A field guide to unclaimed property

Internal Auditor, Feb, 1996 by Paula Smith

States hold the property reported as abandoned until the rightful owner reappears. Hundreds of millions of dollars are turned over annually to the states. California, New York, and Texas alone received approximately $701 million of abandoned property in their last full fiscal year. While the money is held in perpetuity for the benefit of the missing owner, the states enjoy the use of the funds until the owners or heirs come forward.

While holding funds or records relating to the property, the states use the funds for a variety of public purposes. While most states hold the unclaimed property in their general fund, in Texas the funds are split between the state's general revenue fund and the public schools. In Colorado part of the unclaimed funds are used by the Colorado Uninsurable Health Insurance Plan.

Of course, if all people came back to reclaim their property, nothing more than float would be enjoyed by the states. Eye-catching publication of dormant owner lists by state unclaimed property programs, enhanced owner awareness, and better corporate procedures for finding missing account owners continue to increase the amount of abandoned property restored to owners each year.

* Reporting Unclaimed Property

Several United States Supreme Court cases have defined the rules for reporting unclaimed property. The most significant of these cases, Texas v. New Jersey, 379 U.S. 674, was decided in 1965. The Court held that a corporation in possession of abandoned funds should report the accounts to the state of last known address of the owner, if there is such an address on the corporation's books. If there is no such address, then the corporation is directed to report the abandoned account to the corporation's state of incorporation. The Supreme Court recently reaffirmed the priority rules for reporting in a dispute involving competing state claims for unclaimed brokerage accounts whose owner addresses were unknown.

* Risks

Failure to report and remit unclaimed property is a violation of states' laws. Virtually all states have civil penalties in effect that cover failure to report or remit funds to the proper state agency. As an example, the Iowa Uniform Disposition of Unclaimed Property Act provides that a person failing to report or deliver property in a timely fashion to the Treasurer shall pay at the annual rate of ten percent on the property from the date the property should have been delivered. In addition, a person who willfully fails to pay or deliver property as required shall also pay a civil penalty equal to 25 percent of the value of the property. These penalties vary from state to state.

A significant risk of failing to report is a state audit. Most states have some type of audit program in place, involving, at a minimum, a compliance review of whether or not a company is reporting. Many states have full fledged audit programs, which can require corporate staff to produce records going back for many years.

Some corporations are also waking up to the fact that "lying behind the log" may not be the best corporate policy when it comes to unclaimed property. Many states currently offer amnesty or waiver of penalties and interest to corporations that make an effort to bring their unclaimed property reporting up to date. Several options are available to companies that have recognized the problem but have been unable to develop a strategy for minimizing the potential costs associated with past failure to comply with state reporting requirements. Probably the worst and most costly strategy is to wait until the state auditors are knocking at the door.