One area of tax compliance that is not as well understood by tax filers is the area of unclaimed property. To understand the potential tax impact for organizations holding unclaimed property, it is important for holding organizations to have a thorough understanding of what unclaimed property is, what responsibilities holders of unclaimed property have, and what tax compliance filing is required.
Unclaimed property is defined as an asset, either tangible or intangible, that is being held for a person or an organization that has either not taken ownership of the asset or is not able to be located by the holding organization.
A holder is defined as either a person or an organization possessing property that rightfully belongs to another.
Intangible assets include bank savings and checking accounts as well as un-cashed tenders of payment, such as paychecks, commissions, dividend payments, or refunds.
Tangible assets may also be considered unclaimed property, such as the contents of safe deposit boxes.
Rules governing the definition of how property becomes unclaimed vary from state to state.Most states consider property to become unclaimed if the owner cannot be contacted by the holder within a specified period of time, a period that may be as brief as one year or as long as fifteen years for certain intangible assets.For example, the District of Columbia and Maryland consider an un-cashed check to be unclaimed if it is not cashed within three years.On the other hand, Virginia considers an un-cashed check to be unclaimed if it is not cashed within five years.Virginia makes a special exception for wage checks, however, which are considered unclaimed if not cashed within one year.
Most states have separate unclaimed property divisions within their state departments of taxation.The responsibilities of these unclaimed property divisions are to identify unclaimed assets being held—usually through an audit process—and to collect these unclaimed assets as tax revenue to the state.Holders of unclaimed property are required to make a good faith effort to locate the rightful owners of unclaimed property before audit and assessment procedures are taken.Holders who are unable to locate owners of unclaimed property must prepare and file unclaimed property tax returns with the states in which they reside.Information required to be reported on unclaimed property returns include a description of the property, the name of the owner (if known), value of the property, location of where the property is being held, and the date the property was deemed by the holder to be unclaimed.
Given the potential audit and tax assessment exposure, it is important for holders of unclaimed property to understand their responsibility to comply with their state’s unclaimed property laws.Furthermore, unclaimed property holders should be aware of the various methods they may employ to safeguard themselves in the event of an unclaimed property audit.Holding organizations should have policies and procedures in place to periodically measure the amount of their potential unclaimed property liability, document their findings, and record the liability on the books, if appropriate.The documentation of these adjustments should be kept in the organization’s accounting records in accordance with the record retention schedule in place, but for a period of no less than ten years.
Lack of such procedures may permit unclaimed property auditors to impose a tax liability based on either the estimation procedures available under the Uniform Unclaimed Property Act of 1995 or various state laws.