Through analytic reviews, annual reporting, audit defense, VDA assistance and more, Clearview Group helps organizations achieve compliance with state-mandated unclaimed property laws and avoid costly fines and penalties.
When making sure an organization is in compliance with their state and local tax laws, one category that is often overlooked is unclaimed property. Businesses are required to report these unclaimed obligations when it comes time to file their annual reports, which can include liabilities such as uncashed payroll and accounts payable checks, customer credit balances, gift cards, dormant checking or savings accounts, as well as dividends and stocks.
Companies need to carefully review their state unclaimed property obligations to be certain they are in compliance — the risks of non-compliance could result in fines and penalties being imposed, especially today, as states are more incentivized to initiate audits and increase unclaimed property assessments.
The experienced SALT professionals at Baltimore-based consultancy Clearview Group can identify a company’s areas of need, develop a comprehensive plan to get the company into compliance and help maintain that compliance in the future.
State Compliance Requirements
Each state features different rules and regulations when it comes to audits, reporting and compliance. No two states are necessarily the same. This is why Clearview Group seeks to educate clients on their unclaimed property obligations.
As a part of this process, companies also need to understand how to initiate a Voluntary Disclosure Agreement (VDA). VDAs are self-audits in which the company comes forward voluntarily prior to being audited to come into compliance. In exchange, the states (with a couple minor exceptions) will waive interest and penalty for a late filing. Oftentimes, a state such as Delaware will send companies VDA invitations prior to initiating an audit.
“There are different tiers of VDAs and audit complexity based on the individual state,” said Eric Mauldin, a principal within Clearview Group’s State & Local Tax practice and practice leader of the Unclaimed Property division. “For example, Delaware has very favorable tax laws, which is why many companies in this country incorporate there. On the flip side, the state features a very robust VDA and audit program because unclaimed property is usually the state’s second largest source of revenue on an annual basis. Other states like New Jersey and Pennsylvania also have a formal VDA program, but it is not as complex as Delaware. Some states are very informal — the only state that doesn’t have a VDA program is California.”
Mauldin points to Delaware as a particularly interesting example of how states are depending more and more on unclaimed property revenue. “There are so many companies incorporated in Delaware (likely more than 50%) because there are tax benefits,” he said. “When the state initiates a VDA or audit, it is their one shot to get as much money as possible from these companies. After the audit, companies tend to take their unclaimed property obligations a lot more seriously, so the state won’t be able to get another bite of the apple. Today, the state of Delaware has probably completed VDAs or audits on the vast majority of Fortune 500 companies incorporated in their state.”
Performing Due Diligence
After identifying transactions that are unclaimed property and are due to the states for the current reporting period, part of the compliance requirement is first contacting the last property owner through statutory due diligence.
“Unclaimed property’s original purpose was as a consumer-advocate type of process — government protection of the common person against big corporations,” said Mauldin. “Now, in many cases, it has become a revenue generator in most states. The due diligence process goes back to that original idea of trying to protect individuals. It is mandated that the individual or company has to be contacted by a first-class mailed letter. They get 30 or 60 days to respond, and if they respond, you don’t report, but if you don’t get any response, then funds get reported as unclaimed property to the state. States are really cracking down on making sure you try to reach out to individuals or companies before reporting.”
Because states have a variety of requirements for performing due diligence, Clearview Group can help clients through the process and ensure they are meeting all rules and regulations. For example, some states may require just a first-class mailing, while other states may require a certified letter. States are beginning to allow for due diligence to be performed via email. The hope is that this becomes more of a trend in future years.
The Annual Reporting Process
Once the due diligence process is complete, companies will know what transactions need to be reported to the states. “There are 53 jurisdictions in the U.S. that have unclaimed property laws, and each state has different exemption allowances, dormancy periods, reporting due dates, due diligence requirements, payment methods and more,” said Mauldin. “At Clearview Group, we help our clients navigate these different requirements with state-approved software.”
Once reporting is complete for the current year and companies are confident they are in compliance, Mauldin says it is important to keep good records and operationalize the process so that it is repeatable. Clearview Group will assist companies with creating an annual unclaimed property reporting timeline, whether it be mailing due diligence letters, tracking responses, processing state reports or anything else.
“Sales tax obligations are filed monthly or quarterly, while income tax and unclaimed property tend to be more annual processes,” said Mauldin. “Even if you don’t have unclaimed property to report, you should still file the report to indicate you have nothing to escheat. It is important to not only go through the whole compliance process every year, but also, if there are changes to the company or the industry that may impact that particular filing period, you have to stay on top of it.”
The final step is to look to recover unclaimed property funds owed to the company. “I strongly urge my clients, do not recover unclaimed funds from a state until you are in compliance with your reporting obligations,” Mauldin said. “If you start recovering funds but aren’t reporting, you will be on the state’s radar for an audit. The state holds any reported money in perpetuity — get through the VDA or audit file your initial reports, then you can start looking at recovering money owed to your company. There are asset recovery companies that are focused on helping get those unclaimed funds to organizations in exchange for a percentage of what is recovered. This is called a contingency fee and they only make money if they find money on your behalf.”
The Advantage of Partnering With Clearview Group
From the very beginning of the unclaimed property process to the end, Mauldin says Clearview Group works hard to help organizations create a reliable roadmap to compliance through everything from VDA assistance to the development of policies and procedures.
“Unclaimed property is not going away anytime soon — it generates too much revenue for the states. That’s why it is imperative companies know what their obligations are and the way the industry is changing,” Mauldin said. “Unless you are a company with a large number of transactions, it probably isn’t someone’s full-time job to focus on unclaimed property compliance. Therefore, the quality of work often slips through the cracks. We take on that full-time job for you and take that burden and responsibility away from our clients. I’ve worked in consulting for more than 15 years, and I’ve learned how to get large international companies into compliance. I’ve also been on the holder’s side and understand their concerns. Between our competitive rates, experience and quality of work, we would be a great choice for anyone looking for compliance or consulting assistance.”
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