Unclaimed property reporting: Here’s help for Finance to prevent issues with compliance

Fall is an important season for unclaimed property reporting. And it’s something Finance needs to start thinking about as summer ends.

Many states have unclaimed property reporting deadlines in October and November each year. And compliance is crucial, since issues with reports can lead to pricey fines and time-consuming audits.

That means it’s key for Finance pros to have a clear strategy for managing unclaimed property. That way, reporting will have fewer hassles and be more accurate.

In a presentation at the American Payroll Association’s Virtual Congress and Expo, Heather Steffens, partner for strategic solutions at MarketSphere Unclaimed Property Specialists, discussed key audit triggers for unclaimed property compliance and how companies can prevent issues with their reporting.

Red flags for state auditors

State auditors can come calling to review companies’ unclaimed property compliance – and they can also recruit third-party firms to audit employers’ practices.

In addition, 29 states are currently using the State Targeted Assistance Compliance System, a software solution created by one of the largest third-party auditors to automatically track who’s filing unclaimed property reports and whether filing’s being done correctly.

Software like this can help states more efficiently identify audit triggers with an employer’s unclaimed property reports, such as:

• Failing to file
• Submitting reports late
• Filing negative reports each year
• Submitting incomplete reports
• Filing reports that aren’t in each state’s required format
• Failing to report property types that are standard for the company’s industry
• Reporting much less unclaimed property than similar organizations
• Filing to the wrong state
• Claiming property incorrectly, and
• Reporting limited property types without filing reports for all unclaimed property.

Mergers and acquisitions can also be an audit trigger, so it’s important for Finance to keep an eye on unclaimed property reporting throughout the process, and review the terms of contracts to determine who’s obligated to report.

The cost of noncompliance

Penalties for noncompliance with unclaimed property reporting guidelines can be severe.

Some states charge as much as $100 to $200 per day that the property remains unreported, according to Steffens. There can also be additional fines of anywhere from $1,000 to $25,000. Plus, states can assess interest on the property’s value.

That means companies could end up paying more than the actual value of the unclaimed property.

Strategies for unclaimed property reporting

To make sure Finance correctly handles its unclaimed property reporting responsibilities, it must be clear who’s responsible for the task. Both Payroll and A/P may have unclaimed property to manage, most notably uncashed paychecks or other payments.

With that in mind, it’s a good idea to create an unclaimed property administrator for the entire company, Steffens said. Preferably, this would be someone who’s familiar with the guidelines and knows the inner workings of your Finance department.

This person can serve as a point of contact and work with the rest of the Finance team to develop policies, procedures and documentation related to unclaimed property reporting. The administrator can also spearhead the training of staff on unclaimed property procedures.

In addition, the person can schedule regular reviews of unclaimed property protocol to keep up with any changes in state laws and regulations or new types of property to manage. This way, procedures can be regularly self-audited so any compliance problems can be addressed ASAP.

Steps to take when reporting

It can be confusing to know where you should submit your unclaimed property reports. The first priority rule is to remit unclaimed property to the state of the property owner’s last-known address that’s listed in your records.

When that’s unknown, the second priority rule says that you must remit to the employer’s state of domicile or incorporation.

In a nutshell, employers are required to take the following steps when reporting unclaimed property:

• Identify all potential sources of property. This review should cover internal and external sources, including your contracts with any third-party administrators. States take the view that the party that’s made the promise to pay is ultimately responsible for unclaimed property reporting. And depending on contract terms, that may be the employer – not the third party.
• Review supporting records and documentation. Supporting records and documentation you’ll need to review include accounting records, tax returns, HR records, financial reports, legal records and information systems records.
• Apply the relevant state law dormancy period. The dormancy period can vary significantly by state. For example, New York has a three-year dormancy period for both payroll checks and A/P, while Florida has a one-year dormancy period for paychecks and a five-year dormancy period for A/P.
• Perform statutory due diligence. In most cases, due diligence is satisfied by a first-class mailing to the owner at the last-known address and/or an electronic contact at the last-known email address, depending on state law.
• Report and remit the property to the state. Along with keeping the deadlines in mind for fall and spring unclaimed property reporting, it’s key to review each state’s requirements for reporting, including the correct format and methods for remittance. Most states are shifting toward online reporting and remittance, especially considering the pandemic.
• Retain any relevant supporting records for the required length of time. The length of time you need to keep supporting records on file typically includes the dormancy period plus a certain number of years. Together, they’re referred to as “report years.” State retention requirements also vary, but often range between seven and 10 report years. Note that supporting records also includes your unclaimed property filings.