Penalties Loom Large for Unclaimed Property Reporting Missteps

Tax season is officially over — even the Oct. 15 extension deadline has come and gone.

But for banks and corporates, depending on the states in which they are doing business, another reporting season stretches into November, where they must review records for unclaimed funds and tangible property — from uncashed checks, deposit accounts, CDs and safe deposit boxes— that must be reported to the states in which the owners of the property reside. Attempts to adopt and embrace a uniform set of reporting standards and deadlines across all 50 states have fallen short through the decades.

Freda Pepper, general counsel of unclaimed property at Sovos, said property that has been owned — and lost track of — by a customer could represent a potential liability, and even a pitfall, for companies that are not compliant with reporting standards.

At a high level, the Supreme Court ruled that states are in a better position to be the custodians for the rightful owners of that unclaimed property — and that the states, not companies, should enjoy the windfall associated with the unclaimed property.

The Challenges

For enterprises and banks, “the challenge is understanding and keeping up with the state requirements,” Pepper said. “It’s like a moving ball because the states are constantly changing their laws.”

As part of her daily life at Sovos, Pepper said she turns on her computer at the start of the day and is awash with alerts concerning legislative activity involving bills and regulations across various states addressing unclaimed property.

“There are constant changes, and for a company to meet the deadlines and to appropriately report property, they have to make sure they are up to date with the most up-to-date laws in the state,” she said.

The determination as to when property is considered unclaimed is not cut and dried. A bank with an unclaimed certificate of deposit must consider maturity dates and the date of last contact with the customer; a gift card must be accounted for differently.

For those who run afoul of the regulations, audits and penalties can be on the horizon.

“You’re triggering and putting up red flags if you don’t file your unclaimed property reports, especially if you’ve filed one in the past and you’ve missed a deadline this year, or if you’re incorporated in a state that is aggressive in the auditing” of those reports, Pepper said.

Most state deadlines are in the fall, typically by November.

States can charge interest or issue penalties, which in turn is a form of free money, Pepper said. Some states, such as California, will automatically assess interest and penalties for the late reporting of property. Interest at a rate of 12% interest per year from the date a report was supposed to be filed until it was filed is assessed by California.

In some states, “if you’re late on a piece of property, even if it’s worth $10, you could get a $5,000 penalty,” she said.

Unclaimed property audits are also burdensome and cost companies time and money, she said. Just as the IRS can audit a firm for tax compliance, so too can states conduct an audit for unclaimed property compliance — and audits can cover more than a decade’s worth of reporting.

The toughest state when it comes to these audits and penalties is Delaware, which might make sense given that most companies are incorporated in that state and where unclaimed property is among the largest sources of revenue, Pepper said.

Collecting the information far enough in advance to meet the fall reporting deadline entails having access to and analyzing the data that is needed to determine whether property is considered to be unclaimed property and doing it in a timeframe that allows companies to send due diligence mailings to those who have been determined to be owners of unclaimed assets.

“The complexity depends on the size of the institution and whether you are centralized or not, in addition to the amount of data you have to collect,” she said.

Many states have voluntary disclosure programs, allowing companies to voluntarily come into compliance without the threat of interest of penalties. In Delaware, companies must be invited to its VDA programs before being audited by the state, she said. But the invitations often come via snail mail and may get lost in the proverbial shuffle.

It’s incumbent on the corporates to make sure their systems are up to date and that they are following the shifting state-by-state regulatory landscapes (a process made easier with providers such as Sovos), she said. Centralized reporting across an organization is key to making the process consistent and smooth, and constant education about state-by-state changes is imperative as firms grapple with unclaimed property.

“The only thing uniform about unclaimed property compliance is that there’s nothing uniform,” Pepper told PYMNTS.

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