June 28, 2013

Unclaimed Property—the Cost of “Found” Money

Many companies are not aware that, after a period of years, which varies depending on the type of obligation involved, certain monies, including uncashed payroll and vendor checks, credit or gift card balances, deposits and unused rebates, are considered by most states, including the Commonwealth of Pennsylvania and the State of New Jersey, to be Unclaimed Property.

Many companies are also not aware that they are obligated to report and remit funds considered to be Unclaimed Property to the state on a yearly basis. In Pennsylvania, firms are required to file an annual report every April 15th detailing stale account balances that qualify as Unclaimed Property under state laws and regulations, and to remit a check to the Department of the Treasury for that amount. Until recently, most states did not consider auditing companies for compliance with the regulatory requirements relating to Unclaimed Property to be a high priority. However, in the last several years, there has been increased attention given by state treasuries to the recovery of Unclaimed Property.

The professed purpose of the collection by the state of unclaimed or abandoned property, or escheat, as it is historically termed, is to prevent the inadvertent transfer of funds that were not earned. Like a giant “lost and found,” the state holds these funds until the rightful owner, if such owner can be identified, surfaces. In the meantime, the state may borrow from the fund. As such, during times of financial distress, states focus increased attention on company audits as a means to collect Unclaimed Property as a source of revenue.

Legislation enacted in the past decade in both Pennsylvania and New Jersey targets companies that have not reported and remitted funds from stale accounts. In Pennsylvania, companies that have never filed or have recently failed to file Unclaimed Property reports may receive a self-audit questionnaire from the Department of the Treasury. The questionnaire’s purpose is to help the Commonwealth identify non-payers that may be holding remittable funds. The form appears straightforward, but it asks questions about a firm’s account balances, accounting practices, and organizational structure that may expose the company to a comprehensive audit by the Treasury. The report requires a company to answer questions using ten years of historical data, but a formal audit can review a company’s records as far back as the date of the company’s inception.

The penalty in Pennsylvania for failure to respond to a self-audit request, failure to report and/or failure to surrender Unclaimed Property has increased to $10,000. The penalty in New Jersey for similar infractions is $100,000. The penalty in Pennsylvania for refusal to pay or deliver property without proper cause can elicit a misdemeanor conviction with a $10,000 maximum fine and/or a 24-month prison sentence. Additionally, if the Treasurer prevails in a proceeding brought against a holder of Unclaimed Property, the Treasurer can collect 12% interest on all property subject to escheat from the date the property became escheatable.

What It Means to You

Does your company carry uncashed payroll or vendor checks on its books that are several years old? How about old credit account balances, security deposits, or escrow accounts? Maybe your company retains records of these or other types of payment obligations on its books indefinitely. Maybe they are used to offset bad debt expenses or against future transactions. Determining which account balances are actually escheatable is not always a simple matter. Getting legal advice can be both helpful and profitable. For a firm that has failed to report in prior years and is attempting to respond to a self-audit form, the benefit of legal counsel and your counsel’s relationship with the state is invaluable. Not only can retaining knowledgeable counsel save your company from drastically over or under-reporting Unclaimed Property; counsel may also be able to help resolve a company’s situation without severe penalties or cumbersome audits.

 

If your company has received a self-audit form from the Department of the Treasury, is looking to develop an Unclaimed Property reporting policy, or is curious about its Unclaimed Property liability or reporting obligations, we urge you to contact legal counsel with expertise in this area to help walk your company through this process.