Winter is right around the corner. For businesses holding abandoned property on their books (and virtually every operating entity holds abandoned property, whether it knows it or not), that means it’s time to start preparing the annual abandoned property return. In this article, we’ll review abandoned property laws in general and New York’s abandoned property law in particular. We’ll discuss when an abandoned property filing obligation arises and examine the additional notification obligations imposed on filers.
Do You Have Abandoned Property That Obligates You to Comply with Abandoned Property Laws?
Every state (and a few Canadian provinces) has an abandoned property law. Despite this ubiquity, compliance by holders of abandoned property is notoriously low; in the past, states have not enforced these laws with much vigor. But that has changed in recent years as a result of the economic downturn and expanding budget deficits. Rather than taking the controversial steps of raising taxes or imposing new taxes, states are increasingly turning to their abandoned property laws to raise revenue. Consequently, abandoned property audits have skyrocketed in recent years. According to the Annual Reports published by the NYS Comptroller’s Office of Unclaimed Funds (“OUF”), audit recoveries for the 2014-2015 fiscal year increased by 26% over the 2013-2014 fiscal year. This has proven to be a continuing trend: audit recoveries for the 2013-2014 fiscal year also increased by 21% over the 2012-2013 fiscal year. This reoccurring increase of over 20% per year in audit recoveries demonstrates a concerted effort to enforce compliance.
Abandoned property laws typically apply to every type of entity (corporation, partnership, LLC, etc.), and they can even apply to banks, nonprofits, and governmental agencies. A “holder” of abandoned property is any organization that possesses property legally owned by another. When most people think about abandoned property, they usually picture a boarded-up, vacant house, but that’s not really what we’re talking about here. Most abandoned property is some form of debt or obligation belonging to someone else who has not stepped forward to claim said property. The four most common categories of abandoned property are uncashed payroll checks, uncashed accounts payable checks, unredeemed customer or vendor credits, and unused gift cards or gift certificates. If a business has any of these items (or any of the dozens of other categories of abandoned property) sitting on its books, the business cannot simply take the value of the property into income. Rather, if there is no communication between the business and the owner of the property during a pre-set “dormancy period,” the property is deemed “abandoned” and is required to be remitted to the state of the owner’s last known address. If the business doesn’t have an address for the owner and therefore doesn’t know which state should receive the funds, or if the owner is in a foreign country, then the funds are escheatable to the holder’s state of domicile (typically, the state where the entity was formed).
The idea behind abandoned property laws is simple enough. If property remains unclaimed by its rightful owner, rather than letting this property inure exclusively to the benefit of the property holder, the state steps in to claim the property - ostensibly on behalf of the rightful owners. States generally advance a few different reasons to justify this action. First, states frequently claim that they are in a better position to ensure that the property is ultimately returned to its rightful owners. States, unlike private for-profit entities, never go out of business or relocate. States also argue that the while the property remains unclaimed, it should inure to the benefit of all the citizens of the state rather than just to a single entity. Most states, therefore, are permitted to use some portion of these funds in their budgets.
New York’s abandoned property law has created a significant amount of revenue for the state. In the 2014-2015 fiscal year, the OUF collected more than a billion dollars in abandoned property ($802 million in cash and $285 million from sales of lost securities). Over this same period, the state paid out a record $427 million. This means the OUF’s account grew by over $600 million in one year and that money ultimately became part of New York’s general fund.
What Type of Reporting Is Required?
Any business that holds abandoned property must file an annual report detailing the property and must remit the property to the state. The filing deadline varies state to state and even varies within a given state depending on the type of entity holding the property. In New York, most typical business corporations have to file an abandoned property return on March 10 for all property that became abandoned (i.e., property for which the dormancy period has run) during the previous calendar year.
But before a holder files the abandoned property return and submits the property to the state, most states - including New York - require the holder to perform “due diligence.” This due diligence entails attempting to contact the owners of the property to inform them that the property will be remitted to the state if they don’t claim it by a certain date. For example, New York requires holders of abandoned property to make a first-class mailing to each person or entity whose name is expected to appear on their report of abandoned property and request a signed written statement from the owner acknowledging the property’s existence. This mailing must be made by December 10 - that is, 90 days before the return’s due date. And if the property exceeds $1,000, New York requires holders to make a second mailing via certified mail at least 60 days prior to the final report or remittance. This mailing must be made by January 10. This “due diligence” requirement is why most holders begin preparing their abandoned property returns in the fall.
How Do You Become Compliant if You Haven’t Been Filing?
If you haven’t been compliant with your abandoned property obligations, the potential exposure can include the abandoned property itself as well as interest and stiff penalties. For example, New York can impose 10% interest and a penalty of $100 for every day an abandoned property report is late (and there’s no cap on this penalty so the potential exposure can be huge). Most states, however, offer some type of amnesty or voluntary compliance program to help bring holders into compliance. For example, New York offers a voluntary disclosure program that will cancel all penalty and interest so that only the abandoned property is due.
But one must be careful with these voluntary compliance programs: in some states, including New York, the look-back period mirrors the look-back period for audits. New York does not impose a statute of limitations for assessing abandoned property. As a practical matter, the look-back period for audits and voluntary disclosures typically reaches all the way back to 1992! Most companies do not maintain books and records going back 10 years, let alone more than 20 years. And if the company doesn’t maintain these records, the state is allowed to extrapolate a liability. As anyone who has suffered through a contested sales tax audit knows, extrapolations can lead to extremely burdensome liabilities.
Finally, this may not shock anyone used to dealing with New York’s tax law, but New York is generally considered to have one of the most aggressive abandoned property statutes in the nation. In October 2013, the Council on State Taxation graded all 50 states based on the aggressiveness of their abandoned property laws. New York, along with Mississippi and Delaware, received the Council’s lowest grade: a “D-.”
There’s no doubt about it: compliance with abandoned property laws can be a hassle. But the increased risks of audits as well as the substantial interest and penalties associated with failure to report and remit abandoned property make prospective record keeping and compliance a necessity.
Joe counsels clients on a wide range of state and local taxation issues and represents taxpayers in disputes with the New York State Department of Taxation and Finance and the New York City Department of Finance. Joe’s practice focuses on personal income tax and residency matters as well as sales and use tax issues in the technology industry (software as a service, cloud computing, digital products, etc.). Joe also counsels clients on their abandoned property obligations. Joe is the leader of the Abandoned Property Audits Practice at Hodgson Russ LLP and has represented large corporations in complex compliance matters such as multistate abandoned property audits and voluntary disclosures. He can be reached at: firstname.lastname@example.org.