Navigate organizational issues and due diligence

As the October 31 unclaimed property compliance deadline draws ever closer, now is the time to learn more about your compliance obligations and how Friedman can help.

In part one of this three-part series on unclaimed property (UP), we introduced you to UP and explained why it’s important.

Here we are going to 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 for restitution.

Common forms of UP include stocks, uncashed/stale payroll and dividend checks, insurance payments or reimbursements, unused accounts receivable credit balances, uncashed/stale vendor checks, savings or checks and, in some 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 source rules such as apportionment or attribution. UP follows the procurement rules established by the Supreme Court in Texas v. New Jersey (379 US 674 (1965)):

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

This means that a business may not have operations in a state, but may still have UP filing requirements due to the presence of a supplier, employee, or customer in that state.

To learn more about UP, read our in-depth technical overview.

How do I become UP compliant?

UP compliance rules are enacted state by state. While there are some commonalities in how states handle UP, it’s important for companies to be aware of the compliance rules for each state and U.S. territory in which they are exposed. This means knowing the details of UP in any state where they have employees, suppliers and/or customers. In other words, the rules you have to follow in New York are different from the rules you have to follow in California.

Does UP compliance really vary by jurisdiction?

Yes. All 50 US states, as well as the District of Columbia and territories including Guam, Puerto Rico, and the US Virgin Islands, have their own UP laws and guidelines. These affect all aspects of the program, including the return of the PU to its rightful owner and when the PU becomes the property of the state or territory (a process often referred to as escheat).

What steps can I take to become UP compliant?

Five key steps can kick-start your UP compliance journey and permanently remove non-compliant items from your books.

Step 1. Collect relevant data…

Unclaimed property quickly and easily spreads outside the domain of a finance team, making compliance a team effort. Depending on the size of your organization, several services may have a property that requires action.

Of course, the types of information requested will vary depending on your organization and industry as well as UP jurisdiction (state or territory and such laws). For a larger entity, the single request for data is potentially a multi-service quarterly action.

The end result is that for a given filing season, you must identify and collect all unclaimed property, i.e. any type of property that has been idle 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 results.

  • Confirm the property is valid, has reached dormancy, and has not been previously removed or flagged on a holdings list
  • Compare applicable exemptions available, based on state, property type, dollar amount, and other factors, to determine if they are relevant
  • Analyze due diligence measures for UP (next step for compliance) based on the requirements of the actual governing body

Step 3. Perform the necessary due diligence

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

Other key elements of due diligence may exist depending on the jurisdiction. For example, California has a two-part due diligence process that includes the state doing its own submission and requiring specific language and fonts for a submission to be considered compliant. It is also important to note that for many states there is no deposit threshold, which means that even if you do not have to contact the original owner, you must still deposit the amount with the state in question.

Step 4. File your UP report and make the necessary payments

Any PUs that remain unclaimed after due diligence should be filed and turned over 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 the use of UP software to create the specific NAUPA data file, which is then sent to the competent authority in its preferred format. If you only have a few items, manual reporting is possible, but can be tedious.

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

Step 5. Reconcile payments (and keep detailed records)

Now the process comes back to the organization. Remember to make sure the UP is up to date, having never been registered or filed before?

Perhaps the most important step to ensuring compliance is closing these UP payments – either to their owners from a due diligence response, or to the appropriate authority. Reconciling these payments with the general ledgers and sub-ledgers is the most important step. Not only does this keep your UP process clean, reducing headaches, but it helps the company avoid paying off debt and acts as a back up in the event of a potential audit.

Count on Friedman

UP compliance deadlines are a reality, and the approaching October 31 filing deadline means you need to take action today to align your compliance activities with the law. Don’t let your business fall victim to a potentially costly UP audit. Count on Friedman to help get you on the right track with a proactive UP reporting process and risk mitigation plan. Contact your Friedman professional for assistance.

Aubrey L. Morgan