bill Analysis dated June 24, 2021, the FTB already provides the SCO with a list of business entity taxpayers that are incorporated or began conducting business in the last three years and have filed a tax return. With the passage of AB 466, the FTB will be permitted to share business entities’ responses to these questions with the SCO, who can use the information to identify and provide outreach, in the form of education and/or audits, to companies that the SCO believes is not in compliance with the unclaimed property law.

DE S 103, which was signed into law on June 30, 2021, and becomes effective on August 1, 2021, is the latest bill to define virtual currency and include it in the definition of “property” as a property type eligible for escheat. Virtual currency is presumed abandoned 5 years after the owner’s last indication of interest and holders must liquidate it within 90 days of filing an unclaimed property report and remit the proceeds to the administrator. As we have seen in similar bills pending in the unclaimed property space, owners have no recourse against the holder or the state for any gains in value post liquidation.

As the use and popularity of virtual currencies rise and become accepted, the states are similarly stepping up their legislation to bring virtual currency within the scope of escheatable property by introducing bills like DE S 103. States are also looking to the holder to liquidate the virtual currency as they are presently unable to take custody of cryptocurrencies in their native form.

If they haven’t already, holders of unclaimed property should be preparing to send due diligence mailings in advance of the Fall 2021 reporting cycle. Statutory due diligence takes the form of written outreach to the owner at the owner’s last known address, according to the holder’s books and records. The letter puts the owner on notice that his or her property will be reported (“escheated”) to the state as unclaimed property if the owner fails to respond within a specified timeframe, after which the holder will no longer be in possession of the property and the owner must file a claim with the state to reclaim his or her funds.

Due diligence value thresholds, the timing of the mailing, the language required in the notice, and even the method of delivery is determined by the states and vary widely, and in some cases even differ by property and/or holder type. In general, first-class mailings are required to be mailed 60 to 120 days before the filing of the report, but again timing and method of delivery vary.   Additionally, the requirements are ever-changing. The states that have recently enacted revised unclaimed property laws based on the 2016 Revised Uniform Unclaimed Property Act (RUUPA) have not uniformly adopted the 60–180 day timeframe or the requirement to send an email communication in addition to the first-class mailing, if the owner consented to electronic communications from the holder.

Accounts receivable credits (A/R credits) are often overlooked when it comes to unclaimed property compliance. This is problematic because A/R credits, if treated incorrectly, can create a substantial amount of unclaimed property, and can become a key focus in unclaimed property audits. Consequently, any effective escheat program should include formal policies and procedures for reviewing and including accounts receivable credits in the reporting process.

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.