Published February 25, 2020

Audit Preparedness—When States Play “Finders Keepers” with Unclaimed Property

States need revenue and thus are looking for new ways to generate it. Many states are reviewing their unclaimed property rules to help bridge budget shortfalls and are aggressively auditing taxpayers, looking for large, unreported unclaimed property filings in order to make assessments. Healthcare entities are among the most vulnerable when it comes to audit selection, as many states believe they are more likely to have significant amounts of unclaimed property. It is important to know state rules for unclaimed property to stay ahead of the audit curve.

What is unclaimed property?

Unclaimed property refers to property, held in the ordinary course of business, that has yet to be transferred and claimed by the owner. After a certain time, this property is deemed “abandoned” and must be transferred to the state, which will take custody of it and try to reunite it with its rightful owner. Unclaimed property can refer to items such as unapplied cash, accounts receivable credit balances, accounts payable, open payables, patient refunds, write-offs, uncashed checks, unredeemed gift certificates, rebates, and many other types of intangible property. Basically, any financial obligation owed to another party and still on an entity’s books is a probable form of unclaimed property.

Unclaimed property laws were not enacted to be revenue generators, but were simply set up as laws to reflect property rights. Assessments of unclaimed property are therefore not tax assessments, and as such, states are not required to enforce some of the constitutional limitations, like a statute of limitations, that apply to other state taxation laws. This may be troublesome for companies, as states that are in desperate need of revenue are hiring outside auditors to conduct unclaimed property audits on a contingency fee basis. This trend has led to large assessments with high penalties, rendering companies unable to defend such large liabilities, due to the absence of constitutional protections.

Reporting Unclaimed Property

Most companies prefer to focus time and attention on collecting money owed them, instead of money owed others, so unpaid bills or refunds to customers can be overlooked, and remain on the books. Eventually, after enough time has passed, these amounts will be reportable to the state as unclaimed property. Even when attempts are made to reunite these outstanding funds with their owners, under state law, a state is entitled to seize these funds. A state will always assume a property is unclaimed unless an organization can prove otherwise, which can be difficult.

Every state’s laws will differ, but each state will have set criteria outlining the length of time a property must be held (also known as a dormancy period) before it becomes abandoned, and this length of time may vary by property type. During this time, if the owner does not claim the property, it then becomes reportable to that state. Usually, the clock starts with the last date actual contact was made with the owner of the property.

Organizations must file the appropriate paperwork in each state where it has unclaimed property. Also important to know, an organization is not only required to file in the state where the organization is located, but also must file in each state where the owner of a piece of unclaimed property last resided. Knowing each state’s dormancy period is critical to ensuring accurate reporting of all unclaimed property. In order to correctly report all unclaimed properties, companies should:

  • Keep track of the dormancy period for each piece of unclaimed property.
  • List all states in which they have unclaimed property and are required to file.
  • Know how each state enforces penalties for not properly reporting unclaimed property.
  • Understand each state’s filing requirements.
  • Keep track of the due dates for filing unclaimed property reports in applicable states.

States do not provide a guide for the calculation of assessments; therefore, it is difficult for organizations to calculate an estimate for any unclaimed property liability. For an entity found to be noncompliant, the consequences can be costly. Implementing a process to conduct a periodic, comprehensive analysis of all unclaimed property that could exist on an organization’s books could prove to have enormous benefits, as well as ensure compliance with applicable state laws.

If you would like more information about states’ unclaimed property laws and assessments or conducting an analysis, or would like assistance with any matter involving tax planning, financial reporting, or audit, contact one of our PYA executives below at (800) 270-9629.

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