Unclaimed Property Compliance: Navigating Organizational Matters and Due Diligence

Unclaimed Property (“UP”) knowledge is powerful, and with a mandatory October 31 state filing deadline looming it’s important to work today to determine your business’s compliance status.

In part one of this three-part series on unclaimed property, we introduced you to UP and explained why it matters.

Here, we’ll discuss UP compliance.

Remind me: What is UP?

Unclaimed property—or UP—is defined as tangible or intangible property that has been abandoned or lost by its rightful owner for an extended period of time and diverted to the state to be returned.

Common forms of UP include stocks, uncashed/stale dated payroll and dividend checks, insurance payments or refunds, unused accounts receivable credit balances, uncashed/stale dated vendor checks, savings or checking accounts, and, in certain states, gift certificates. A company in possession of UP is known as a “holder.”

Is UP compliance a tax filing requirement?

No. Unclaimed property is not a tax so it does not follow typical tax sourcing rules like apportionment or allocation. UP follows the sourcing rules set by the Supreme Court in Texas v. New Jersey (379 U.S. 674 (1965)):

• First, to the state of the rightful owner’s last known address, if known, or
• Second, to the state of the holder’s incorporation or domicile, if the owner address is unknown or foreign.

This means that a company could have no operations in a state but could still have UP filing requirements due to having a vendor, employee, or customer in that state.

For more on UP, read our detailed technical overview.

How can I become UP compliant?

UP compliance rules are handed down on a state-by-state basis. Though there are certain commonalities in how states handle UP, it’s important that businesses are aware of the compliance rules in each US state and territory in which they have exposure. That means getting to know the details of UP in any state where they have employees, vendors and/or customers. In other words, the rules you must follow in New York are different from the rules you need to follow in California.

Does UP compliance really vary by jurisdiction?

Yes. All 50 US states, plus the District of Columbia and territories including Guam, Puerto Rico and the US Virgin Islands, have their own laws and guidance when it comes to UP. These affect every aspect of the program including the return of UP to its rightful owner and when UP becomes property of the state or territory (a process often referred to as escheatment).

What steps can I take to become UP compliant?

Five key steps can kick off your UP compliance journey and remove non-compliant items from your books for good.

Step 1. Gather relevant data…

Unclaimed property quickly and easily spans outside of the realm of a finance team, making compliance a team effort. Depending on the size of your organization, multiple departments may have property that requires action.

Of course, the types of information requested vary based on your organization and industry as well as the jurisdiction of the UP (state or territory and those laws). For a larger entity, requesting data alone potentially constitutes quarterly, multi-department action.

The end result is that for a given filing season, you must identify and collect all unclaimed property, meaning any type of property that has been dormant for the amount of time prescribed by the effective governing body.

Step 2. …and analyze it

Now that you’ve gathered your data it’s time to confirm, compare, and analyze your findings.

• Confirm that the property is valid, has reached dormancy, and was not previously removed from or reported on any list of holdings
• Compare applicable exemptions available, based on state, property type, dollar amount, and other factors, to determine if relevant
• Analyze due diligence measures for UP (next step in compliance) based on requirements from the effective governing body

Step 3. Perform necessary due diligence

Before reporting unclaimed property to the rightful states and territories, your organization is required to make reasonable efforts (based on the respective laws of those governing bodies) to reconcile UP to its rightful owner. This can be an arduous and messy process (outreach response rates below 10% are not uncommon). Work with your advisor to determine that you’re within existing outreach guidelines, including letter language, timing, and value threshold, as they vary by jurisdiction.

Other key due diligence items may exist based on jurisdiction. For example, California has a two-part due diligence process which includes the state doing its own mailing and requiring specific language and fonts for a mailing to be considered compliant. It is also important to note that for many states, there is no filing threshold, meaning even if you don’t have to contact the original owner, you must still file the amount with the particular state.

Step 4. File your UP report and remit necessary payments

All UP that is still unclaimed after due diligence must be filed and remitted to the state. This filing process includes preparing National Association of Unclaimed Property Administrators (NAUPA) data files, individual state/territory filings, and processing payments with your reports.

Filing requires using UP software to create the specific NAUPA data file, which is then sent to the correct governing authority in their preferred format. If you only have a few items, manual reporting is possible but can be cumbersome.

Most states have online reporting options. In fact, many require online submission for the sake of ease and organization. After reporting, organizations with UP are required to remit payment upon the receipt of an online confirmation and the acceptance of the report filing.

Step 5. Reconcile remittance payments (and keep detailed records)

Now the process comes back full circle to the organization. Remember the bit about ensuring the UP is up-to-date, having never been previously recorded or filed?

Perhaps the most important step in ensuring compliance is closing out those UP payments—either to their owners from a due diligence response or the respective authority. Reconciling these payments with ledgers and subledgers is the most important step. Not only does it keep your UP process clean, reducing headaches, but helps the company avoid repaying a liability and serves as support in the event of a potential audit.

Count on Marcum

The October 31 filing deadline calls for immediate action to ensure that you’ve aligned your compliance activities with the law, and serves as a timely reminder that the spring filing season closely follows, with deadlines beginning March 1. Acting now to begin the compliance process could keep your business from falling victim to a potentially costly UP audit.

Count on Marcum to help you get on track with a proactive UP reporting process and risk mitigation plan. If you have any questions, contact Angela Gebert, National Leader of Unclaimed Property.