In lean economic times, states are often hard pressed to secure revenues. Regulations, fees and fines that may not have been as strictly enforced in more robust environments make their way to the surface to become key enforcements.
“When budgets are tight and states are looking to increase revenue, we have seen unclaimed property enforcement step up,” said Valerie Jundt, senior manager, Deloitte & Touche, LLP, during the CMA-sponsored teleconference
“Escheatment: What Every Credit Manager Needs to Know.”
Like many U.S. laws, escheatment and unclaimed property laws have roots that go back several centuries to British common law. Under the regulations, after a certain period of time, companies are required to turn over all unclaimed or unapplied customer credit balances, rebates, dividends, un-cashed paychecks, commissions, discounts and a host of other properties to the state. Escheatment is actually the physical transfer of property to the state that has the effect of making the state legal owner, rather than merely the custodian, of the transferred property. More often than not, states are interested in cash or cash equivalent property that can be liquidated quite easily.
Companies that are acting as holders for unclaimed property are required each year to submit reports to the government outlining their unclaimed property activities and to remit funds as necessary. The problem is that oftentimes, companies are simply unaware of their unclaimed property responsibilities or are culpable of some sort of infraction as laws and statutes vary widely from state to state.
“What we’ve found is that oftentimes many companies who feel that they’ve been filing reports for years are not in compliance; and that tends to be a mess,” explained Jundt. “The reality is that all holders are likely to have some
unreported unclaimed property liability. And the larger you are, the more complex you are, the more dispersement accounts, the more merger and acquisition activities that you have, the greater the risk that you have. So, if you are a
very large company and have somewhat of a complex organization structure, the likelihood that you are going to have unclaimed property issues is high.”
Unclaimed property fines are not a tax, though they are often perceived as one. Both civil and criminal penalties can be applied for unclaimed property violations. Fines can be assessed for not reporting unclaimed property, for not
performing due diligence or complying with state statutes or for not handing over the property to the state. Knowingly filing a fraudulent report can have devastating financial impacts. Fines up to $25,000 and interest up to 75% can be tacked on to the property. Plus, failure to properly account for unclaimed property liability can be viewed as a violation of Generally Accepted Accounting Principles (GAAP) or Sarbanes-Oxley Act internal control and reporting requirements. States are also vigilant for any warning signs from companies that could trigger an audit on a company, resulting in unclaimed property laws violations.
“The likelihood of you being audited is greater than it used to be,” said Jundt. “Though from my experience most states are very reasonable.”