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Running a business is no small feat, and it comes with various financial responsibilities and potential pitfalls. One reporting requirement that business owners may not be aware of relates to unclaimed property reporting. In the following beginner's guide for business owners, we will provide a basic summary of unclaimed property reporting requirements, the consequences of non-compliance, the importance of self-audits, and the steps you can take to rectify any reporting issues. Whether you're an experienced business owner or just starting out, this guide will help you better understand this area of business management.
Unclaimed property refers to financial assets that have been abandoned or left inactive by their rightful owners for an extended period of time. The required abandonment period for an asset to be considered unclaimed and require reporting varies based on the type of property. As a business owner, here's what you need to know:
Unclaimed property is generally intangible property and can include uncashed checks (payroll and vendor checks), dormant bank accounts, unreturned customer or security deposits, uncollected customer refunds, unused gift cards, unpaid wages or commissions, and more.
The federal government does not administer a unified unclaimed property program; instead, each state has its own unclaimed property laws and regulations. However, there are some federal laws and regulations that relate to unclaimed property reporting and handling.
The federal government's involvement primarily revolves around "escheatment," which is the right of the government (generally the state government) to take ownership of unclaimed property. According to federal law, unclaimed property should be turned over to the state of the property owner's last known address, even if that state is different from the holder's state of incorporation. In addition, there is no minimum dollar threshold for amounts considered for escheatment.
Each state has its own laws and regulations governing unclaimed property reporting. Businesses that operate in multiple states or that have employees, customers, or vendors operating in different states need to be aware of these variances:
The definition of unclaimed property can vary by state, including the types of assets or funds subject to reporting, as well as the abandonment period required for each property type.
Different states have varying deadlines for unclaimed property reporting, so it's crucial to stay organized and aware of the various deadlines. For the states of Oregon and Washington, the reporting deadline is October 31 for all items considered abandoned as of June 30 of the current year.
State law dictates the responsibilities of the holder (the business) regarding unclaimed property, and these responsibilities can differ substantially state to state.
For example, in the state of Oregon, holders are currently required to perform adequate due diligence to contact the rightful owners of property if the value of that property is more than $100. However, in the state of Washington, due diligence steps are required for balances exceeding $75. In addition, the type of due diligence required to be performed differs slightly between each state.
Penalties for non-compliance with unclaimed property laws vary from state to state, but they often include fines, interest, and legal action.
Improper filing can lead to substantial penalties; however, the amounts and types of penalties vary by state. Here's what you need to be aware of:
States conduct audits to ensure businesses are complying with unclaimed property laws. In addition, states can request that certain businesses perform self-audits and report on their findings. Businesses can be chosen for these audits randomly or based on specific triggers, such as someone related to the business claiming property through the state's.
States have the authority to audit records (or request that you self-audit records) dating back several years. Full cooperation during the audit process is essential, including providing the necessary documentation and information. Failure to comply with audit requests can result in fines and legal action.
Performing self-audits is a proactive way you can identify and address unclaimed property issues before facing a state audit. Below are a few steps you can take to review your own financial records for any potential unclaimed property that might require reporting:
Collect all relevant financial records, including accounts payable, accounts receivable, payroll records, and all general ledger detail for the past few years. If you have not reported any unclaimed property in the past, then you will likely want to review your records for the past 10 years.
Review records to identify any unclaimed property that should have been reported. Consider any old checks, accounts payable, or credits in accounts receivable that are still outstanding in the current year or that were written off and recorded as income in the past. These may represent items that should have been remitted to the state as unclaimed property.
Correct any past non-compliance by reporting and remitting unclaimed property as necessary based on your review of the financial records.
Once any historical issues have been resolved, it's important to develop policies and procedures to ensure ongoing compliance with unclaimed property laws. This involves establishing and documenting formal annual processes to review all aged transactions within the general ledger.
In addition, you'll want to determine who will be responsible for performing this review, when the review will occur, and the steps that individual should take to connect with the rightful owner of any aged property. Finally, you will want to establish formal documentation of the due diligence steps taken, along with the retention policy of all documentation related to the filing of the unclaimed property report.
By taking control through self-audits and implementing formal processes for unclaimed property reviews, businesses can reduce the risk of penalties and maintain a strong reputation.
If you've encountered problems with your reporting returns, were selected for a self-audit and have identified unclaimed property that needs to be reported, or have not been filing tax returns as required, here's how you can address these issues:
Address the issue promptly by reviewing your financial records, filing any overdue tax returns, and making any necessary tax payments. The government generally welcomes voluntary compliance.
If you owe money to the government related to past unreported unclaimed property and you can't pay in full, consider setting up a payment plan to gradually settle your debt over time.
Consider consulting a tax professional or CPA who can help you navigate the process and potentially reduce penalties through negotiation or correction. Delap's Business Advisory team can assist you through this process and help implement procedures for compliance going forward. Reviewing many years of general ledger data can overwhelm your software. Our team's use of can be crucial in saving your team time and money during this process.
Unclaimed property is an aspect of tax reporting that many individuals and business owners are often unaware of. Understanding and managing unclaimed property and adhering to federal and state requirements is an important aspect of responsible business ownership. Stay informed, proactive, and compliant to ensure the success and longevity of your business.
If you have any questions regarding unclaimed property and how it might impact you, please reach out to the Delap Business Advisory team.