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 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:
Prior to reporting, research should be performed to identify and correct accounting errors and avoid over-reporting.
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:“Any outstanding check, draft, credit balance, customer’s over-payment or unidentified remittance issued to a sole proprietorship or business association as part of a commercial transaction in the ordinary course of a holder’s business shall not be presumed abandoned.” [1]
The result of a statutory exclusion is that the holder obligation to report does not apply to the excluded property. Reporting such items will result in over-reporting.
In addition to exclusions, may states have de minimis exemptions that permit the holder to exclude from reporting, any property valued under a specified dollar amount. One example of a de minimis exemption is Michigan’s exemption of items $25 or less. The statute states “property is not subject to the custody of this state as unclaimed property if its value is $25.00 or less.” [2] Again, if a holder does not take these exclusions into account when preparing unclaimed property reports, over-reporting may occur.
Many holders knowingly over-report unclaimed property due to convenience or the fear of an audit. For those that wish to more accurately report, the best solution is the identification and analysis of accounting errors and exclusions/exemptions. Holders that have large transnational volumes (e.g., they issue a large volume of checks or have a significant customer base with many transactions) may prevent over-reporting by creating policies and procedures to review outstanding and unresolved items. These holders may perform research on selected items (e.g., using a dollar threshold), adjust non-reportable items identified by this research, and document the reason for non-reportable items.
As part of the process, holders must establish a timeline that would permit them to perform the identification and analysis and still meet the statutory time-frames for due diligence and reporting. In addition, the policies and procedures should include the following:
As the escheatability of some non-reportable items may be subject to interpretation, you may wish to have legal counsel interpret state statutes to avoid the possibility of liability in the event of an unclaimed property audit.
The recent passage of the latest Revised Uniform Unclaimed Property Act included a provision allowing for the retroactive repeal of statutory exemptions/exclusions. This “transitional” provision was included in Illinois’ recent update of its’ unclaimed property statute, and states:
“An initial report filed under this Act for property that was not required to be reported before the effective date of this Act, but that is required to be reported under this Act, must include all items of property that would have been presumed abandoned during the 5-year period preceding the effective date of this Act as if this Act had been in effect during that period.” [3]
The effect of this provision was to require holders to report business to business transactions previously exempted for the 5-year period prior to the Act’s introduction.
Before determining that items are non-reportable, holders should monitor changes to state statutes and administrative regulations to ensure that there have been no statutory or administrative changes that impact non-reportable items.
If you believe your company may currently be over-escheating or has over-escheated in the past, you may want to consider engaging with an unclaimed property professional advisor who can accurately review your outstanding data and your escheat history to identify non-escheatable items and ensure that you are reporting only what is truly escheatable.
[1] Kansas Disposition of Unclaimed Property Act, § 58-3935 (g)
[2] Michigan Uniform Unclaimed Property Act, § 567.224a
[3] Illinois Revised Uniform Unclaimed Property Act, 765 ILCS 1026/15-1503(a)
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