What Is Unclaimed Property? Did You Know It’s Your Job to Find It? by Stacy Smith, CPA
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hat happens when an employee quits and you can’t find her to send a final paycheck? What if a customer has a credit balance on an account and you can’t locate him to return it? Or what happens when you own a rental property and a vacated tenant doesn’t leave a forwarding address for you to return the rental deposit? These are all examples of unclaimed property, which can be a risky area for business owners who aren’t aware of their obligation to account for it. As of 2020, there is an estimated $49.5 billion in unclaimed property in the United States. The top states for unclaimed property are New York, Massachusetts, Nevada, Rhode Island, Virginia, California and Connecticut. As states become increasingly aggressive to look for new sources of revenue, unclaimed property examinations are also on the rise, which could result in big penalties. What is unclaimed property? Unclaimed property laws were created to protect owners who are vulnerable to the loss of their property, which can be intangible (uncashed paychecks, stocks) or tangible (the contents in a safe deposit box). You may have also heard similar terms like “escheat” or “abandoned property.” Typically, the owner of the property has had it for at least a year. Examples of unclaimed property can include abandoned property, annuities, insurance payments, security deposits, gift cards or certificates, payroll checks, uncashed dividends, balances on a customer account, refunds, rebates – basically items of value. And there is no standard statute of limitations.
As you expand your business across multiple states, unclaimed property can be viewed as a liability. Growing your business requires transparency in accounting for liabilities and assets. Compliance with state rules can be confusing and often the definition of unclaimed property isn’t clear. Do you have to pay taxes on unclaimed property? Unclaimed property is not taxed while it is filed as unclaimed. However, when it is claimed, the property may be officially recognized as taxable income, which is another reason to pay attention and have an understanding about the unclaimed property you must account for.
STACY SMITH, CPA, is a shareholder with Mize Restaurant Group (formerly Mize Houser & Company), a full-service accounting firm that has provided the Elevanta Accounting & Payroll Solution for FBS members.
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If you are non-compliant with correctly reporting unclaimed property, the penalties can be painful. Case in point: A recent audit of a restaurant owner with multiple locations resulted in a $3 million initial assessment, including interest and penalties. Depending on the specific state, you can expect to pay significant interest approaching 20% per year and hefty penalties. If you are audited, some states will go back a decade or more looking for unclaimed property. If a business cannot provide records, estimates will be used that can greatly increase the assessment amount. If you are not compliant, there is still hope. Most states offer voluntary disclosure agreements that offer amnesty from interest and penalties if you come forward and bring your business up to date. However, these only apply if you enter an agreement before you get audited. S
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It’s your job to find it. And account for it. As a business owner, it’s your job to capture and account for unclaimed property. The challenging part is identifying these assets so you are in compliance with regulations that vary from state to state. Also, the definition of a “dormancy period” (i.e., how long the property has been unclaimed) can be different. If you do find unclaimed property, you are obligated to identify it (known as due diligence), notify or return the unclaimed property to the owner and, if you cannot locate the owner, remit the unclaimed property item to the state (also known as escheatment).
How to deal with unclaimed property. Because laws vary widely from state to state, identify the states where you have employees working. Set up a method or tool to capture information on uncollected property and a timeline for reviewing the list and sending out notifications each year. Also loop in your accountant or tax adviser to review your list of unclaimed property items.
