Unclaimed property compliance is seen by many as just another set of costs for organizations to bear. Almost all organizations hold property that technically belongs to someone else from time to time. Most of the time possession of that property, whether funds or goods, is usually transferred successfully to the owner in the normal course of business. Sometimes, however, checks remain uncashed or customer deposits are not translated into full sales, resulting in organizations holding unclaimed property.
Whenever an organization identifies an item of unclaimed property, it has to try to locate its owner to restore possession back to them. If the owner cannot be located, the organization has to report that information to the relevant state (the state of the owner’s last known address, or the organization’s own state), and then pay the value of the unclaimed property to that state’s authorities.
Complying with unclaimed property requirements can be costly and complex. Each state has its own regulations, and its own reporting cycle. The shift to electronic sales and the growth of remote working means that even very small companies might now have customers, suppliers and employees in multiple states – and thus a requirement to understand the regulations and file reports in all those states.
It is undoubtedly costly to comply with unclaimed property requirements. The due diligence process appears to impose an unrecoverable cost. But to ignore the requirements would be a grave mistake. States are entitled to assess penalties and interest on any unreported unclaimed property. Given that much unclaimed property is in the form of low-value, uncashed checks, the potential financial penalties can dwarf the value of any unclaimed property. Failure in reporting can also result in an organization being audited, a process that can take up a lot of management’s time and organizational resources.
In other words, while actively managing potential unclaimed property and filing annual compliance reports may, at first sight, seem high, the potential costs of non-compliance could be higher still.
So, what can you do about it?
The first step is to try to reduce the chance of property becoming unclaimed. One way is to reconcile payments efficiently, so any outstanding items can be flagged as soon as possible, allowing action to be taken to contact the owner before contact is lost. Another is to consider shifting toward electronic payment methods, such as direct deposit for payroll and ACH for supplier payments, which are both much less likely to become unclaimed when compared with checks.
Then, set up a consistent unclaimed property process, with a named person responsible, who will start by identifying unclaimed property, and managing the due diligence process, before reporting to (and then paying) the state authorities. Technology and specialty consultants can both help to manage this process, particularly with understanding each state’s specific reporting requirements, which can be arduous.
For more detail, see the AFP Payments Guide on Unclaimed Property, underwritten by MUFG.