Unclaimed property audits.

Possible windfall for states.

One of the "hottest" areas in state and local tax practice centers on state audits of businesses for unclaimed property. Most states have laws under which, if property remains unclaimed for a specified time, it is presumed abandoned by its owner and the holder of the property is required to turn it over to the state. (The state's possession of this property is on the owner's behalf. Should that owner be located or come forward with a claim, the state is obligated to return the property.) For states looking for new sources of revenue and funds, the aggressive enforcement of unclaimed property laws can provide a windfall.

BASIC CONCEPTS

The usual definition of unclaimed property is intangible property that has been held, issued and owed to another, in the ordinary course of the holder's business, beyond a specified time and without the owner's exercise of any right of ownership. Typically, such property involved dormant bank accounts, unrefunded security deposits, uncashed dividend checks, untendered stock shares and outstanding insurance drafts; nowadays, gift certificates, payroll checks, electronic gift cards and customer credits also are included.

The time that must pass for property to be deemed abandoned is called the dormancy period, which varies with the state that has jurisdiction over the property. The period begins from when the property's owner last exercised control or expressed an interest in the property. The shortest dormancy periods usually involve uncashed vendor and payroll checks; the longest periods, traveler's checks and money orders.

Rights to property and priority of claims. Once the specified period has passed, the holder must turn the property over to the state. Unclaimed property first goes to the state of the owner's last known address (as shown by the holder's books and records). If the holder does not have that address, the property goes to the state where the holder is incorporated.

Lookback period. Few state unclaimed property laws provide for a statute of limitations. Therefore, states are not limited to how far they can go back in auditing companies for unclaimed property.

UNCLAIMED PROPERTY REPORTING

When audited, many companies are surprised to find they have unclaimed property reporting and payment obligations to the states. Rather than "reversing" the transactions and returning the amounts of the property to their own accounts (as many have done), those companies find they must turn this property over to state unclaimed property divisions.

Further complicating the situation is the requirement that a corporation file returns not only in the state of incorporation but also in jurisdictions in which its creditors reside--even if the corporation does not conduct any business in those other jurisdictions.

To limit this multiple-filing requirement, some states have reciprocity programs allowing a holder to report on a single return the unclaimed property owed to a number of states.

Financial statement ramifications. What might have been simply a tax issue becomes a financial statement issue as well. If for a number of years, a company has reversed these transactions and returned the amounts to the original accounts on its books, those accounts may be severely overstated, making the company's financial position suspect.

Amnesty programs. Many states have amnesty programs to increase the awareness of unclaimed property reporting requirements, to help businesses comply with these laws and to return unclaimed property to its rightful owners. If companies pay over to the states unclaimed property due from prior years, any penalties and interest that may apply can be waived.

For a discussion of unclaimed property audits, see the State & Local Taxes column, edited by Karen Boucher, Noel Hall and Matthew Chenowth, in the September 1999 issue of The Tax Adviser.