How to avoid unclaimed property liability for your business
May 16, 2011
States use various strategies during tough economic times to increase revenue. Maryland is no different. Businesses are often a target when states step up their enforcement of certain laws during an economic downturn.
One of our clients was recently made aware that they will be the subject of an unclaimed property audit by the Business Tax Audit Section of Maryland’s Compliance Division. The state’s auditor requested a review of a significant number of the company’s documents dating back to 2003 so they could look for unclaimed property. These audits can consume a great deal of time and result in a high level of frustration for everyone involved.
Seeing that the economy is weak and one of the comptroller’s top priorities is “reuniting Marylanders with their lost or misplaced property,” this is a good time to remind clients of the steps they can take to minimize their unclaimed property liability.
What is unclaimed property?
“Mostly, it’s money,” according to the Comptroller of Maryland’s website. “Financial institutions, insurance companies and corporations must report bank accounts, contents of safe deposit boxes, wages, insurance benefits, security deposits, stock dividends and other funds to the Comptroller of Maryland if they remain unclaimed for three years or more. Unclaimed property does not include real estate, boats or cars.”
According to an article in the Journal of Accountancy, “Unclaimed property is generally defined as a liability a company owes to an individual or entity when a debt or obligation remains outstanding after a specified period of time.”
Common examples of unclaimed property are uncashed vendor or payroll checks, unused gift cards, forgotten escrows, and undistributed benefits payments.
In our view, the vast majority of unclaimed property is eventually claimed by the state, and as such, they see unclaimed property as a potential revenue source.
What does the state look at in an unclaimed property audit?
Our experience with these audits is that the state’s auditor focuses almost all of his/her attention on journal entries and bank reconciliations, looking for a charge back to cash for a stale check.
While it is unusual to see a material check never get cashed, it occasionally occurs with relatively nominal check amounts. Eventually as time passes, which could be up to several years, the outstanding check is voided and a journal entry is posted, putting the amount back into cash.
What is often unclear to an outside auditor reviewing this information (and often the internal accounting personnel as well) years after the check was written is whether the check was replaced, went uncashed because it was written in error, or an adjustment was made by both parties, agreeing it was not owed, all of which would not result in an unclaimed property liability.
Good recordkeeping is key to minimizing unclaimed property liability
Maryland requires that businesses report unclaimed property to the state after exhausting all options to locate the property’s owner. Full guidelines for reporting unclaimed property are online.
Chief financial owners, controllers and bookkeepers can take steps to minimize their company’s unclaimed property liability by adopting good recordkeeping and record retention policies. It is important, for example, to capture supporting detail for general ledger entries. Make a note to indicate whether an original check was replaced with a second check, or whether you and another party subsequently decided that no money was owed.
The bottom line? Good recordkeeping and documentation related to unclaimed property laws is essential.
For more details about unclaimed property
An article in the Journal of Accountancy does a good job explaining what unclaimed property is, and how you can comply with states’ unclaimed property laws and reporting requirements.
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