Unclaimed Property: Compliance, Reporting Requirements and Current Trends
This tax tip is a follow up to our previously issued tax tip on July 4, 2012. It is important to note that, as the respective states become more aggressive in their collection of escheat property, this is an area that deserves closer attention by taxpayers on a continuous basis. Generally, most state unclaimed property laws entitle the state to calculate an estimate of unclaimed property liability in the event a holder of unclaimed property fails to file a report and remit the unclaimed property to the state.
What Is Unclaimed Property?
Property (as defined by each respective state statute) retained by an organization that is deemed to be abandoned or dormant for a given period of time must be returned to the original source (e.g. employee, vendor or patient). Generally, abandoned or dormant property applicable to most corporate taxpayers includes, but is not limited to, the following:
- outstanding payroll checks;
- outstanding accounts payable checks;
- deposits;
- deferred revenue;
- patient valuables;
- billings in advance;
- certain third party credit balances, including patient and customer refunds, overpayments and unutilized prepayment; and
- electronic payment methods, electronic gift certificates, stored value cards and other electronic forms of property.
Who is determined as “holder” of unclaimed property?
A holder is defined as any person or legal entity, including a corporation (whether taxable or tax-exempt), limited liability company, partnership, business association, financial institution and insurance company that possesses unclaimed property.
When does the property become reportable?
Once property has remained unclaimed for the required dormancy period, it becomes reportable. All holders are required to review their records annually to determine whether or not they are holding any property that has remained unclaimed for the required dormancy period. Dormancy periods vary based upon the type of unclaimed property and by each particular state jurisdiction’s laws. For example, the dormancy period for unclaimed wages is generally one year while the dormancy for uncashed accounts payable checks, credit balances or patient refunds may be three years in many state jurisdictions. It all depends on the type of unclaimed property and the unclaimed property rules and regulations within the state in which the unclaimed property resides.
What is the unclaimed property process?
Each state determines its own dormancy periods, due diligence procedures, filing dates, report format and report filing, including whether paper or electronic. In most states, at the conclusion of the dormancy period, the holder of unclaimed property must exercise “reasonable due diligence” and attempt to return the property to its rightful owner. If unable to locate the rightful owner, the property may be remittable to a specific state. Please note that there are also ways and methods to mitigate amounts remittable to the state jurisdictions in certain situations. Most, if not all, states will accept a filing of unclaimed property for years in which a taxpayer failed to report under a voluntary compliance program.
When are unclaimed property reports due?
Each state jurisdiction establishes its own report year end and due date for purposes of filing an unclaimed property report. Many state jurisdictions utilize a fiscal year end of June 30th for unclaimed property purposes which report is due on or before November 1st annually. Taxpayers must undergo due diligence procedures relating to unclaimed property between June 30th and November 1st in these instances; although, taxpayers should always be aware of potential unclaimed property issues during the course of the year. Please note that this fiscal year requirement applies for unclaimed property purposes even if the taxpayer operates on a calendar year or different fiscal year-end basis.
Current developments
Statute of Limitations
Many states do not provide a statute of limitations for assessments of unclaimed property. Accordingly, this can result in major record keeping problems and unclaimed property liabilities for taxpayers that fail to report and remit unclaimed property to each applicable state jurisdiction.
Whistleblower Actions
Third-party lawsuits under state false claims law is another of the risks holders face. A third-party will file a claim against a holder stating that the holder knowingly made false claims to the government regarding unclaimed property and knowingly concealed property that was required to be delivered to the government. If a holder is found liable, it can be subject to damages plus a per occurrence penalty.
Contract Auditors
A majority of unclaimed property audits are being performed by third-party auditors. Often times, the compensation paid to the contract auditors is directly tied to the amount of their audit findings, in other words, it is in the auditors best interest to ensure that there is unclaimed property turned over to a state. The third-party auditors receive a percentage of revenues the state would not otherwise receive. More states are utilizing contract auditors as it does not cost the state anything if no unclaimed property is found.
Conclusion
Holders of unclaimed property must take proactive steps to ensure their policies and procedures are in compliance with unclaimed property rules and regulations for states in which they hold unclaimed property. Although this may result in a time consuming process for taxpayers it is important in order to avoid any undue burden, both from a record keeping perspective and unclaimed property liability perspective, in the event of a state unclaimed property audit.
NEED MORE INFORMATION?
Please contact a member of WS+B’s Healthcare Services Group at [email protected] for further questions or assistance.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
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