• Service: Tax, Global Indirect Tax
  • Type: Regulatory update
  • Date: 12/12/2013

United States – Often overlooked compliance burden of unclaimed property 

GITB United States
Unclaimed property compliance is an often overlooked aspect of doing business in the United States. Most firms have unclaimed property reporting obligations, yet non-compliance with unclaimed property regulations is very common among firms operating in the US. In recent years, States have become more aggressive in enforcing compliance to raise revenues in a lackluster economy, which has been especially true with unclaimed property.

What is unclaimed property?

Unclaimed property is an unsatisfied obligation, either tangible or intangible, that has become dormant or gone unclaimed for a period of time – such as bank accounts, vendor checks, stocks and bonds, insurance proceeds, dividends, payroll checks, customer deposits, and unused gift certificates and gift cards. When the property owner does not claim it within a prescribed period of time, or “dormancy period,” State law requires the holder to remit the property to the State agency that administers unclaimed property laws. Priority rules provide that property should be remitted to the State of the owner’s last known address based on the holder’s books and records, or, if that information is unavailable or incomplete, to the holder’s State of incorporation. The State then holds the property in trust until it is claimed by its rightful owner.

For example, a business may have a payroll check that a former employee never cashed, possibly because the employee moved. The business owes the funds to the employee, but because the employee never cashed the check, the money is still in the business’s custody. The business cannot simply reclaim the money that it owes to its former employee. It must, after the dormancy period has lapsed, remit the unclaimed funds to the State.

Risks of exposure

While unclaimed property is not a tax, unclaimed property compliance often falls within the responsibility of tax departments. Unlike most taxes in the US, some States, regardless of a taxpayer’s compliance with reporting requirements, do not limit the number of years for which a business may be audited for unclaimed property compliance. Many other States will audit a 20-year period. Delaware, which is especially notorious for unclaimed property audits, looks back to 1981 in conducting unclaimed property audits. Businesses that failed to maintain adequate records could be required to estimate potential liabilities for those periods. Because Delaware is a common incorporation location for corporations in the US, and priority rules generally provide that a holder must report unclaimed property to its state of incorporation if the property owner’s name or address is unknown, it is known for pursuing unclaimed property audits.

Occasionally, States offer voluntary disclosure or amnesty programs. Such programs, which require participating firms to remit all liabilities and agree to comply going forward, typically reduce or abate penalties and interest and sometimes limit the look-back period. Recently, Delaware instituted a voluntary disclosure program permitting an entity to report previously unreported liabilities for a limited look-back period depending on when the entity participates in the program. Entities participating in the program must report liabilities back to 1993 – more than a decade shorter than the statutory audit period.

As States increasingly employ unclaimed property audits as revenue collection tools, businesses operating in the US must be aware of the pitfalls of non-compliance. Because unclaimed property laws can be vastly different between States, firms doing business in the US must be vigilant regarding compliance responsibilities.

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Global Indirect Tax Brief - December 2013

GITB - December 2013
Global indirect tax brief brings together articles on international VAT developments, written by KPMG member firms'.