Tracking Unclaimed Property Helps Firms Avoid Tax Audits and Penalties

Maybe you’ve gotten the emails, or heard through word of mouth: There are billions of dollars’ worth of unclaimed assets held by state governments.

Ann Fulmer , director of unclaimed property consulting services at Sovos , told PYMNTS that the holdings are both tangible and intangible … and corporations need to be mindful of the obligations that they may be sitting on, as they may be on the hook for interest and other payments.

The state’s goal, Fulmer said, is to get that property back into the hands of its rightful owners. Consumers can go to various websites and look for unclaimed property in a bid to get it back … and it is up to the companies to get the value of what’s owed.

Broadly speaking, the unclaimed property “really comes down to a fixed and certain obligation that’s being held by an organization or a company that is due to somebody else.” It’s not only large organizations that can be affected, cautioned Fulmer, who added that all firms issue checks, or have credit balances. Some companies do business solely in one state — others can have a presence across dozens or even all 50 states, which can impact the states where they have a reporting obligation.

Unclaimed property can come in a variety of forms, spanning outstanding paper checks that have never been cashed, a gift card at the bottom of someone’s drawer or an accounts receivable credit balance that has not been paid. Or maybe it’s a bank account or client account that’s been dormant for a few years … or even oil and gas royalties.

Financial Impact to Firms

The audits and the impact of compliance can be expensive, Fulmer said, given the fact that the state governments can assess double-digit interest rates of up to 12% per year when property is reported late. An unclaimed property audit typically includes 10 report years, she said, and dormancy periods add another three to five years to that time frame, for a total of 13 to 15 years. Most states, in addition to conducting their audits, also offer voluntary disclosure programs to encourage compliance.

The interest and audits “can add up quickly for an organization,” Fulmer said. Providers like Sovos, she said, endeavor to educate companies about unclaimed property compliance processes and how to navigate the requirements on a state-by-state basis — acting as an outsourced partner to help keep track of and address unclaimed property.

For the states, unclaimed property can wind up being a significant source of funds — Fulmer has seen this firsthand, having worked for the state of Pennsylvania, which is sitting on more than $4 billion in unclaimed assets. For the state of Delaware, unclaimed property has historically represented the third-largest revenue generator — beating out the state lottery, for example.

In addressing unclaimed property, she said, Sovos recommends that a company undertake risk assessment — determining where they have potential exposures, well beyond the confines of uncashed checks, doing a deep dive to examine unidentified remittances, obligations or balances tied to activities that can create or hold funds due to another party.

“If you’re a highly decentralized organization, you have to reach out to all of your different lines of business that could be sitting under your organization because they, too, could be sitting on potential exposure that needs to be reported up through a parent company, or you need to determine whether they’re going to report it individually or at their level,” Fulmer said. Nothing can be assumed to be written off, so examining all lines of business and accounting cycles is a critical endeavor.

“We recommend an unclaimed property coordinator be assigned or appointed within the organization so that we have one key contact who understands how all of your unclaimed property moves and where it needs to go,” she said.

Partnering with providers, she said, can help organizations keep up with the constantly changing state requirements, including shortening and lengthening “dormancy” periods, ensuring that companies remain in compliance. There’s an entire team within Sovos, she said, that is devoted solely to monitoring state-level changes in unclaimed property policy.

As Fulmer told PYMNTS, “It really is important for organizations to understand how unclaimed property requirements can impact the organization. And it’s really important because of the fact that state enforcement efforts and audits are becoming more and more aggressive.”