Heather Steffans, VP of Strategic Compliance Solutions with unclaimed property specialists MarketSphere, penned an informative piece for the American Payroll Association about the misinterpretations regarding unclaimed property.
The primary caveat being that “the biggest reason companies fail to report unclaimed property correctly is that legislation is different in all 54 jurisdictions and the laws change frequently”.
Common Misconceptions
- Only large companies are being audited for noncompliance.
Because auditors are paid on a contingency basis and much of the income potential of large companies has been sapped, smaller companies have become the new prime target. - An uncashed check becomes income.
The standard protocol in cases like these may be to simply write off an uncashed check in a general ledger as income. However, unclaimed property belongs to the property owner. If a case of misreporting occurs, it would be best to simply comply with state law in order to avoid the risk of an audit. - Unclaimed property can be reported by separate departments.
Contrary to this belief, many states ask that companies file a single report containing all property types. Auditors may be prompted if a company files separate forms or if specific property types are excluded (such as AP, AR, and payroll). The best way to resolve this issue is to assemble an unclaimed property team to ensure that compliance is met to the letter. - Most companies manage their own unclaimed property audits.
Although conducting audits internally would be ideal for a company, in many cases the process is very complex and figures are misreported. It is highly advised that a company enlist professionals to avoid issues. - Unclaimed property is a tax. Actually, unclaimed property reporting is NOT a form of tax, but in some cases it is handled by a company’s tax department. Unclaimed property is required by law and must be reported directly to the state according to the property owner’s last known address.
- Dormancy periods are all the same. A dormancy period occurs when the property owner doesn’t take action on unclaimed property. Legislation varies depending on the state and property types.
- There are no penalties for not complying. In some states, misreporting or lack of compliance can cause an incurrence of a $100-$200 fine per day with a $10,000 maximum and an initial $1,000-$25,000 baseline fine.
- Sarbanes-Oxley doesn’t apply to unclaimed property. The requirement of adequate internal financial control to ensure accurate reporting does in fact apply to unclaimed property. An accumulation of unclaimed property noncompliance and penalties with interest could cause overstated corporate earnings and/or false financial statements.
- Send all unclaimed property to the state in which you do business. Some states offer reciprocal agreements to ease the process, but due to the complexity of their procedure, it’s best to avoid this procedure and opt for reporting to more than one state if needed.
- Unclaimed property doesn’t apply to new owners in the case of an acquisition or merger. To ensure that a new acquisition or merger begins on the right foot, establish a transition services agreement or be sure to receive a list of liabilities for future reporting.
By understanding the misconceptions and remaining current on the updates, your business has a better chance of avoiding the dreaded audit or at least being well prepared for one.
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