Managing Your Unclaimed Property Risk

Tuesday, April 1, 2008 - 01:00

Editor: What is unclaimed property?

Panaccione: It is property held or owing in the ordinary course of business which has not been claimed for a certain period of time by the owner. Some examples of that would include unpaid wages and uncashed payroll checks, credit balances or customer overpayments, unused gift certificates, unredeemed vendor credits and payments, open checks, drafts, and deposits, unidentified remittances, stock and other securities, and interest and dividend payments.

Editor: Who is subject to unclaimed property laws?

Panaccione: All companies are, whether they are private or public, large or small, if the company has been in existence for at least the minimum dormancy period, which is the period that must expire before an asset becomes unclaimed property [dormancy period typically ranges from 3-5 years depending on the asset type]. Any business that has been around that long is subject to unclaimed property laws and has unclaimed property filings that must be made to be in compliance. Some think they are not subject to these rules, but all 50 states have unclaimed property laws that require companies that hold these assets to remit all unclaimed funds after the dormancy period.

Editor: Should corporate secretaries be concerned about unclaimed property compliance?

Panaccione: Yes, they should be aware of the overall compliance requirements and make sure that they are properly addressed within the organization. While the typical day-to-day, month-to-month activity of tracking and inventorying unclaimed property and completing the various state compliance filings is usually housed within the tax, accounting or finance departments, corporate secretaries should be very involved in unclaimed property compliance as it relates to shareholders and the holders of other company securities. Publicly traded companies in particular can have some pretty substantial issues with shares and other securities that are not claimed and uncashed interest or dividend checks.

Editor: Do all the states have the same unclaimed property rules and deadlines?

Panaccione: No, they differ from state to state. Generally, there are two filing seasons each year - one filing season in the fall and another in the spring. Each requires a report to be filed annually and funds to be remitted to the state. Different states can have different exemptions for things like gift cards. Another very important difference has to do with collection techniques. Some have dedicated staff to handle audits. Other states will hire third party auditors who are compensated on a percentage basis.

Editor: Generally, what are the duties of a holder of unclaimed property?

Panaccione: In general, you have a duty of due diligence, which means you have to try to find the property owner before you file the report and remit the funds to the state. You also must protect the unclaimed property and implement proper controls on behalf of the owner of the property until it is transferred to the appropriate state. As we have already discussed, you have to file annual compliance reports to all applicable jurisdictions and remit the funds to each state related to the unclaimed property. You also must maintain copies of the reports that you file. It is also important to note that some states require the filing of negative reports, even if the company has no unclaimed property liability to report.

Editor: What happens if a company does not keep records regarding unclaimed property?

Panaccione: In the absence of records, states can and do use "estimation techniques" during audits to determine a company's unclaimed property liability. In those cases, auditors may look at the amount of unclaimed property that a company has accrued over the last several years and use those numbers to estimate what was likely accrued each year records were not kept/reports were not filed. It is easy to see how estimation techniques, in the absence of records, can lead to significantly higher unclaimed property liability. It is a very challenging situation.

Editor: How does unclaimed property benefit a state?

Panaccione: While states do not technically own the unclaimed property assets remitted, they are the custodians of these assets. As such, they can collect income on the proceeds and use the income generated to fund state programs and avoid the need to increase state taxes. For those reasons alone, you can see why many state governments view unclaimed property as an important revenue source that has few political consequences.

Editor: Typically what agency or office within state government is responsible for unclaimed property compliance?

Panaccione: In many states, unclaimed property compliance will be enforced by the Controller's Office within a state's Department of Finance. However, some states treat collection of unclaimed property more like a tax and vest this responsibility in the Division of Revenue or other department responsible for collecting taxes. To give you a sense of the amount of money these offices are collecting, in February the Wall Street Journal reported that the following states were holding unclaimed property assets of $2 billion dollars or more: New York ($7 billion), California ($5.1 billion), Delaware ($2.4 billion), and New Jersey ($2 billion).

Editor: What can trigger a state audit of unclaimed property?

Panaccione: It might be a recent merger or acquisition, filing of negative reports, or the realization that a company has never made an unclaimed property filing. States also seem to be attracted to companies with a large transient workforce because statistically there is a higher probability that there will be uncashed payroll checks. The type of industry a company operates in may also cause an audit to be triggered because certain types of businesses have more unclaimed property liability than others, i.e. a chain of retail stores that has lots of gift cards.

Editor: Is there a statute of limitations on how long state auditors can look back at a company's unclaimed property liability?

Panaccione: Yes and no. If a company has not been filing annual unclaimed property reports most states do not have a statute of limitations on the look back period that can be used by auditors. However, if a company has been filing unclaimed property reports and the company is audited, most state laws will only allow auditors to look back 13-15 years.

Editor: Is there anything that a company can do to mitigate the risk of an audit?Panaccione: If a company has failed to file unclaimed property reports, the best way to avoid an audit is to make a voluntary disclosure. States will enter into unclaimed property voluntary disclosure agreements (often referred to as a "VDA") if the holder comes forward before receiving notification of an audit. The benefits of a VDA can be substantial. They can include a reduced look back period (sometimes with more favorable estimation methodologies) and abatement of penalties and interest.

If you qualify for a VDA, you may wish to retain an advisor or consultant to help you because getting your unclaimed property history in order can be difficult. It will not only involve an examination of your internal procedures, record keeping, software and all other relevant systems to make sure that you are recording the proper information, but it may also require your organization to deal with some unique legal and business issues for which you may not have any in-house expertise.

Of course, once you go through the VDA process, the best way to mitigate risk going forward is to keep on top of all the rules, regulations and deadlines of each state filing office and to file your reports annually.

Editor: Can you give us a sense of how much companies are forced to pay after an unclaimed property audit?

Panaccione: For a large company, whether public or private, if you are audited and you have not come forward, that figure could be in the millions. A company may have to go back twenty plus years and then face penalties and interest. Even mid- and small-sized companies may owe hundreds of thousands of dollars.

Editor: Is it possible to outsource unclaimed property compliance?

Panaccione: Yes, at Corporation Service Company (CSC) we offer an unclaimed property compliance service to help companies meet their compliance obligations in this area. If you are a company who is looking to enter into a VDA due to past non-compliance, CSC has relationships with a network of knowledgeable legal and accounting advisors that can help companies undertake the VDA process. For companies who have been complying with unclaimed property laws and filing reports annually or companies who have recently entered into a VDA, CSC can help prepare and file annual unclaimed property reports in all 50 states. Since rules, regulations and deadlines regarding unclaimed property are constantly changing, it really makes sense to outsource this compliance function to someone you can trust who has their finger on the pulse in each of the 50 U.S. jurisdictions. Not only will this help reduce your risk, but by reducing the number of hours of staff time spent annually on managing this compliance obligation, you can quickly see how outsourcing can yield a significant cost savings, too.

Andrew Panaccione is a Vice President at Corporation Service Company ® and is responsible for managing CSC's Unclaimed Property Compliance Services division. Mr. Panaccione is a certified public accountant (CPA) and is a member of the American Institute of Certified Public Accountants, the Delaware Society of Certified Public Accountants and the Unclaimed Property Professionals Organization (UPPO).

Corporation Service Company, a privately held company headquartered in Wilmington, DE, USA, is a leading provider of legal and financial services for many of the world's largest companies, law firms and financial institutions. Founded in 1899, CSC is a service company dedicated to reducing risks and costs for clients by providing corporate identity protection; corporate governance and compliance; litigation and matter management, as well as deal and transaction support services. Each of the services offered by CSC is fully integrated with its monitoring, workflow, compliance and reporting solutions.

To learn more about unclaimed property services offered by CSC, visit www.cscglobal.com. To view a free 1-hour web seminar regarding unclaimed property compliance, please go to http://incspot.cscinfo.com/cscglobal/onlineTraining.csc.

Please email the interviewee at apanaccione@cscinfo.com with questions about this interview.