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Name It and Claim It: All You Need to Know About Unclaimed Property

By: Cathleen A. Bucholtz Steven Swaigenbaum |

This article originally appeared in the June 2019 issue of California CPA.

By Cathleen Bucholtz & Steven Swaigenbaum

Many people have heard about unclaimed property, but there’s often confusion on what it is and how the rules work. What follows are some questions most people ask about unclaimed property and how it may impact their company—including the risks of non-compliance, assessing a company’s unclaimed property exposure, and things to consider before reporting past-due property to a state and the best way to do so.

California also may be reflecting on its unclaimed property program. The Legislative Analyst’s Office (LAO), a nonpartisan government agency providing fiscal and policy advice to the California Legislature, released a report in March on the state of unclaimed property in California. Among the report’s findings:

  • An estimated 2 percent of roughly 900,000 California businesses comply with the state’s unclaimed property laws;
  • The California Controller’s Office estimates that billions of unclaimed property has not been reported;
  • There is a need to increase compliance among companies holding unclaimed property; and
  • Suggested unclaimed property questions be added to businesses’ tax forms and provide a one-time amnesty program to waive interest for unclaimed property holders that voluntarily report past-due unclaimed property.

While these ideas may increase holder awareness and temporarily increase compliance rates, respectively, there is a third option for the state to consider: A California unclaimed property voluntary disclosure program (VDA).

Why Worry About Unclaimed Property?
Every company generates unclaimed property, which is generally defined as any intangible property owed by a company to an unrelated party that’s unclaimed for a specific period of time by the rightful owner. Once a business has held the property for a statutorily mandated period (the dormancy period) without receiving communication from the owner, it becomes subject to escheat, and the holder has a responsibility to report the property to the appropriate state.

Which State Has the Right to Claim Unclaimed Property?
Over time, the U.S. Supreme Court has established a set of priority rules to determine the state to which a business is required to report unclaimed property in its possession. The first-priority rule provides that unclaimed property escheats to the state of the apparent owner’s last known address as shown on the holder’s records. The second-priority rule provides that if the apparent owner’s address is unknown, unclaimed property escheats to the holder’s state of incorporation (or state of legal domicile).

Is Unclaimed Property a Tax?
Despite some similarities, including annual reporting requirements and potential state audits, unclaimed property is not a tax. The state is not collecting revenue driven by a percentage of an underlying transaction. Instead, the state is acting as a custodian, requiring that the holder remit property in its possession for the safekeeping of the rightful owner. Therefore, tax concepts such as nexus, most statutes of limitation and tax-based record retention requirements don’t apply.

What are Some Examples of Unclaimed Property?
Certain types of unclaimed property tend to be generated by all companies, including uncashed payroll checks, vendor checks and accounts receivable credit balances. However, some forms of unclaimed property are industry specific, including uncashed royalty checks or unused gift certificates/gift cards. States also are expanding and redefining their statutes to capture additional property types and forms as technology changes (i.e. virtual currency).

What Can Happen if Holders Don’t Report Unclaimed Property Correctly?
Failing to correctly report and remit unclaimed property can result in a potential material misstatement of the financial statements of a company by improper classification of unresolved/unreported unclaimed property liabilities. Also, corporate executives may not be able to make the necessary certifications and attestations regarding the company’s financial statements if proper controls for unclaimed property liabilities are not in place.

Finally, there is the threat of whistleblower statutes, where disgruntled employees can notify a jurisdiction that a holder is not in full compliance in exchange for a portion of any amounts recovered via audit. In addition to the financial costs, the associated reputational damage in such a case can be significant.

What Can a Holder Do to Determine its Unclaimed Property Liability?
The first step is to understand the company’s history, including states and dates of formation, as well as merger and acquisition activity. There should be a review of past unclaimed property filings—including subsidiaries and acquisitions, discussions with departments that may generate various property types that could become unclaimed property, and an assessment of the years for which records are available. Once the availability of data has been established, the holder should review all available information, including, but not limited to:

  • Chart of accounts;
  • Year-end trial balance reports;
  • Unclaimed property reports;
  • Unclaimed property audit history;
  • Organizational charts for current and historical periods;
  • Acquisition history, including purchase and sale agreements;
  • Bank statements and reconciliations for open and closed bank accounts;
  • Accounts receivable aging reports;
  • Potential liabilities associated with industry specific property; and
  • Benefit plans and workers compensation.

Any amounts shown as unresolved should be reviewed to determine if they represent unclaimed property, accounting errors or items that have already been resolved, as well as whether there are any applicable state unclaimed property reporting exemptions that can reduce the company’s obligation.

When a holder is faced with calculating its unclaimed property exposure for multiple report years (due to an audit or VDA), but doesn’t have adequate records, auditors often use the information available to develop an extrapolation model to estimate the potential unclaimed property exposure for those periods where incomplete records exist.

How Does a Holder Report Past-due Unclaimed Property?
Before reporting past-due property to a state, a holder should determine whether that state has an unclaimed property VDA program. Not all states offer this, and among those that do, terms and conditions vary significantly. Notwithstanding state variations, a VDA is a written agreement between a holder and a state outlining the specific terms under which the holder and the state agree to settle past-due unclaimed property liabilities. The benefit for the state is that the holder agrees to continue reporting unclaimed property prospectively, as well as remit past-due property. The holder benefits as most states will reduce or waive penalties or interest, and may reduce the look-back period for which property must be remitted under a VDA.

Does California Offer a VDA Program?
While the largest jurisdictions in the U.S.—Florida, Illinois, New York, Pennsylvania and Texas—offer a VDA program, the state with the largest population, California, does not. Holders with past-due unclaimed property simply report the property to the state and await the assessment of interest, which is required by statute at 12 percent per annum.

California’s statute does offer the availability of an interest waiver on past due property for those holders that can demonstrate the high standard of “reasonable cause” established by the state.

What If No VDA Is Available or Past-due Unclaimed Property Is Immaterial?
If a jurisdiction does not offer a VDA, or if the amount due does not warrant a VDA, a holder may consider reporting past-due property using a voluntary remittance letter. With a voluntary remittance letter, a holder informs the jurisdiction(s) of its intent to voluntarily come forward and remit past-due unclaimed property and requests the abatement of any applicable interest and penalties. Many jurisdictions will accept past-due property through a voluntary remittance letter and may abate interest and penalties, especially for first-time filers. Unfortunately, many holders still adopt a wait-and-see approach for reporting to California, as there exists no reliable method to ensure the abatement of interest or penalties with no VDA program available.

Why Doesn’t California Have an Unclaimed Property VDA Program?
No one can say for certain why this is the case. Some of the reasons may include a lack of resources for administering the program, difficulty in getting support for legislation that would create such a program and, possibly, the fact that there has been no public push by the citizens of California to make this a priority for their legislature.

How Would an Unclaimed Property Voluntary Disclosure Program Help California Citizens?
Over the past 20 years, out of every $10 reported to it as unclaimed property, California has reunited $4 with the property’s owner. Much of that property that could be returned to owners and consumers may be small checks, deposits, etc., that the owner simply forgot about or lost. A VDA program is likely to significantly increase the overall amount of dollars reported to the state and thus benefit California’s citizens by increasing the amount of money reunited with them.

How Would an Unclaimed Property Voluntary Disclosure Program Benefit California?
More than half of the states are already administering successful VDA programs for one key reason: Having an unclaimed property VDA program for eligible companies encourages companies to report unclaimed property. The increase in unclaimed property remitted to California would allow the state to have the use of the money, as well as any interest it may generate, until it can be reunited with the rightful owner.
In addition, California would have the indefinite use of any money that’s never claimed by the owner (estimated at $6 for every $10 reported), as well as owner-unknown property, which the state may keep in perpetuity, as there is virtually no ability for owner-unknown property to be claimed.

The monies not reunited with owners flow to the state’s general fund, aiding public programs that benefit the entire community.

Would an Unclaimed Property Voluntary Disclosure Program Really Work?
The enthusiasm with which companies would respond to a California unclaimed property VDA program was foreshadowed by the success of the state’s brief unclaimed property reporting amnesty, which ran January 2001–December 2002. Under the terms of this previous amnesty, companies that were not under audit by the state could report and remit past-due property without assessment of penalties or interest. Under the amnesty, the state received 4,927 holder reports detailing 145,903 properties valued at $196 million, representing more than 25 percent of the $780 million escheated by California in total during the two fiscal year periods during which the amnesty ran. Of those reports, 1,567—or 31.8 percent—were from first-time unclaimed property filers.

Would an Unclaimed Property Voluntary Disclosure Program Increase Holder Compliance?
The LAO report estimates that only 16,555 of the approximately 900,000 businesses that may hold unclaimed property are reporting it to the state, and gives three key reasons for this low compliance rate:

  1. Holders are unaware of their obligation to report unclaimed property;
  2. Holders are willfully noncompliant, most likely due to the relatively high interest rate assessed on past-due property; and
  3. Audits can only address a small share of Holder non-compliance, with California on average issuing just 20 audit reports annually since 2013-14.

Increasing holder awareness through a well-publicized VDA program would increase compliance among companies that were unaware of their unclaimed property reporting obligations. Other companies, which only became aware of their reporting obligation after the property they’re holding was already past-due, would likely report the property if they could do so without the concern of facing a significant statutory interest assessment.

Finally, California’s audit efforts on average have only yielded roughly $6 million annually, including interest revenue; a paltry amount in comparison to the LAO estimates that billions of dollars remain unreported.

What Can I Do?
Owners: First, look to see if you have any uncashed checks, gift cards or other items that you may have forgotten about; it’s faster to cash them yourself than to claim them from the state once reported as unclaimed property. Next, search the California unclaimed property website (sco.ca.gov)—you, or someone you know, may have money waiting for you!

Businesses: Check your own compliance history to evaluate whether you may be holding unreported property. As you search the California unclaimed property website for any property that may be waiting for your company, remember that filing a claim may put your company on California’s radar and potentially put your company at risk for audit. Make sure that your company is in compliance before filing a claim with the state.

Everyone: Reach out to your legislative representative, as well as groups supporting a California VDA program, like the Unclaimed Property Professionals Organization to let them know that you support a VDA program.

Read this article at CalCPA.org