By: R. Michael Sorrells, CPA, Tax Principal
Every U.S. state, the District of Columbia, U.S. territories and several foreign countries have unclaimed property (escheat) laws on the books. The purpose of these laws is to protect consumers and companies by ensuring that money owed to them is returned to them instead of remaining permanently with companies and organizations. These laws definitely apply to nonprofit organizations. The unclaimed property programs actively and continuously find owners of lost or forgotten assets through a variety of methods.
What is Unclaimed Property? The rules vary from state to state but unclaimed property generally includes uncashed checks, financial accounts, safe deposit boxes, securities, refunds and a variety of other items. Before an asset is considered unclaimed, there is a holding period before it has to be reported to the state. These periods vary by asset type and by state, but generally are a few years. The most common type of unclaimed asset for nonprofit organizations are uncashed checks including payroll and vendor checks. Each state has an unclaimed property website that should explain the rules for that jurisdiction and contain the forms required to report and remit unclaimed property.
How does the Reporting Work? The organization with unclaimed property (according to that state’s definition) must report it to the state through specific forms and must also remit the amount of the property to the state, which then keeps the assets and makes efforts to return them to the owners. Once remitted to the state, the funds are never refunded to the organization no matter how long they are left unclaimed. There are penalties for not reporting unclaimed property and states do audit organizations for unclaimed property. Merely writing off uncashed checks from the organization books does not relieve the organization from the obligation of reporting.
Local Jurisdictions: The District of Columbia, Maryland and Virginia all have unclaimed property laws that vary considerably, so organizations should look at the rules for their state of domicile to determine if they have any unclaimed property to report and remit. One key distinction to keep in mind: Both Virginia and Maryland have a business-to-business exemption, so that property of a business that is unclaimed is not required to be reported. The District does not have this exemption. Thus, the most common type of unclaimed property for nonprofits, uncashed vendor checks, are only reported and remitted in DC. Additionally, Maryland and Virginia do not require or request returns from organizations with no unclaimed property. The District of Columbia interestingly “requests” these returns but does not require them. So, filing “zero” returns is optional in DC.
Michael Sorrells is a principal in Tate & Tryon’s Exempt Organization Tax services department and can be reached at Msorrells@tatetryon.com.