Increased Enforcement of State Abandoned Property Laws

By:
Joseph Endres
Published Date:
Feb 1, 2015

All 50 states, the District of Columbia and three Canadian provinces have abandoned property laws on their books. These laws are intended to safeguard the abandoned property of the jurisdiction’s citizens, who, for some reason, have failed to claim the property from the businesses holding it. The states secure the abandoned property of their citizens, while utilizing that property for the benefit of all citizens until the rightful owners claims it. Unfortunately, these laws often impose substantial liability on unwitting businesses who fail to report and/or remit the property to the state. Despite the ubiquity of these laws, compliance by holders of abandoned property is notoriously low because 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 often controversial and politically-difficult steps of raising tax rates 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.

Although there is nothing to prevent a state from launching a slew of abandoned property audits on any number of businesses, some states offer a form of amnesty through voluntary compliance programs. Case in point, the New York State Office of Unclaimed Funds is aggressively pursuing “voluntary” compliance by sending out hundreds of notice letters (available on the Office of the State Comptroller of New York website), informing companies that they “may not be in compliance with the filing requirements of New York State’s Abandoned Property Law (APL).” The letter explains New York’s abandoned property voluntary disclosure program, which is “intended to help companies that may be unaware of or non-compliant with the APL by providing instructions on how to get into compliance interest and penalty-free.”

In essence, the letter is a request for a company to voluntarily engage in a “self-audit.” Clearly the company receiving the letter is, to some extent, on the state’s radar. Do nothing and the company could face an official, non-voluntary audit that results in a liability that includes significant penalties and interest. On the other hand, although voluntary compliance could eliminate potentially costly interest and penalties, some businesses end up facing a higher liability than they initially contemplated. But before we get too far down this rabbit hole, let’s consider some general questions that will help determine whether an abandoned property liability exists.

Do You Have Abandoned Property that Obligates You to Comply with Abandoned Property Laws?

To determine whether you may have abandoned property (most operating entities do), let’s review a few of the requirements. Abandoned property laws apply to every entity type (corporation, partnership, LLC, sole proprietorship, etc.) as well as to banks, non-profit organizations, courts and governmental agencies. A “holder” of abandoned property is any individual or organization that possesses property legally owned by another. There must be a fixed and certain legal obligation between the holder and the owner of the property. Contingent obligations generally do not create an abandoned property liability.

The most common categories of abandoned property are uncashed payroll checks, uncashed accounts payable checks, customer credits (including rebate payments) and unused gift cards or gift certificates. Beyond the above stated categories of abandoned property, there are dozens of others. The common thread in these categories is a debt owed by the holder to the owner of the property. Here are a few examples: An employer issues a paycheck to an employee who never cashes the check. A business pays a supplier for goods or services with a check that the supplier never cashes. Despite the failure of the employee and supplier to cash the checks, the holder (the employer and the customer) remains responsible for the debt. This lingering obligation creates an abandoned property liability.

If a business has any of these items sitting on its books, in most states, including New York, the business cannot simply take the abandoned property into income. Rather, at the end of a “dormancy period” (typically three to five years), during which there is no communication between the owner and the holder, the property becomes “abandoned” and must be remitted to the state of the owner’s last known address. In the event the holder does not know the owner’s address, or if the owner is in a foreign country, the abandoned property is escheatable to the holder’s state of domicile (typically the state where the entity was formed).

Filing a Report of Abandoned Property After Performing Due Diligence

Holders of abandoned property must file an annual report describing the property that became abandoned during the year, and must remit the property detailed in the report to the state. The filing deadline varies state to state and even varies within a given state depending on the type of property. In New York, most typical business entities 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 its abandoned property return and submits the property to the state, many states, including New York, require the holder to perform “due diligence.” Generally, “due diligence” means the holder must attempt to contact the owner of the property in writing and inform the owner that the property will be escheated to the state if the owner does not respond by a specified date. For example, at least 90 days prior to the due date of the report, New York requires a holder to send a letter by first class mail to each person or entity whose name is expected to appear on the report and request a signed written statement from the owner acknowledging the property’s existence. If there is no response to this initial mailing and the value of the abandoned property exceeds $1,000, a second letter must be sent, this time by certified mail, to those same individuals or entities. This second mailing must be sent at least 60 days prior to the due date of the report.

How Do You Get Compliant If You Haven’t Been Filing?

If you haven’t been compliant with your abandoned property obligations, the exposure includes the abandoned property itself, as well as interest and potentially stiff penalties. For example, New York can impose 10% interest on the abandoned property and a penalty of $100 for every day an abandoned property report is late. Thus, a company that has not been compliant for many years may be facing a crippling liability. However, most states offer some type of amnesty or voluntary disclosure program to help bring holders into compliance. As mentioned earlier in this article, New York offers a voluntary disclosure program that will cancel all penalty and interest so that just the abandoned property is due.

But participants have to be careful with these programs because the devil is always in the details. Unlike New York’s voluntary disclosure program for tax liabilities, there is no limited look back provision in the abandoned property program. Thus, a holder typically has to remit abandoned property that has been on its books since 1992! And if the holder doesn’t have business records dating back to 1992, the state can estimate the liability for these periods by projecting recent abandoned property liabilities to any periods for which there are inadequate records. Let’s face it, who has business records going back more than 20 years? This extrapolation of a current liability to past years can cause a voluntary disclosure participant’s exposure to skyrocket. So if you’re considering any state’s voluntary disclosure program, make sure you’re going into it with a solid understanding of the potential liability.

Conclusion

Clearly compliance with abandoned property laws can be a hassle. But the increased risks of an audit and the substantial interest and penalties associated with failure to report and remit abandoned property make proper record keeping and prospective compliance a necessity. And if you have not been compliant, participating in a voluntary disclosure program to become “current” can raise its own set of challenges.


Joseph EndresJoseph Endres 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. He handles sales and use tax matters in the technology industry (software as a service, cloud computing, digital products, etc.) and has represented clients in numerous multistate compliance matters.Mr. Endres has also advised clients with respect to various federal and state tax incentive based programs such as the federal renewable energy investment and production tax credits, and New York State's Start-Up NY Program, Excelsior Program, and the former Empire Zone Program. Additionally, he counsels clients on their abandoned property obligations in the various states and has represented large corporations in abandoned property audits and voluntary disclosures.He can be reached at jendres@hodgsonruss.com.

 
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