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Since many states have begun increasing enforcement of unclaimed property regulations, contractors need to proactively identify unclaimed property and comply with the applicable laws.


Contractors Face More State Audits for Unclaimed Property

  • 5/6/2014

Many types of property may be considered “unclaimed property” by state agencies if a company cannot find its owner. Almost all businesses have some level of unclaimed property liability, but it can be easy to overlook the importance of submitting unclaimed property to the state. This is particularly true for contractors, who may have unusual types of unclaimed property.

Examples of the typical types of unclaimed property include:

  • Unclaimed bond interest and stock dividends
  • Uncashed checks and payroll wages
  • Unclaimed insurance benefits

Unclaimed property has not been a significant problem for contractors in the past, but an increasing number of contractors are finding themselves subject to unclaimed property audits by state agencies. Therefore, contractors should understand what kinds of unclaimed property they may have, and how to comply with state laws.

What happens if I don’t submit unclaimed property to the state?

The amount of time a company can hold property before it is considered abandoned and must be remitted to the state vary by state. The company must try to contact the property owner by letter 60 to 120 days before the expiration period, and if it cannot find the owner, it must submit unclaimed property returns in the state of the last known owner.

Each state has a program that aims to return property to the proper owner. Before the property is claimed, the state holds the property and is entitled to the interest that it generates. Further, the majority of the property is never claimed by its rightful owners. When the property remains unclaimed, it stays in the state’s fund with the purported goal of benefitting state residents.

Audits and the statute of limitations

Due to increasing budget deficits, states have increased enforcement of unclaimed property regulations, and have started using third-party auditors to conduct those audits. These third-party auditors are often paid on a contingency fee basis, and conduct audits on behalf of multiple states at one time.

Audits are further complicated by the fact that there is no statute of limitations on unclaimed property procedures. Most states limit the time period that companies can be liable for unclaimed property to the previous 10 or 20 years, although many states may increase this time period if no ownership records can be found.

This can be problematic because most companies do not retain financial records of its employees this far back. In the absence of records, auditors can estimate when the company took ownership of the property — and this may stretch as far back as the company’s date of formation. The company then has no means of proving that these calculations are inaccurate and are forced to settle with the auditors to avoid costly litigation.

Additionally, because unclaimed property is not technically considered taxes, a company does not need to have nexus with a state to be subjected to its unclaimed property rules. Many businesses don’t realize that they may have unclaimed property obligations in states where they are not paying taxes. Therefore, the potential liability arising from unclaimed property issues and potential audits can be substantial.

How do I comply with laws?

Contractors need to be proactive in identifying unclaimed property and complying with the applicable laws. They can find unclaimed property by reviewing records and identifying outstanding checks or dated credit balances. Further, businesses can prevent issues with unclaimed property by notifying previous and current staff and clients of a change of address, communicating with property owners, and promptly updating business record systems.

Ignoring unclaimed property issues will not make them disappear. These obligations can grow significantly because there is no statute of limitations. If you discover that you may have an unclaimed property liability, a voluntary disclosure agreement or other amnesty programs could help you manage your liability and become compliant with the various state unclaimed property programs. Your tax advisor can also help determine your potential exposure to unclaimed property risk and implement policies, procedures, and internal controls to reduce the risk.