First-Time Unclaimed Property Reporting Considerations

The familiar adage that there’s a first time for everything holds when it comes to unclaimed property compliance. Companies that have never filed an unclaimed property report need to decide whether the first time will happen voluntarily or because of a cumbersome audit.

All 50 states, together with the District of Columbia, Guam, Puerto Rico, and the Virgin Islands, have unclaimed or abandoned property laws. Holders are expected to attempt to notify owners of dormant property that if they fail to take action to claim their property, it will be reported and remitted to the states. Holders are then required to report the remaining unclaimed property by a set annual deadline. Because jurisdictional statutes vary, dormancy periods, due diligence requirements, and deadlines differ by location, property type, and several other factors.

For holders who have not previously filed, taking the initial steps toward becoming compliant can seem daunting. However, it’s far less of a burden than being forced into compliance because one or more states subject you to an audit. Following are several factors to consider before filing the first report.

Red Flags
While holders may be eager to file their first report as quickly as possible, it’s critical to understand that states look for filing history gaps, missing property types typically reported by holders in the same industry, and scrutinize companies without consistent reporting histories. Upon receiving a first-time unclaimed property report, states may take extra measures to ensure it includes all reportable property covering all of the company’s legal entities. As a result, a holder’s well-intentioned effort to become compliant could serve as an audit trigger.

M&A Activity
Organizations that have merged with or acquired other entities may have also acquired hidden unclaimed property risk. If a merged or acquired company fails to fully and accurately report all of its unclaimed property, the liability does not disappear once the transaction is complete. Rather, it can become a problem for the combined company or new owner. Sometimes, the organization may have properly reported but hasn’t provided sufficient documentation during the transition to make the states aware of the corporate action. Lack of documentation can be as significant of a problem as no reporting history.

Electronic Payments
When first identifying potentially unclaimed property, holders are likely to examine the most common sources, including uncashed checks. However, they may overlook electronic payments, including direct deposits, ACH payments, and wire transfers. Unlike checks, which may be misplaced, forgotten, or ignored, electronic payments occur without action by a payee. If, however, an electronic payment bounces back or is rejected, the payor must have a process in place to track and address these funds. States are aware that this property type may be overlooked and will review reports carefully to ensure they address unclaimed electronic payments.

State Examinations
When a state believes a holder has not adequately reported all unclaimed property, it may conduct a formal examination. These audits often span several years and require significant staff resources. Ultimately, they often end with large assessments, including interest and penalties.

States often retain the assistance of third-party auditors who work on a contingency fee basis. This payment structure incentivizes them to identify as much unreported property as possible. When holder records cannot be located to demonstrate that a holder under audit has reported all dormant property correctly, the auditor may use available records to extrapolate liability for property with no available records.

Auditor estimation can produce devastating results. When Delaware audited Temple-Inland Inc. in 2012, the state’s retained auditor identified a single unclaimed check worth $147.30. From this single check, it extrapolated the company’s liability at more than $2 million, which was later reduced to $1.4 million. Regardless of Temple-Inland’s strong compliance history, the dispute over the auditor’s aggressive estimation techniques led to a long, costly legal battle.

Risk Assessments
These are just a few factors holders must account for when considering filing their first unclaimed property reports. The best starting point is understanding the company’s current unclaimed property risk. Undertaking a comprehensive risk assessment can give the holder a thorough snapshot of its potential liability, an initial path for mitigating risk, and assist in identifying process gaps that may need to be fixed.

A professional unclaimed property advisor can help bring your business into compliance and stay in compliance. These experts assist in identifying your organization’s potential sources of unclaimed property, creating or updating unclaimed property policies and procedures, and guiding you through the initial compliance process. They can also assist in creating a plan to remain compliant in the years ahead.

MarketSphere provides a comprehensive approach to escheat compliance management that enhances current programs, addresses gaps, and ensures that newcomers are compliant. For information about how MarketSphere Unclaimed Property Specialists can help with your unclaimed property challenges, Contact Us today.

*Content contained in this article is considered accurate as of the publish date.