Found money? Maybe not.

By Terry Barrett

A former employee never cashed that last payroll check. A refund check issued to a customer was never cashed. Is this “found money?” What about those unredeemed gift cards that expired? Do you get to keep the cash? Can these all be written off to income? Many businesses do not understand that the uncashed checks, customer credits and similar types of transactions may represent unclaimed property that should be turned over to the state.

Unclaimed property (abandoned and unclaimed property, or “AUP” as is the technically correct term) is property, tangible or intangible, held by a business, including nonprofit organizations, that belongs to another person or business yet that other person has made no attempt to claim such property or utilize the funds for an extended period. This includes the uncashed payroll checks and unredeemed gift cards noted above. The business is considered the “holder” of the property; the person to whom the money/credit, etc., is due is considered the “owner” of the property – even though he or she does not have possession of and has not taken any action to claim it.

Some of the more common types of unclaimed property are outstanding payroll checks, outstanding checks to vendors, accounts receivable credits, customer deposits, insurance proceeds, dividends and checking/savings accounts. The Virginia Department of the Treasury, which administers the unclaimed property program in Virginia, lists on its website 133 different types of property. One of the more recent areas of unclaimed property is gift or stored value cards. With gift cards, only a portion of the value may be used or the card may have been forgotten and never used. The states vary as to their treatment – some (like Virginia) do not consider gift cards with no expiration dates as unclaimed property; other states do. This area is problematic these days, particularly for online sellers who issue gift cards, as their cards may be purchased by anyone, anywhere.

Unclaimed property is a legal liability due to the owner, and not a tax imposed on the holder, thus no organization is exempt from annual reporting requirements. The property does not revert back to the holder if unclaimed by the owner, but rather is held in trust by the states’ unclaimed property/treasury departments and paid over to the owners if they are ever reunited with their property. The states will attempt to locate the owners and return their property to them. The intent of unclaimed property laws is to protect the owners of such property by ensuring that money/property owed to them is returned. If the money is never claimed, it is used by the states for specific purposes. In Virginia, unclaimed property funds go to the Literary Fund to help support education initiatives in K-12 public schools.

Many perceive AUP to be a tax because of the harsh penalties and extended look-back periods that may result from noncompliance. The states have reporting requirements, conduct audits and issues assessments. Penalties may be assessed for failing to perform due diligence (in Virginia, up to $50 per account for which due diligence was not performed), failing to timely report (in Virginia, up to $1,000 per day the report or payment is late capped at the lesser of $50,000 or 100 percent of the value of the property that should have been but was not reported).

Many states have voluntary disclosure programs to encourage businesses to come forward and report past liabilities. In addition, AUP may feel like a tax in that all states have their own rules applicable to unclaimed property reportable in their states. Unclaimed property is reported to the state of the last known address of the owner. If a business does not know the last known address of an owner, the property is reportable to its state of incorporation. Thus, a business that has customers or vendors in multiple states may have reporting requirements in multiple states. Some states require “zero” reports, meaning one must file a report even if there is no unclaimed property to report; some require reporting only if there is property to report; some require reporting only if there is property to report (like Virginia). Obviously, the different and frequently changing rules makes compliance with states reporting requirements time consuming and burdensome.

Here's how the AUP process generally works (but the rules may be different for specific states, so make sure you consult the individual states’ rules): After statutorily defined holding periods, the holder of the property has an obligation to file annual reports and remit the property to the appropriate state(s). The holding periods vary depending upon the type of the property and the holder but typically is five years. It is the holder’s obligation to attempt to locate the owner by performing due diligence. Each state has its own “due diligence process,” but it generally requires the holder to send a letter to the last known address of the owner in an attempt to reunite the property valued at a certain amount with its owner. If the owner does not respond to the letter, the property is then reported to the state. Typically, states require the due diligence a certain number of days in advance of the report due date to the state. In Virginia, the reporting date for most types of businesses is Nov. 1. The reports should include amounts reportable as of June 30 of the prior year. Thus, reports due Nov. 1, 2017, should include amounts reportable as of June 30, 2016. Due diligence for such should begin July 1. Thus, now would be a good time to start identifying potential sources of unclaimed property within your organization.

As noted above, penalties for noncompliance can be harsh and look-back periods typically go beyond standard statutes of limitations applicable to taxes. The look-back periods can go back to “day one” of a business’ operations. Today’s record retention policies generally do not go back to “day one,” making compliance with an auditor’s information request challenging possibly leading to extrapolations and estimates that may be overstated but impossible to defend.

A number of businesses do not have unclaimed property policies and procedures. Often these are developed only after an audit. However, such policies and procedures can assist a company in staying current with its filings possibly the risk, possibly decrease the risk of audit (because it is reporting), or, if audited, provide the documentation necessary with the audit defense. If you do not have any AUP processes in place, or if you have been taking those uncashed checks back into income, consider rethinking that, now that you know more about the unclaimed property laws. And be sure to consult the specific rules of the states where you potentially have reporting requirements.

Terry Barrett, CPA, is a tax senior manager at Keiter in Glen Allen. She focuses on state and local tax consulting and primarily non-income tax issues, such as sales and use tax and business license and personal property tax, in Virginia and other states.