Changes and leading practices in unclaimed property compliance

June 14, 2018 | Recap of Bloomberg Tax hosted webinar sponsored by KPMG LLP

Unclaimed property compliance is a moving target for companies across the country in all industries, as a shifting regulatory environment presents ongoing challenges.

A recent KPMG/Bloomberg Next webinar, “Unclaimed Property Obligations: State Reforms, Common Audit Challenges and Best Practices,” highlighted some of the more important takeaways from recent legislation and litigation in this space.

State Unclaimed Property Changes: What to Monitor

Each state has its own unclaimed property regulations and reporting requirements. It’s a common misconception that unclaimed property operates like a sales tax, with compliance required only in states where a company has a physical presence. However, businesses are required to report unclaimed property to the state of the last known address of the property owner as reflected in the records of the company holding the property, so many companies must comply with many states’ rules by virtue of having customers, vendors, employees, and other property owners residing in all of the states.  This multi-state compliance requirement presents challenges due to the varying, and frequently changing, regulations and reporting requirements.

Specific areas to watch include:

Changes to dormancy periods. Recent trends indicate many states are shortening their regulatory dormancy periods, defined as the length of time holders of unclaimed property can hold the property before having to transfer the property into the custodies of the states, to take custody of the property years earlier.

Increasing state scrutiny. Many states are applying more scrutiny to how companies are handling their unclaimed property compliance through more frequent initiation of audit examinations, often conducted on behalf of numerous states by a third party contract audit firm.  Some states are reviewing other tax filing and business registration databases to identify companies not filing unclaimed property reports, or filing reports that may be incomplete or understated, to identify companies to subject to audit examinations. As such, companies will want to tighten up and test the completeness of their compliance processes.

Due diligence and activity requirements. Businesses should monitor changes to notice windows and contact requirements, including mode of contact, with some states allowing unclaimed property holders to use electronic means. In addition, many states are refining requirements for evidencing activity, or lack thereof, with property owners.

New reporting methods. Many states are moving to require online filing for unclaimed property. For security, the reporting software for some states will generate encrypted filings that holders can burn to a CD and mail.

Clawbacks of Business-to-Business (B2B) exemptions. Some states have historically exempted certain types of property owing between businesses but Illinois recently removed its exemption and asserted a retroactive claw back of the prior five report years of B2B property previously withheld from reporting by companies that elected to apply the B2B exemption in prior years. If other states follow suit with repeals of B2B exemptions, a negative impact to income will result for companies that have historically taken such exempt property to income when the property needs to be reported to the states.   

Rule changes in retail. There is much ongoing litigation regarding unclaimed property rules for gift cards, merchandise credits, loyalty programs, and prepaid or stored-value cards. Retailers should understand the characteristics of their programs to ensure they are appropriately complying with the state unclaimed property laws.

Leading Practices. What can businesses do to ensure they are staying on top of the unclaimed property issues applicable to their industry? Some leading practices for companies include:

Get organized. Oftentimes, items mistakenly give the appearance of being unclaimed property as a result of careless and incomplete accounting records so it is important to maintain organized records. It may also help to automate repetitive processes for compliance such as mailing statutorily required due diligence letters to owners of unclaimed property prior to reporting the property.

Clean up customer credit balances. Institute more frequent monitoring of credit balances owing to customers and reach out to customers urging them to use the carried balance.

Keep documentation for voided checks. Under an audit examination, checks voided more than thirty (30) days after issuance are presumed unclaimed property liabilities unless a company can prove the underlying obligations were not owed or were satisfied through another payment or means so it is important to maintain evidence of the discharged obligations justifying all voided checks.

Be aware of lookback periods. The lookback period for an unclaimed property audit, or even a Voluntary Disclosure Program, can be long – oftentimes, at least ten (10) report years plus the dormancy period which can equate to around fifteen (15) years. Oftentimes, a company’s state of incorporation can extrapolate an estimated assessment from existing records for years for which complete records are no longer available.

Don’t just start filing negative reports to all states. Many states require a negative or “zero property to report” filing if there’s no unclaimed property to report in a given year. But companies, especially those that have been operating for many years, should not just start filing negative reports to jurisdictions with which they have no compliance history, as this is a common trigger for unclaimed property audits. Prior to filing negative reports, companies should first be sure to review all records for all property types to ensure they are not holding any property that may be reportable to the states.

Come into compliance voluntarily. A company can potentially reduce the risks and headaches of an unclaimed property audit examination by proactively self-reviewing its unclaimed property exposure areas and coming into compliance through a Voluntary Disclosure Agreement program.

Unclaimed property is a challenging element of business administration, but staying organized and up to date on the types of changes states are making can help ensure compliance. 

To view a replay of the webinar, click here