Passion is not a word normally associated with taxes and business compliance responsibilities. But passion is evident when people talk about abandoned and unclaimed property compliance.

State government regulators are passionate about returning property to its rightful owner. Third-party contingent fee auditors are passionate about the yields of their audits — particularly the yields where a “rightful owner” cannot be located. Companies are passionate about the aggressive enforcement of abandoned and unclaimed property compliance requirements by the states. And CPAs are passionate about AUP because it isn’t really a tax, there is no statute-of-limitations protection generally, and clients or employers who are audited are often disappointed with the CPA if the CPA didn’t at least warn them about the risks.

Abandoned property (or unclaimed property) is intangible property and, in some situations, tangible property that has gone unclaimed, or without activity initiated, by the owner for the length of a prescribed abandonment or dormancy period. Generally, AUP must be returned to its rightful owner or turned over to the appropriate state agency so it can locate the rightful owner after the required dormancy period lapses. The process of returning property to a rightful owner/heir or reversion of the property to the state is called escheat. Each state has its own version of an AUP statute, and compliance requirements vary. Most states, however, have adopted some form of one of the versions of the Uniform Unclaimed Property Act.

According to the National Association of Unclaimed Property Administrators’ Web site, about 2.5 million claims totaling $2.25 billion were remitted to rightful owners in fiscal year 2011 via state unclaimed property programs. That site also reports there is another $41.7 billion of assets waiting to be returned to owners in those state programs.

AUP coverage is extensive, and assets are generally subject to escheat unless exempted.

One of the basic concepts in AUP law is the concept of activity. Activity is an action taken by the owner that has the effect of tolling, or restarting, the running of the applicable abandonment period under the law of the relevant jurisdiction. Activity generally includes actions such as a deposit or withdrawal, receipt by the holder of a written communication from the owner, or use of a debit, credit, or stored value card.

Another basic concept in this area is the priority of claims on the asset. As a general rule, if an owner or heir cannot be located, the primary state to which the AUP should be conveyed is the state of the owner’s last address in the holder’s records. If an owner can’t be located and there is no last known address, then the next priority of claim is generally the holder’s state of incorporation/formation, known as domicile.

An abandonment, or dormancy, period is a third critical concept. This period is the continuous period of time, as prescribed by state law, without any activity by the owner that must elapse before property is considered “presumed abandoned” and, thus, reportable as abandoned or unclaimed property. The abandonment period generally begins to run on the date the property is payable or distributable (such as the date of an uncashed check) and continues to run until the owner engages in activity related to the property. The abandonment period restarts upon each incident of owner-generated activity.

Depending upon the nature of the business, the locations of payees, and the types of transactions, a business could easily be required to file in and remit assets to many states. As noted, each state has its own law and dormancy periods with respect to different assets.

After passage of the dormancy period, the account must be reported as unclaimed property and remitted to the appropriate state.

A compelling question, and one that is sure to raise some passions, is what due-diligence requirements are appropriate for organizations to be in compliance. There are two areas of due diligence that are appropriate.

The first area really is about how a company obtains and retains documentation for disbursements. One of the best procedures is to refuse to make a payment without a tax identification document on file. Have an appropriate record retention policy in place that contemplates all applicable federal, state, local, and foreign jurisdictions for tax, AUP, and general governance purposes.

A simple routine of obtaining, renewing, and retaining such documentation will go a long way toward getting AUP compliance right; but those routines also will help with domestic (IRC Chapter 61) back-up withholding obligations and nondomestic (IRC Chapter 3, “FDAP income,” and IRC Chapter 4, “FATCA”) withholding. You can even weave sales and use tax exemption form procedures into the best practice of obtaining, renewing, and retaining transaction-related documents.

The second area is the year-end review process in which all assets, liabilities, and equity accounts are reviewed to identify potential unclaimed property at or near the applicable dormancy period for each state. Picture a compliance checklist that identifies state jurisdictions, types of unclaimed property, and dormancy periods. A good part of the year-end compliance process is a first pass at locating the owner of record; a task that is much easier these days with the advent of Internet search engines and a variety of services available to locate people. Documentation of first and second attempts to contact is important as well. Consider some type of contact control log. Recall that the intent of AUP laws is to return property to a rightful owner. The content and frequency of the communications as elements of “due diligence” will vary by state.

A review of miscellaneous income and expense accounts as well as purchase and sales discount accounts is a good idea too. It’s important to identify and document real corrections of errors, such as issuance of duplicate payments versus an uncashed check subject to escheat. Having a process in place with appropriate controls goes a long way toward mitigating any problems that may arise on audit.

The due-diligence procedures and the related documentation are critical for defense in an audit by a state. Those procedures are also important to avoid a suit by a lawful owner for the turning over of unclaimed property to a state when the lawful owner was “findable.” As the preceding recommendations suggest, the extension of a company’s system of internal controls to unclaimed property is key to limiting the risk arising from contingent fee audits and lawsuits arising from premature escheating to state governments. Those risks can be material to financial statements, so understanding the risks and the mitigating controls in place can be important to the auditors of companies as well.

There is a great deal of activity occurring with respect to AUP law in the United States. Groups are is in the process of recommending changes to the uniform AUP statute. At the same time, lawsuits are ongoing on a variety of technical issues.

Hopefully a company’s passion comes from the pride of how its controls appropriately comply with state AUP laws, and not the passion that arises from the anguish of worrying that a company is at risk. AT

Edward R. Jenkins, CPA, CGMA, is an instructor of accounting at Pennsylvania State University in University Park, a tax consultant with Boyer & Ritter in State College, and chair of The Pennsylvania CPA Journal Editorial Board. Reach him at erj2@psu.edu. Reprinted with permission from The Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPAs.

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