As more companies become familiar with their unclaimed property compliance responsibilities, many are likely to find that they have obligations past due to one or more states. Barrie Saltzman, escheatment officer for CIT Group, and Jenna Fenelli, senior manager in KPMG’s state and local tax practice, provided insight into the risks of noncompliance and steps to achieve compliance during their 2017 UPPO Annual Conference session, “Uh-oh, I Missed the Deadline.”
Risks of Late Filing
States typically charge penalties and interest when unclaimed property is not escheated in a timely manner. For example, California charges 12 percent interest, plus $100 per day up to a $10,000 maximum for late reporting, and between $5,000 and $50,000 for late delivery. Nevada charges 18 percent interest, plus $200 per day up to a $5,000 maximum in addition to a $1,000 per day fine for willful failure, up to a maximum of $25,000 plus 25 percent of the property’s value.
In other words, noncompliance isn’t cheap.
“In addition to penalties and interest, late filers also need to consider other issues,” Fenelli says. “Filing a bunch of late properties to a state can raise a flag. If they see you’ve never filed there before and suddenly you’re filing a bunch of late accounts payable checks, they may wonder what other property hasn’t been filed and decide to perform an audit.”
Other risks include potential penalties for improper due diligence mailing, reputational risk and damage to customer relationships.
Some states allow for extension filings. They may offer a request form, such as California’s, which is due at least 30 days before a reporting deadline. Similarly, New York requires its form submission at least 30 days before the reporting deadline along with estimated payment. Other states, such as Massachusetts and Vermont, don’t have a form but accept requests via letter.
“Filing for an extension is an easy process,” Saltzman says, “but you need to be aware of the timing to ensure your request will be considered for acceptance.”
Voluntary disclosure agreements (VDAs) provide another option for property holders wishing to come into compliance. Again, each state is different. If a state offers a VDA program, it may have a formal, well-defined process. Some, however, have less formal VDAs for first-time filing programs, by which companies send a letter with their first filing, stating that they’re coming forward in good faith, want to be in compliance, and have put measures in place to mitigate the risk from happening again.
“With a voluntary disclosure agreement, aside from the benefit of a penalty and interest waiver, some states will allow for the VDA lookback period to be closed off from audit,” Fenelli says. “Not having to worry about an audit from that state when coming into compliance is a great benefit.”
Ensuring Future Compliance
As holders work to get control over their unclaimed property compliance efforts, they should focus on several internal areas:
- Policies & Procedures: A corporate policy should clearly outline compliance obligations and the roles and responsibilities of the escheat department, operations, accounting, legal and others that are applicable to each specific company. Procedures should describe a step-by-step process for handling unclaimed property from the gathering of the data, securely managing it, corresponding general ledger activity, due diligence and state reporting.
- Training: If employees aren’t trained to understand it, they usually have no idea what unclaimed property is. There needs to be ongoing training throughout the company about what constitutes unclaimed property, how to identify it and who is responsible.
- Assigning Clear Ownership: Someone must have overall ownership for oversight of the process. The day-to-day functions may be assigned to others.
- Centralization: By centralizing the unclaimed property function, holders ensure there is a uniform process throughout the company. They also have unclaimed property subject matter experts available to provide insight as the company changes.
- Industry Involvement: Becoming involved in organizations like UPPO offers access to ongoing education, idea sharing, best practices and the ability to stay current with legislative updates.
- Technology: Without using unclaimed property software, holders expose themselves to more potential mistakes. There’s way too much information to maintain manually, so the risk of missing something increases when software isn’t used to. It’s best to eliminate as much manual work as possible.
“If your company doesn’t have a UP [unclaimed property] program in place, you’re not alone,” Saltzman says. “There is hope, and you will get there. Coming into compliance and putting the proper procedures and processes in place will help reduce the risk of penalties and interest in the future.”
To help with compliance efforts, UPPO members can access the Jurisdiction Resource Guide, which provides reporting deadlines, dormancy periods by property type, due diligence letter requirements, exemptions and deductions, and other helpful information for U.S. and Canadian jurisdictions.