Almost every entity has unclaimed or abandoned property, be it uncashed payroll, dividend or other checks, account receivable credit balances or unclaimed real estate. If not treated correctly, your not-for-profit’s abandoned property could pose a liability to your organization in terms of financial and reputational loss.
Unclaimed property (sometimes referred to as abandoned property) refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for one year or a longer period. States have the right to acquire an interest in unclaimed property after a dormancy period established by statute. The dormancy period, definition of unclaimed property, and abandoned property reporting processes vary by state, which makes compliance with the regulations challenging.
Massachusetts and California have a three-year dormancy period. In Rhode Island, the dormancy period depends on the type of unclaimed property. Complicating matters, states such as Arizona and New York reduced their dormancy periods in recent years. Most states have no time limit for filing claims. The state of Massachusetts holds unclaimed assets in perpetuity and in trust for the rightful owners and or their heirs. In Indiana, after 25 years unclaimed property can no longer be claimed and becomes the property of the state.
Most states’ unclaimed property laws require business entities and others to review their records each year to determine whether they are in possession of any unclaimed funds, securities or other property that is reportable under their respective laws. Entities generally must make an annual report of their findings. Some states require entities that are not holding any unclaimed property to file a negative report affirming that the holder does not have unclaimed property to report.
The National Association of Unclaimed Property Administrators (NAUPA) provides a searchable database of abandoned property state statutes on its website. It is highly recommended that not-for-profit organizations review their states’ procedures, especially because some of the rules may have changed in recent years. Organizations that are out of compliance with these regulations may face fines, fees and other penalties.
The Risks of Non-Compliance
The state treasurers and other officials who administer the unclaimed property programs have developed many powerful and effective methods to locate owners. These tools include the use of websites, cross-checking public data, staging thousands of awareness events at state fairs and shopping malls, and developing a national database, MissingMoney.com.
In other situations, many states have hired contingent-fee auditors to audit both commercial and not-for-profit organizations in search of abandoned property. With the support of these audit firms, many states have gradually expanded the scope of their investigations to encompass a growing variety of property types. Furthermore, they have extended the “look back” period to 20 years or more in many cases, thereby giving states access to a vast treasure trove of once-forgotten assets that may in some states, after a period of time, revert to the state’s treasury for general use. These tactics have proven quite effective for many states. Delaware received an estimated 14 percent of its gross revenue in 2013 directly from unclaimed property.
States have been successful with abandoned property audits in large part because a significant percentage of organizations, both not-for-profit and commercial, have historically failed to comply with state unclaimed property laws. According to the NAUPA, only 15 to 35 percent of entities nationwide are in full compliance with abandoned property laws. And even those who are “technically” in compliance may be over-reporting because they are not correctly interpreting what the law in their state requires.
As the risks of audits, fines or other penalties escalate, not-for-profits must be vigilant concerning their unclaimed property liability. They must report any unclaimed assets on the appropriate form and ensure that this liability is properly reflected on their balance sheets. To do so, not-for-profits must determine which state may have claim to the abandoned property and report the assets to the correct authority. First property holders “must exhaust all options” in their effort to locate the property’s rightful owner.
For organizations without established policies and procedures in place to track and report unclaimed property, state auditors use estimation techniques to determine the liability. That’s not good news for not-for-profit organizations. To prevent this, organizations without existing policies should immediately adopt procedures that are compatible with unclaimed property laws in their state. Again, failing to comply with state laws exponentially increases the likelihood of an audit (at your not-for-profit’s expense), as well as fines and penalties assessed by states. Adding insult to injury, the offending organization is also subject to an interest charge on all property that is not reported or delivered as required by the law.
Avoid an Audit
State attention on unclaimed property is not going away. Louisiana State Treasurer John Kennedy announced in November 2014 that the state returned $35.5 million in abandoned property during the 2013-2014 fiscal year, a Louisiana record.
The message is clear: comply with all applicable abandoned property laws or risk an audit and other penalties – an expensive and increasingly likely outcome for not-for-profit organizations.
For questions regarding the legal ramifications of abandoned property, contact your CBIZ Tofias not-for-profit tax professional, or contact us here.
Joe Giso, CPA, MST, is a Managing Director in the Not-for-Profit & Education Tax Practice. Joe can be reached at JGiso@cbiztofias.com or 617.761.0623.