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Ten Best Practices for Unclaimed Property Compliance

By: Cathleen A. Bucholtz Michelle Moloian |

Read this article online at TaxExecutive.org.

On the surface Unclaimed Property (“UP”) compliance reporting seems straightforward. Companies often believe they are in compliance and protected from audit risk, but upon closer inspection many companies find that they lack the required historical documentation to verify their compliance practices when they come under audit. To help ensure your company is truly in compliance, we encourage you to benchmark your policies, communication, and monitoring protocols against this list of 10 Best Practices for Unclaimed Property Compliance.

1. Know Your Audit Risk

There has been an increase in the number of audit firms working on behalf of ALL states.  Unfortunately, more audit firms means more audits. Today’s reality is that UP is a source of significant revenue for many states, and they are targeting companies like yours.  Sensitize your team to be on the lookout for audit letters, invitations to participate in voluntary disclosure programs, and other state UP notices.

2. Assign Responsibility for UP Compliance

VP of Tax, CFO, Controller, internal legal counsel and others often oversee high level risk issues, disclosures, accruals and compliance. Therefore, it is important to get their involvement with UP. Secondary responsibility commonly falls to the tax teams since they have an infrastructure in place to address multistate reporting. Make sure to designate an Escheat Coordinator to work with the various departments that may generate potential UP including, but not limited to, accounts payable, accounts receivable, payroll, and potentially Human Resources and Risk Management.

3. Identify “Hidden” Unclaimed Property

Most companies understand that unresolved liabilities such as uncashed checks, unredeemed gift cards or customer credit balances can result in UP, however there are other not-so-common areas that need to be considered. Keep an eye out for liabilities assumed in an acquisition, self-insured third party benefit plans, small dollar write-off accounts, mineral interests, and more. Audit firms are experts at finding “hidden” unreported areas of exposure, so this step is critical.

(For a comprehensive list of potential unclaimed property, visit the National Association of Unclaimed Property Administrators (“NAUPA”) website at: www.unclaimed.org/reporting.)

4. Develop Effective Policies & Procedures (“P&Ps”)

Policies & Procedures should include high-level narratives of the company’s policy regarding UP. The narratives should address the organization’s reporting responsibility, summarize the reporting process, assign an Escheat Coordinator, describe areas where UP may arise within in the company, set materiality limits and record retention rules. For each policy related to specific areas or departments within a company, there should also be detailed procedures. The policies should also work in tandem with the company’s standard accounting or record retention policies.

5. Develop a Compliance Calendar

Just like your tax filing calendars, a UP compliance timeline is critical for smooth efficient flow of processes and should govern activities for all departments and individuals involved. Since UP has various reporting periods and different due diligence letter mailing timelines depending upon the jurisdiction, a compliance calendar should capture all action steps and due dates for areas where you have reporting responsibilities.  (Contact us for a sample compliance calendar here.)

6. Prioritize Communication

Effective communication of UP policies and procedures may not be high on everyone’s priority list but it will pay big dividends when deadlines arrive. Here are some suggestions:

  • Schedule an annual UP compliance kickoff meeting at the start of each compliance year. On the agenda should be: review the P&Ps and compliance calendar, review each department’s responsibilities, bring new personnel up to speed, answer questions, etc.
  • Schedule brief status meetings before each major process step approaches. For example, schedule a conference call a week before the due diligence mailing period begins to ensure all individuals are familiar with the process. These meetings need not be long; the primary objective is to reinforce the items from the kickoff meeting and highlight upcoming deadlines.
    • Send preset calendar reminders for each upcoming due date/deadline two weeks before and one day before the due date. (This may seem simple and obvious, but we’ve seen it work wonders for inter-department communication!)

7. Conduct State Research

State research should be conducted to determine important reporting details for each jurisdiction based on your industry. Unfortunately, reporting guidelines vary significantly from state to state, and many states don’t list uniform instructions on methods of performing due diligence, submission of reports and remittance requirements. This information is generally available on third party reporting software state information tables. If you don’t use a third party reporting software your research should include: the types of files you need to create, method of file transfer, negative reporting requirements, exemptions and deductions, required attachments, etc. Armed with this information, we recommend creating a State Research Matrix to summarize the reporting requirements. (Contact us for a template here.)

8. Perform Statutory Due Diligence

Most companies have an internal process for generating letters and statements informing customers and vendors of aged liabilities or account balances. These general account statements may not satisfy a jurisdiction’s UP due diligence requirements. UP due diligence letters require specific content and mailing timelines that are generally summarized in a jurisdiction’s filing guidelines. For example, most jurisdictions require that UP due diligence letters be mailed within a time window preceding the submission of the reports, usually no more than 120 and no less than 60 days prior to the report due date. Some states may require an attestation upon submission of the report that due diligence was performed pursuant to state requirements. Also, jurisdictions may have other specifications such as thresholds for the requirement of sending letters and certified mailing requirements.

9. Determine and Apply Exemptions and Deductions

As indicated in #7 – Conduct State Research, every company should determine which states have available exemptions and deductions. It is important to carefully review each state specific exemption or deduction for conditional requirements and ensure these conditions are clearly enumerated in your policies. For example, some states may allow a business-to-business (“B2B”) exemption on customer credit balances however, the exemption may not apply if the credit was eventually issued to the customer as refund check. If your company currently utilizes a third party reporting application, many of the exemptions can be automatically applied by the software, but conditional exemptions may need to be applied manually.

10. Reporting & Record Retention

UP record retention rules do NOT adhere to IRS record retention requirements. The period scoped under a typical UP audit may include property generated back 10 years plus the state determined dormancy period, which often extends beyond the period for which records are readily available. Under a UP audit, the state of incorporation can use a company’s available data to estimate the presumed exposure for those periods where information is not available. To avoid estimations, it is important to ensure that UP records are retained pursuant to the relevant state requirements, or a minimum of fifteen years. The types of records that should be retained include but are not limited to: complete bank statements and reconciliations for open and closed accounts, trial balances, AR agings, chart of accounts, check registers and void lists. In addition, changes in an ERP system or other system of record, including records from acquisitions or predecessor system(s), should remain accessible throughout the retention period. Archived systems should be capable of restoring historical records to enable company research of specific transactions (e.g., uncashed checks, aged credit balances, etc.).

There is no way to completely eliminate all risk associated with a UP audit. You may think your company is in compliance, and then rules change. With all of the state legislative and administrative activity, implementing compliance best practices will certainly give your company a head start before each reporting period.

If you are interested in learning how to implement these steps in your organization, contact Cathleen Bucholtz or Michelle Moloian for more information.