Most businesses, whether they know it or not, have the potential to generate unclaimed property and the associated obligations that come with it.
What is Unclaimed Property?
Unclaimed property is any financial asset that has been abandoned or unclaimed by the rightful owner for a specific period of time. Examples include:
- Bank accounts and contents of safe deposit boxes
- Dividends, payroll or cashier’s checks
- Stocks, bonds, mutual fund accounts
- Mineral interest or royalty payments
- Court deposits, trust funds, escrow accounts
- Inactive savings accounts
- Life insurance proceeds
- Customer overpayments
- Gift certificates
In short, these items must be given to the owner or turned over to the state. Unclaimed property can have some expensive consequences if not handled correctly, so it’s important to understand how property can qualify as unclaimed, and what steps your business may need to take to deal with it.
How does Property Become ‘Unclaimed’?
There are several reasons property could become unclaimed. In some cases, the owner simply forgot about the property, passed away or left it behind. Unclaimed property can result from an employee termination, an owner changing their address without notification, or an owner moving from a location where a deposit was required.
Businesses holding these types of items may know they exist, but think the item is too small for them to take the time to deal with it. This may seem like a small oversight, but it could prove to be very expensive in the long run.
What do you do if your Business has Unclaimed Items?
There are three progressive steps that must be taken when unclaimed property is discovered:
- Identify any unclaimed property item (research)
- Notify, or return, the unclaimed property to the owner (due diligence)
- If the owner cannot be found, remit the unclaimed property item to the state (escheatment)
Here are a few definitions of common terms:
- Holder: The business in possession of an unclaimed property item.
- Dormancy Period: The amount of time an unclaimed property item can be held before it has to be reported to a state. This varies by state. In Nevada, it’s generally three years with some exceptions.
- Escheatment: The act of turning unclaimed property over to a state. Once you do this, they now have the responsibility for it.
- Due Diligence: The act of making one final attempt to locate the property owner.
Common Questions on Unclaimed Property
Connecting identified unclaimed property with the rightful owner can be difficult and time consuming. Businesses need to make sure they are diligent in trying to locate the owner and documenting their efforts.
Many businesses end up asking the following questions:
- What types of property do I have that may be subject to these rules?
- What is the value that should be reported?
- To what state should the property be reported to?
- How do I go about tracking down the property owner?
- How do I know whether or not an account is dormant?
- How long after the account is dormant do I have to report it?
There may be different answers to these questions depending on the state where an unclaimed property item is reported. Different states have different rules for reporting, and there are strict timelines to follow. Some states see unclaimed property as a revenue source, even though unclaimed property is not technically a tax. Other states, such as Minnesota and Wisconsin, approach unclaimed property from a consumer protection perspective. This is helpful, as it should result in a state’s collaboration with a company, instead of fostering a confrontational review.
Unclaimed Property in Nevada
The Nevada State Treasurer keeps an unclaimed property website where people can search for unclaimed property and find other valuable information. Businesses will also find information on reporting any unclaimed property they have, as well as an audit guide for businesses who are selected for an audit of their unclaimed property reporting.
The state currently holds about $830 million in unclaimed property, and returned $37 million in 2018. While it doesn’t charge any fees for returning property, Nevada does make revenue on it. For the fiscal year that ended June 30, 2019, Nevada recorded $29.4 million in revenue from unclaimed property. For fiscal year 2018, they recorded $33.1 million.
Because unclaimed property is public record, there are many companies and individuals, known as heir finders, who may reach out to Nevada residents to help them obtain unclaimed property for a percentage of the value of the property. Using an heir finder is not necessary, and although this practice is legal, Nevada limits the fee heir finders can charge to 10% of the total value of the unclaimed property. Also, be aware that the state is not a party to any contract signed with an heir finder.
Rules Surrounding Unclaimed Property
There are a number of important differences between unclaimed property rules and tax procedure:
- A company can be subject to a state’s unclaimed property rules without having nexus—in other words, no presence in the state.
- The statute of limitations for unclaimed property generally does not supsend. Audits can look back 10–20 years, and Delaware has been known to look back more than 30 years.
- Audits can go back 10–30 years. Most businesses don’t keep records for that long, so the auditors resort to using statistical extrapolation for older years. Again, the property holder has the burden to prove these estimates are wrong. With no rebuttable records for early years like 1981, the business will find providing proof a very difficult and onerous task.
- Third-party auditors (yes, most states including Nevada hires companies to perform these audits) often hold simultaneous contracts with multiple states, which can often lead to very aggressive and expensive audits and can take as long as three to five years to complete.
- Generally, there are no administrative appeal procedures in unclaimed property audits. A business must pay the tax, interest and penalties or litigate.
- Interest and non-compliance penalties can potentially reach amounts that are close to the value of the unclaimed property itself.
Importance of Compliance in Unclaimed Property
States are increasing unclaimed property enforcement efforts, and there can be hefty consequences if your business is not in compliance. There’s no statute of limitations on unclaimed property audits if you have failed to turn over all the unclaimed property, which means a state can come knocking at any time, and it can wind up being very costly.
Chris Wilcox is a partner with Eide Bailly.
