C-suite individuals receive a plethora of important letters, many of which pertain to certain compliance requirements for their companies. Some of these letters come from states and deal with unclaimed property. Understanding and being familiar with the type of mailing received is important. If handled improperly, unclaimed property notices may result in increased risk for companies.
This article provides an overview of unclaimed property, the types of unclaimed property notices companies receive, and best practice recommendations on how to handle such notices.
Unclaimed property basics
All 50 states, together with the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands, have unclaimed or abandoned property laws. For further information on unclaimed property basics, including key terms, please refer to the Journal of Accountancy article "Unclaimed Property: What Is It, and What Are the Risks?"
State unclaimed property notices
States have typically adopted a version of the model Uniform Unclaimed Property Act from 1981, 1995, or 2016. Each of these acts provides states with the statutory authority to examine a company's books and records to verify abandoned property compliance. To this end, each state employs its own methodology to verify a holder's compliance.
At a high level, the unclaimed property notice that companies received from the state will come in one of three forms: an annual compliance reminder, a notice of examination, or an invitation to an amnesty program/self-audit.
Annual compliance reminders
States will often mail holders of unclaimed property a letter reminding them to file unclaimed property reports in the months leading up to the annual reporting deadlines. State unclaimed property reporting deadlines vary by state and generally fall into three reporting cycles (spring, summer, and fall). Filers should pay particular attention to any changes in the reporting process referenced in the letter, which may include:
- Any recent law changes (to filing dates, dormancy periods, etc.);
- How and where to submit the report;
- Due-diligence requirements;
- Remittance requirements and payment type threshold, as applicable;
- Tangible property requirements;
- Securities transfer instructions;
- Negative reporting requirements; and
- Filing extension procedures.
Notices of examination
Escheat compliance is not optional. Because states have the authority to audit the books and records of the holder to determine compliance, they will almost certainly do so.
States often have specific criteria and identification techniques, including the use of third-party auditor software, to determine targets for examination. This software enables the states to determine the property types and amounts that have been filed by the holder and analyze the data for red flags. Common red flags include missed report filings by the holder, inconsistencies in the amount reported, or irregularities in the property types reported. States may also review the company's filing history against those of other entities in the same industry to identify noncompliance.
Companies should carefully read notices of examination they receive from a state. Important pieces of information in audit notices include:
- Whether a state official or a third-party auditor will be conducting the examination.
- The scope of the examination, including the entities, types of property, and years under examination.
- Whether statutory penalties and interest may be imposed.
- What, if any, further action may need to be taken by the holder (e.g., do not report past due property until the audit is complete).
Audits conducted by the state are generally not as stringent as examinations conducted by a third-party auditor. Third-party auditors maintain relationships with many states, and it is likely that if a company receives one audit notice, then other state audit notices are on the way.
Self-audit (amnesty program invitation)
Prior to conducting a full examination, many states allow companies the opportunity to conduct a self-review to verify compliance. (Interestingly, many of the state self-reviews are guided by one of the state's third-party auditors.) Companies should not take such self-reviews lightly, as their responses have the potential to lead to a full examination. Companies should take note of any response deadline indicated in the notice to reduce additional risk.
Delaware, which is arguably the most active state when it comes to unclaimed property compliance enforcement, routinely sends Voluntary Disclosure Agreement (VDA) invitations, Verified Report, and Compliance Review mailings.
For Delaware VDA invitations, should a company fail to enter the VDA program within 90 days of the letter date, the company "will be referred to the State Escheator for examination." Performing a Delaware VDA has several distinct benefits compared to undergoing an examination, some of which include:
- The work is driven by the company versus the auditor.
- The testing procedures under the VDA program are less stringent than those under an audit.
- The company is allowed a waiver of penalties and interest (which can be significant under audit).
Verified Reports and Compliance Reviews sent by Delaware are notices targeted at current filers of unclaimed property that have either failed to file a report for a given report year or otherwise appear to be out of compliance. If a company fails to respond to the notice within the time frame provided, Delaware may issue a Notice of Examination.
Nearly every company can generate unclaimed property. Having a comprehensive unclaimed property compliance program, however, can minimize a company's liabilities and lower its risk of audit. Companies should have robust policies and procedures to help identify, track, and document their unclaimed property efforts. Regularly performing self-audits or risk assessments to locate missed or underreported property can assist in early detection and remediation efforts.
— Luke A. Sims, CPA, is a partner and advisory practice leader at MarketSphere Consulting LLC in Overland Park, Kan. MarketSphere Group LLC is not an accounting or law firm, and the information provided within this article should not be viewed as accounting or legal advice. To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.